Dubai SME, with the help of Dun & Bradstreet, has launched the SME Friendliness Index to provide more clarity for SMEs and banks.

The issue of financing in the UAE has been brought up time and time again, but the lack of clarity and data available on the topic has been a hindrance to developing any real solutions.

Dubai SME is hoping to get the ball rolling with the release of its new SME Friendliness Index aimed at giving constructive feedback to banks on their SME strategies and help them realise the opportunity of providing financing options to the UAE’s SMEs (that opportunity is estimated to be between AED 3.6 and AED six billion). At the same time, the index will provide insights to SMEs on local banking structures and practices. Overall, the input of 487 SMEs and 21 banks were used in the research that was done jointly with Dun & Bradstreet.

Dr. Manoj Nakra, Executive Director at Dubai SME, tells SME Advisor that one of the reasons of conducting the study was to shed light on industry dynamics and answer some of the questions being addressed on both sides.“I think the way to incentivise financing for SMEs, is to show the size of the opportunity; that was the focus of the Index study. What we’ve done with the research is provide some clarity in that area going forward. I have a very strong belief that the banks have adequate horse power but they needed informational clarity; They want to serve the customer and want to lend. The question is do SMEs want to borrow?”

Interestingly, the study revealed that only 14% of SME respondents used bank finance for growth. A large proportion of them actually use personal money and financial support from family and friends. Nakra explained that many of the SMEs he speaks to do not have enough knowledge on financing options to be encouraged enough to seek funding.

The study shows that loyalty is a major area of challenge for banks in the UAE, as customer retention rates remain low. Nakra says SMEs could provide banks a real opportunity in this area. “For every new SME client that you can covert from a relationship to a primary relationship, that number is estimated at AED 90,000 a year. The other area of dialogue among banks now is, how to go about target setting for their SMEs. Before they had no data, Now at least you can say that if I have so many customers and retention is only 30%, can you increase that and go to my existing customers and convert them into banking customers.”

An overwhelming majority of the SMEs who took part in the survey fall under the established category being at least three years of age. The age of the business is a major determining factor for many banks, as it can be measured against the level of risk. Startups and younger SMEs are usually advised to seek funding through Venture Capital and angel investors. Interestingly the index also revealed that the smaller the business, the less formalised its accounting practices were.

This is where Dubai SME’s new online platform will come in to provide some guidance. The website bebankable.ae will launch in September 2012, and provide information for SMEs on auditing and best practice for corporate governance. It also will provide a tool that will enable SMEs to self-assess their readiness to seek a loan from the bank, and they will also be able to submit an application through the website. Qualified auditing companies will be very much involved with the website, giving users pointers on basic auditing practices and how to select an auditor

The SME Tool Box designed for banks will allow for a better understanding of financing needs of SMEs according to size (micro, small and medium) and compare them with larger enterprises. The goal is to better educate bank relationship managers on the SME community, to be able to develop and tailor their finance products accordingly.

“The positive aspect is there will be a website giving SMEs the information they need. The question is the use issue. If I’m an SME and I say I want to submit an application for a loan via the website, in Dubai, I still foresee an SME saying, if I give this information will it be confidential?,” says Nakra. Dubai SME will launch a marketing campaign along with the website with the goal of changing such perceptions.

Experts point to a lack of understanding as part of the reason why SMEs hesitate to seek funding.  The desire to avoid any roads that lead to bankruptcy remains prevalent. The newly proposed bankruptcy law in the UAE is a step towards giving more SME owners some piece of mind. Under the law, those who become unable to repay debt, will be able to restructure those loans with the bank’s relationship manager to work out a solution. Nakra says he is of “the view that non-existance of a bankruptcy law and post-dated check of security is a very good thing, because contract law is very difficult to enforce. The positive of a non-existance of a bankrupcty law, is taking conservative business decisions,  and limit risk taking.”

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