Credit bureaus help open a bank's door for business with SMEs |
|
Network this!
All people are entrepreneurs, but many don't have the opportunity to find that out," said a famous economics professor, insisting that institutional support was important for people to achieve their goals. He went on to become a Nobel Peace prize recipient for his phenomenal success with microcredit programmes in Bangladesh. Professor Muhammad Yunus and the banking institution he founded, Grameen Bank, have given wing to many underprivileged people, financing their cottage-scale ventures. In fact, he has shown the world that lending to the informal sector can indeed be a commercially viable business model.
Credit is a vital ingredient in any success story. It is the lifeblood for large corporations to invest and realise their business plans. Credit is also required by a street vendor to buy his stock for the next day's sale. In between these two ends of the spectrum exist small- to medium-sized enterprises (SMEs), an important sector known to significantly drive economic growth.
Despite their promising potential, SMEs often face difficulties in raising capital. According to a report from Dun and Bradstreet, more than 50 per cent of SMEs in the UAE face difficulty in accessing finance.
As Prof Yunus puts it, a person who sells shawarma on the street is as much an entrepreneur as anyone else. For that street vendor, securing a $50 (Dh183) loan to start his small business can be even more challenging than a global CEO looking to fund $500 million in financing. Credit bureaus help level the playing field, facilitating greater access to opportunities for everyone. Credit bureaus believe in the shawarma principle that credit is required by all people and all types of businesses. By helping lenders gain greater perspective on borrowers, credit bureaus help bring both parties closer.
Constraints for SMEs
Globally, SMEs account for 99 per cent of the business sector and contribute to 50 per cent of the world's GDP. In the UAE, there are 260,000 companies of which 208,000 are SMEs, accounting for 80 per cent of the country's GDP. This dominance of the SME sector, both in terms of the number of firms as well as contribution to GDP, highlights the importance of this sector to the success of the UAE economy.
Banks are generally apprehensive about lending to SMEs as they perceive them to carry high risks. In light of the current financial crisis, banks have become even more stringent. This restriction of credit to the SME sector can be detrimental to the economy and impact economic growth.
According to Dun and Bradstreet's report, the interest rates for unsecured lending are much higher in the UAE (by about 15 per cent) than in more developed nations. Meanwhile, secured lending, which is the dominant form of SME finance in the UAE, requires collateral. This is often challenging, especially in developing countries and particularly in the case of SMEs, which lack significant assets.
One of the main reasons for banks curtailing credit to SMEs is that they lack the information they need about the borrower's creditworthiness. Further, banks' costs of investigating and acquiring data on SMEs is usually greater than the potential revenue to be generated from lending to SMEs since their credit assessment could involve reviewing a large amount of data from numerous sources (such as banks, auditors, trading partner references, multiple registrars, authorities etc). Another major problem, particularly in the UAE, is that the data maintained on SMEs is often out of date and incomplete.
Faced with such a situation and in the absence of information, banks are unable to make a complete analysis of the company's financial situation. Consequently, banks choose to reduce lending to SMEs. This could lead to loss of revenue opportunities for both.
Understanding repayment behaviour
Credit bureaus are an important component in this equation. As the aggregator of credit information from various traditional and non-traditional sources, they assist banks by providing them with important, impartial, reliable and timely credit information about both existing and prospective borrowers. They help to fill the information gap that exists between the banks and SMEs.
Credit bureaus allow SMEs to build reputational collateral based on their transactions with their creditors, customers, suppliers, utility providers and other third parties. They provide factual records of transactional behaviour, which when examined in the context of the banks' risk appetite, becomes a highly valuable source of information. With the formation of reputational collateral, SMEs can use the limited traditional collateral they hold for other more productive purposes. By having access to information from credit bureaus, banks can make more informed and quicker lending decisions. Further, banks can use credit bureau services to monitor and manage their existing portfolios. This will allow banks to extend loans to SMEs while keeping a check on their risk exposure in case of any deterioration in their credit profiles.
Instilling trust among lenders
The word credit is derived from the Latin credo, ie to believe. Lending can only take place where the creditor trusts the borrower to pay back his loan. Credit bureaus can help instil such trust based on valuable insights on how an individual manages his payment obligations. The efforts of a credit bureau need to be supported through a more concerted effort from the banking industry and policymakers to ensure that credit data sharing is followed diligently and that deserving SMEs have access to finance.
By Zaid Kamhawi
© Emirates Business 24/7 2009
Community Comments (0) - 
Comment on this article 
Comment on this article
The opinions of the authors expressed herein do not necessarily state or reflect Zawya. Read our Comment Policy.
Loading ...
Zawya Comment Policy:
-
Zawya encourages you to add a comment to this discussion. You agree that when you add content to this discussion your comments will not:
1.1 Contain any material which is libelous or defamatory of any person, is obscene, offensive, hateful or inflammatory or causes damage to the reputation of any person or organisation.
1.2 Promote sexually explicit material, violence, discrimination based on race, sex, religion, nationality, disability, sexual orientation or age or any illegal activity.
1.3 Be made in breach of any legal duty owed to a third party, such as a contractual duty or a duty of confidence.
1.4 Be threatening, abuse or invade another's privacy, or cause annoyance, inconvenience or needless anxiety.
1.5 Be used to impersonate any person, to misrepresent your identity or affiliation with any person, or be likely to deceive any person.
1.6 Give the impression that they represent Zawya.
1.7 Advocate, promote or assist any unlawful act such as (by way of example only) copyright infringement or computer misuse. - The content posted on www.zawya.com is created by members of the public. The views expressed are theirs and unless specifically stated are not those of Zawya. Zawya reserves the right to review all comments prior to posting and edit or delete any contribution, but Zawya is not responsible for and can not be held liable for any content posted by members of the public on www.zawya.com.
- Zawya is not responsible for the availability or content of any third party sites that are accessible through www.zawya.com. Any links to third party websites from www.zawya.com do not amount to any endorsement of that site by Zawya and any use of that site by you is at your own risk.
- By submitting your comment, you hereby give Zawya the right, but not the obligation, to post, air, edit, exhibit, telecast, webcast, re-use, publish, reproduce, use, license, print, distribute or otherwise use your comments worldwide, in perpetuity.
Post Your Tender Notices for FREE
(No Sign-in Required)
Zawya Tenders is a Tender Notices service entirely driven by contribution
from issuers in both public and private sectors. It is not an e-tendering service and is entirely FREE.
As an Issuer, you can benefit from posting an unlimited number of Tender
Notices for FREE and reaching out to an online community of bidders.
The service also offers you a tool to track the interest of bidders to your
tenders 'live' online.
from issuers in both public and private sectors. It is not an e-tendering service and is entirely FREE.
As an Issuer, you can benefit from posting an unlimited number of Tender
Notices for FREE and reaching out to an online community of bidders.
The service also offers you a tool to track the interest of bidders to your
tenders 'live' online.
| Financial Services Tenders | Due Date |
Community Buzz
Stories
Companies
Most viewed companies by Community in the last 24 hrs
| Company Name | Country | Industry |
| Consolidated Contractors Company | Overseas | Construction and Design |
| Saudi Binladin Group | Saudi Arabia | Construction and Design |
| Saudi Electricity Company | Saudi Arabia | Electric Utilities |
| Saudi Telecom | Saudi Arabia | Telecommunications Services |
| Sharjah Electricity and Water Authority | UAE | Electric Utilities |
| Hyundai Engineering and Construction Company - Saudi Arabia | Saudi Arabia | Construction and Design |
| Al Azizia Panda United Company | Saudi Arabia | General Retailers |
| Qatari Diar Real Estate Investment Company | Qatar | Landlords and Developers |
| Emirates Telecommunications Corporation | UAE | Telecommunications Services |
| Almarai Company | Saudi Arabia | Food |
Projects
Most viewed projects by Community in the last 24 hrs
| Project Name | Country | Sector |
| Takreer - Ruwais Refinery Expansion | UAE | Oil and Gas |
| Al Futtaim Carillion - Marina Hotel (Yas Island) | UAE | Real Estate |
| Emirates Aluminium (EMAL) - Smelter Complex - Phase 1 | UAE | Industry |
| Abu Dhabi DOT - Abu Dhabi Metro | UAE | Infrastructure |
| ENEC - Nuclear Power Plant | UAE | Power and Water |
| SATORP - Jubail Refinery and Petrochemical Complex | Saudi Arabia | Oil and Gas |
| Dubai RTA - Dubai Metro | UAE | Infrastructure |
| Al Safwa - Jeddah Cement Plant | Saudi Arabia | Industry |
| Qatar Bahrain Causeway Foundation - Qatar Bahrain Causeway | Bahrain | Infrastructure |
| Qatar Bahrain Causeway Foundation - Qatar Bahrain Causeway | Qatar | Infrastructure |