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Forcesmustrally Inaidofbusiness FT SPECIAL REPORT Arab World Banking & Finance Tuesday May 28 2013 www.ft.com/reports | twitter.com/ftreports Forces must rally in aid of business Efforts are focused on reviving sources of funding that have sputtered or stalled as a younger generation presses for change. Michael Peel reports conomic hardship has driven month. “It was also a crisis about the region’s myriad small businesses and the popular uprisings and private sector – or, more appropri- is growing stronger as a younger gen- wider discontent sweeping ately, its weakness.” eration presses for change. the Arab world and the trou- Many business people and econo- “Small and medium-sized busi- bles of funding private sector mists agree that one of the great tasks nesses remain the region’s beacon of Egrowth have been a big part of that. during this era of political and eco- hope and the anchor of the interna- While financial conditions in the nomic change is reform of the private tional community’s economic vision region vary widely – from cash-rich sector, with banks, finance houses for the region, thanks in part to their Gulf petrostates to the beleaguered and rich individual investors all success over the past decade,” said north African and Levantine coun- required to play an important role. Vali Nasr, dean of Johns Hopkins Uni- tries – companies of all sizes have While the uprisings have in some versity’s School of Advanced Interna- suffered similar constraints stemming ways complicated matters further for tional Studies, in an article on the Bullish? Alternative investment groups and other possibilities for start-ups are cited by those who are optimistic Alamy from harsh government policies and companies, squeezing sources of capi- International Monetary Fund website difficulties in securing finance. tal and ramping up the cost of debt, in March. “But this vision is also “The Arab spring was not just a they have also opened new possibili- based on the belief that there is still of the private sector. Countries Efforts are focusing on reviving laws, conservative lending practices crisis about the state – its ability to ties by toppling autocrats and making ample capital in the region – from praised in the past for making sources of funding that have sput- and a culture of offering the populace reform, redistribute and represent others think more about the develop- local investors who are far more com- progress in generating investment, tered or stalled. At the same time, generous state benefits and lucrative ordinary citizens’ interests,” said ment they need to keep their popula- fortable with political risk than west- such as Tunisia and Egypt, are in business people and economists are government jobs. Bassem Awadallah, a former Jorda- tions happy. ern investors – that could keep that post-revolutionary turmoil. Mr Nasr pressing for finance to be freed up in The sense is that, with notable nian finance minister, and Adeel The big question is whether the dynamism alive.” points to how domestic investment in Gulf oil-producing states that have exceptions, unhelpful government pol- Malik, an academic at the University finance sector can, as some maintain, For now, the Arab spring has Egypt fell 10.5 per cent in 2011, with mostly been free of political trouble. icies and unadventurous thinking of Oxford, in a presentation at the exploit the spirit of entrepreneurship thrown into confusion many of the foreign investment plunging more These countries have seen the growth London School of Economics this that has always been present in the positive predictions about the growth than 90 per cent to just $500m. of companies stunted by restrictive Continued on Page 2 Cultural shift required to ease unemployment the headlines since the Small business financial crisis put many companies out of business. Start-ups need more The issuance of personal help from the cheques to guarantee loans is commonplace. When region’s lenders, businesses fail, company says Simeon Kerr owners can often find them- selves facing criminal and civil charges. Prevailing opinion in the “It’s a huge burden for Middle East and north small businesses to bear Africa is that growth in and also counterproductive small- and medium-sized to financial institutions as, enterprises is vital to foster- if the client ends up ing long-term growth and detained, he can’t work to tackling the region’s politi- Mouayed Makhlouf of the repay the debt,” says Mr cally disastrous youth IFC: ‘Something is wrong’ Williams. unemployment. The IFC has been work- SMEs form a crucial ing with regional authori- aspect of governments’ with the correct legal infra- ties to introduce “moveable reform efforts, not least structure, to create momen- assets” legislation that since boosting the number tum,” says Mr Makhlouf. would encourage financing. of small businesses has a Large Mena banks put Such a law would give lend- knock-on effect through the insufficient resources into ers a clearer idea of what economy. Each new job cre- SME loans because they assets had been pledged ates another 20 along the require more due diligence against loans as collateral. chain. and collection efforts. The Mr Makhlouf argues that While SMEs may account banks also tend to lend at a cultural shift is necessary for up to 80 to 90 per cent of higher interest rates of 10 to if the region’s large lenders the region’s businesses, pro- 18 per cent as a result of are to recognise that small viding about half its jobs, higher risk, bankers say. businesses are an opportu- they are in desperate need Governments have been nity, not a burden. “We are of finance if they are to setting up funding pro- working to show banks that become bigger employers. grammes to help start-ups this is profitable business,” Only a fifth of SMEs in get off the ground as they he says. “If they don’t do it, the Middle East and north encourage nationals into someone else will.” Africa have a bank account the private sector and away The evidence suggests or loan. The Mena region from their traditional pref- that others are moving in. suffers particularly badly erence for public sector An SME-focused financing from this problem, says the jobs. group, World Business Part- International Finance Cor- Sector specialists, such as ners UAE, an offshoot of a poration, the private sector the Gulf Finance Corpora- US-based group, plans to arm of the World Bank, tion are going through a offer its first loans to small because banks in the region “boom period” as small businesses in the next few are more comfortable lend- companies seek cash. months. ing to state-backed enter- Steve Williams, the com- Brandon Short, WBP pres- prises and recognised fam- pany’s chief executive, says ident and a former Gold- ily groups. business is up 75 per cent man Sachs banker and pro- SME loans comprise only over last year. Having fessional American football 8 per cent of banks’ balance expanded into Saudi Ara- player, plans to issue as sheets. In the Gulf Co-oper- bia, the unit of Dubai-based many as 300 loans this year, ation Council countries, the investment bank Shuaa ranging between $35,000 level is lower at about 2 per Capital expects to lend and $1.5m. cent. Dh1.2bn to SMEs this year. Using Shariah-compliant “Something is wrong This includes Dh1bn to contracts, the company will here,” says Mouayed United Arab Emirates com- take ownership of compa- Makhlouf, the IFC’s Mena panies, an estimated 10 per nies’ assets and lease them regional director. “Given cent of total SME lending in back as part of the financ- their role in economic the country. ing package. growth, something has to Changes to legal and reg- “If, say, a dry cleaner happen for banks to lend.” ulatory frameworks are wants to expand, it may Other middle-income being urged in order to fos- have a great business model countries average 18 per ter a healthier environment but may still not meet pre- cent and high-income states for small businesses and determined benchmarks set 22 per cent. “The biggest entrepreneurs. by banks for loans,” says challenge is access to A big problem within the Mr Short. “We see this finance – banks have to pro- financial architecture of opportunity for solid busi- vide more loans to SMEs to most Gulf states, the crimi- nesses that do not fit in a enable an environment, nalisation of debt, has hit predetermined box.” Inside » SME funding Debt workouts Jordan Angel investors International banks Promotion of tech back fledgling forced to write skills creates businesses down number of Middle East’s shunned by lenders bad loans Silicon Valley Page 2 Page 3 Page 4 2 ★ FINANCIAL TIMES TUESDAY MAY 28 2013 Arab World Banking & Finance Risk takers Disclosure move to fill gap need deters left by play-safe offerings to raise new money, limit- IPOs ing the options for family Few families are groups. lenders Saudi Arabia, according ready for the to bankers, has a more attractive framework and required level of better liquidity. But, as transparency, writes stock markets rebound – Dubai and Abu Dhabi Camilla Hall recently hit three- and four- year highs – bankers argue that now is the time to tap For almost every family equity capital markets for company in the Gulf, how- family businesses ready to ever big or small, the topic take the step that could SME funding Simeon Kerr reports on a of selling shares to the pub- expand their business sig- lic inevitably arises. “It’s nificantly. potentially rewarding arena for entrepreneurs a natural concept for this “The investor base is very region,” says Michael hungry for it,” says Bevan, head of equity capi- Anthony Habis, head of hen Tarig El-Sheikh lost Crowd investing is seen as having tal markets at HSBC in family offices Middle East his investment banking new potential for seed capital.
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