Credit to small and medium-sized enterprises (SMEs) is likely to be a key focus for the banking sector in 2013. This segment of the lending market is an opportunity to tap what Bahraini leaders believe is an underserved segment, while addressing the long-term priorities of the country and its economic agenda. SMEs are considered an important part of Vision 2030, the country’s long-term development strategy.
The kingdom provides public support and risk-sharing through Tamkeen, the labour fund, which in recent years has developed several financing schemes for fledgling businesses, through guaranteeing bank loans and paying part of the cost of this financing. Early efforts are also under way to develop microfinance, and two lenders already exist. The Central Bank of Bahrain (CBB) has identified the further study of regulations for microfinance as a part of its 2013 agenda.
BOTTOM UP: Expanding the pool of borrowers is important for Bahrain as it plans for a post-oil future. The kingdom has predicted that it will be the first country in the region to run out of oil and, as a result, its economy is arguably the most diversified in the Gulf, with financial services, oil and tourism serving as the three main contributors to GDP. Top-down solutions have added to the economic diversity, but for the future the government wants to ensure that credit is available to entrepreneurs whose business ideas might boost employment opportunities from the bottom up.
In recent years putting the right incentives in place has meant increasing the cost of imported labour through fees charged to Bahrainis who employ foreigners, and capping the number they can hire. Half of that money, which is collected by the Labour Market Regulatory Agency, goes to Tamkeen to spend on SME development and job-creation programmes.
DEFINING SMES: Tamkeen defines small businesses as those with up to 50 workers (or up to 100 in the construction sector) and up to BD50,000 ($131,570) in annual turnover. Medium-sized enterprises have turnover of no more than BD500,000 ($1.32m) and up to 250 employees (up to 400 for construction). Large SMEs, according to the programme’s conditions, are those with the same caps on the number of workers and no more than BD5m ($13.16m) in annual turnover.
SUPPORT PROGRAMME: According to Tamkeen statistics, the fund’s lending efforts had allocated roughly BD292.5m ($769.7m) to SMEs as of the end of 2012, affecting more than 66,000 Bahrainis. There were 3061 Bahraini businesses that utilised the programme up to 2011, according to Tamkeen’s most recent annual report. There are currently 10 banks participating in the initiative and the majority of these – although not exclusively – are sharia-compliant lenders.
Financing options vary according to whether borrowers want a conventional loan or prefer to use a sharia-compliant method. For a conventional SME loan, Tamkeen will guarantee 50% of the principal for loans as large as BD125,000 ($328,925), although amounts can increase beyond that level to BD500,000 ($1.32m). Tamkeen will also pay half of the interest cost (rates were typically 8% as of early 2013) on behalf of the borrower. For sharia-compliant loans, the same principal guarantee applies, and half of the bank’s 8% profit rate (charged instead of interest) is also paid by Tamkeen.
In both cases, the cost of finance is determined on a reducing-balance basis; it is calculated for each payment period based on the outstanding principal owed, instead of on the original amount borrowed. Tenors are up to 10 years and grace periods can range from one month to two years. The cost of borrowing varies by borrower, however, according to Infura Consulting Group, a Bahrain-based business advisory firm.
Typically, those in business for less than two years turn to the Bahrain Development Bank, whereas older ones seek out a commercial bank. According to Infura’s market research, SMEs with turnover of BD2m ($5.26m) or more, solid profit margins and no major outstanding debts may not be required to provide collateral to secure a loan. Loan applicants must provide basic documents, such as a commercial registration certificate or licence and recent bills and bank statements as part of the process for securing funds.
MARKET FORCES: An important question for the future will be exactly which types of SMEs can be expected to emerge from the Bahraini market. A recent report indicated that, in 2012, almost a third of programme participants were in wholesale and retail trade. Construction firms accounted for 14% of the total, manufacturers for 9%, and food and accommodation, which form a combined category, also accounted for 9%.
New technology has the potential to further support retail growth. Mohammed Malik, CEO of card-issuing company CrediMax, told OBG, “There are a couple of technologies that are currently being developed in the kingdom. For several years, contactless payment cards have been hyped as the next big thing in banking and retail because they permit customers to pay for less expensive items without having to key in a passcode.”
The trading sector’s dominance fits with the historic character of the economies of the Arabian Peninsula and the wider region, as a trading centre for merchants from Europe and Asia throughout the centuries. Still, small-time traders and retailers in the future may find themselves under pressure as a culture of shopping in hypermarkets has taken root in Bahrain and will likely expand as the economy develops. So-called mom-and-pop shops may find it increasingly difficult to compete with the lower prices, quality control and wide selection of goods on offer in larger stores.
MANUFACTURING FOCUS: The long-term vision in the kingdom is to encourage SME growth in other sectors, with manufacturing – typically a labour-intensive activity – tabbed as a priority. Small-scale manufacturing has not historically been a key part of the economic mix in Bahrain or in the wider region, and while full-year figures were not yet available for 2012 at the time of writing, the first 11 months of the year showed overall lending growth in Bahrain growing faster than that of manufacturing specifically. Figures from the country’s Economic Development Board indicate a 7.7% rise in credit to businesses when compared with the same period in 2011. Within that category, growth was 8.4% for the trading sector and 1.1% for manufacturing.
In the past decade, however, GCC countries have embraced manufacturing as a means of increasing economic diversity, and as a way to use the region’s access to inexpensive energy as a competitive advantage. That has meant large-scale production of finished or semi-finished goods for which energy costs are an important factor; plastics and petrochemicals products, for example. Aluminium Bahrain (Alba), incorporated in 1968, was one of the first projects in the GCC to follow this model. Currently about half of Alba’s production goes to Bahrain’s downstream industry, and it is planning to boost capacity by 30% to 1.3m tonnes, with capital expenditure estimated at $2.5bn by 2015, according to a Bloomberg report. For SMEs in Bahrain, ideas that use and build on the smelter’s output would be a welcome addition to the economy and precisely the type of opportunity that Tamkeen wishes to see.
Bahrain aims to cultivate an industrial cluster near the new Khalifa Bin Salman Port, which the kingdom hopes will become a focal point for shipping in the northern Gulf. The port is in the Hidd area, on the island of Muharraq, a short drive to the east of central Manama and close to complementary facilities including the Bahrain International Investment Park and the Bahrain Investment Wharf. The investment park is not a free zone, but comes with similar incentives, such as tax breaks, exemptions on import duties and access to Bahrain’s free trade compacts. According to the park, its tenants enjoy a 5% margin against industries located in regional free zones, because of a 5% duty on goods sold from free zones to GCC markets. Bahrain Investment Wharf houses industrial space, logistics facilities and office space, as well as accommodations.
“Bahrain has under-utilised free trade and industrial zones, attractive rents and a workforce that is unrivalled in the Gulf,” said Hassan Jarrar, CEO of Standard Chartered Bank’s Bahraini operations, which lends to SMEs through Tamkeen’s programmes.
MICROFINANCE: Thus far, the two providers of microfinance in Bahrain are Family Bank and Ebdaa Bank. The former is a sharia-compliant lender and the latter is a conventional one. Some existing regulations for microfinance are found in Volume Five of the CBB’s Rulebook, which covers specialised licences. More regulations can be expected, as CBB officials recently visited India to learn more about microfinance there, with the goal of developing guidelines to suit the Bahraini market.
In February 2013 Tamkeen announced an agreement to extend BD1m ($2.63m) to Family Bank for use by their microfinance customers, doubling the support that it has already provided. The lender, which was licensed in 2009, has so far extended credit to 653 enterprises with Tamkeen funds and built up a loan portfolio worth BD1m ($2.63m). Extended loans range between BD5000 ($13,157) and BD7000 ($18,420). Similar to its sharia-compliant SME lending programmes, Tamkeen also takes on half of the profit cost, making the initiative attractive to both the SMEs and banks.
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