It is easy to discern the fresh momentum in the drive to boost the private sector and, more particularly, small and medium-sized enterprises (SMEs) in Qatar. A number of recent developments indicate the government’s determination to create a more balanced economy for the hydrocarbons-rich state: the appointment in January 2015 of the minister of economy and commerce, Sheikh Ahmed bin Jassim bin Mohamed Al Thani, as the new chairman of the Qatar Stock Exchange – integrating the stock market more closely with the ministry; the launch of a new $27.4m Qatar Business Incubation Centre – reportedly the largest mixed-business incubator in the MENA region; plans for a new venture market to augment the main exchange; the raising of the maximum level of foreign investment in listed companies from 25% to 49%; the creation of three special economic zones, the first of which will be developed in phases between 2017 and 2019; and more funding of SMEs by Qatar Development Bank (QDB) and Qatar Foundation.
CRUCIAL SECTOR: The potential benefits of nurturing Qatar’s SME sector are clear. As the backbone of any sustainable, diverse economy, SMEs form a central component of the various growth strategies deployed by governments across the region. In more mature economies like the US, 98% of the 302,000 companies which exported goods in 2011 were SMEs with fewer than 500 employees, while small firms accounted for 63% of the net new jobs created between 1993 and mid-2013. In economies across the globe SMEs make significant contributions in areas such as innovation, efficiency, job creation and international competitiveness, and it is generally agreed that the economic diversification and job creation sought by Gulf nations cannot be realised without the assistance of this important sector.
However, the growth of the SME sector in Qatar starts from a relatively low base. According to the IMF, despite Qatar’s high ranking of 13 in the “Global Competitiveness Index” (the highest in the region), the SME sector in Qatar contributes only 10% to GDP, compared to the MENA average of around 30%. One of the principal reasons for the modest growth of the nation’s SMEs is their limited access to funding: in an October 2013 presentation on SMEs in the GCC region, economic researcher Ashoor A Ashoor asserted that bank lending to SMEs as a share of total lending was just 0.5%, significantly lower than levels seen elsewhere in the GCC.
While data concerning SME financing in Qatar is sparse and rendered moot by a lack of an agreed-upon definition of what constitutes an SME there, in terms of turnover or employee numbers, it is apparent that the segment has been historically under-served by the banking sector. Given the nature of the economy, this is not an unexpected phenomenon: a plethora of large hydrocarbons projects and a reliable pipeline of massive infrastructure construction, resulting from a government development strategy, have meant that the most direct route to profit for banks is through high-margin, low-risk, big ticket lending. The SME market in Qatar, on the other hand, has traditionally been less appealing to banks, due to its relatively small size, high risk and set-up costs, the lack of a comprehensive legal structure to facilitate quick arbitration and the absence of an SME-specific rating in the credit bureau.
GOVERNMENT RESPONSE: In an effort to overcome these systemic hurdles the government has moved to work with the banks in their approach to SMEs. The state-owned QDB provides direct project finance and raw material loans to start-ups and existing businesses at competitive interest rates.
A typical project finance facility for a start-up might have an eight-year repayment period and an annual interest rate of 5%, with a one-time processing fee of 1%, while raw material loans tend to be revolving facilities with a 12-month repayment schedule. However, more interesting from a sectoral point of view is the QDB’s indirect lending programme, Al Dhameen. The indirect lending initiative was launched by QDB to assist smaller firms that were unable to obtain funding from banks due to a lack of collateral or financial history, but rather than directly lending to them credit facilities are offered through a number of partner institutions in the banking sector. As of 2015, 14 of Qatar’s conventional and sharia-compliant banks and finance houses operate the scheme: Ahlibank, Al Jazeera Finance, Al Khaliji Bank, Barwa Bank, the Commercial Bank of Qatar, Doha Bank, First Finance, International Bank of Qatar, Mashreq Bank, Qatar Finance House, International Islamic Bank, Qatar Islamic Bank and Qatar National Bank.
Through the programme SME’s seeking a credit facility approach one of the QDB’s partner institutions, which screens the applicant for eligibility under the indirect lending criteria and carries out a due diligence process if required.
Should it choose to proceed, the lender is able to conditionally approve credit and request a guarantee from QDB to cover part of the facility (up to 85% of the loan amount for start-ups and 75% for existing companies). The programme addresses the challenge that relatively high-risk lending to SMEs poses to Qatar’s lenders, and has had a significant impact on the development of small businesses in Qatar.
In 2014 Al Dhameen guaranteed credit facilities valued at about QR174.6m ($47.7m) for 62 SMEs, according to Jawaher Al Noaimi, Al Dhameen programme manager at QDB.
GATHERING MOMENTUM: Beyond the scheme’s utility as a source or guarantor of capital for SMEs, the Al Dhameen programme offers other benefits. In implementing Al Dhameen’s indirect lending module, QDB holds annual training events for customer relationship managers and credit officers of its partner banks, which have enhanced their skills with regard to the niche disciplines of SME credit and project evaluation. Speaking at the conclusion of a recent workshop conducted in October 2014, Abdulaziz bin Nasser Al Khalifa, CEO of QDB, highlighted the importance of this skills transfer. "This annual training shows our efforts to support and strengthen Al Dhameen by working with our partners, helping the relationship managers and credit officers on the ground provide the right resources to SMEs and entrepreneurs in Qatar. We know that financial institutions and banks in Qatar have a key role to play in promoting SMEs and private sector growth and we are proud to be partners – not competitors – with them in that mission,” he said in a QDB statement.
NEW REVENUE: This knowledge gained by banks through their participation in the Al Dhameen programme has proved useful to them as they have set about enhancing their capacity to address SME lending. An increasingly competitive market is the principal driver behind this phenomenon: banks which have historically built their loan books on corporate lending have begun to seek new sources of revenue in a crowded market, and the smaller firms that are flourishing on the back of large infrastructural projects look like increasingly attractive propositions.
While government projects are key, private sector growth is rising in the form of ancillary services, such as equipment rental and IT services. The underserved SME segment is expected to grow in coming years, as construction and transport projects make up around 81.7% of current developments, according to QNB. The activity of the larger players is generating demand for smaller service providers.
For this reason, QNB is not the only lender to have recalibrated its structures to better accommodate the needs of the nation’s small businesses: all of Qatar’s larger banks have adopted strategies that include dedicated SME banking centres, relationship managers, 24-hour banking payroll services, overnight vaulting and time deposits, cash and cheque collection and a more flexible approach to lending. While SME lending remains a challenge – as is the case for banks around the world – in Qatar’s market it will be a key part of the credit mix over the coming years.
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