Sep 19 2012
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Saudi SME opportunity
Saudi small-to-medium enterprises (SME) may account for a fourth of the country's gross domestic product, 63% of employment, and 98% of all enterprises, but they will need further support from the government if they are to become engines of growth and play a huge role in job-creation.
The Saudi SME sector is similar to other countries where small enterprises generate the most employment, even though large enterprises usually grab all the media headlines.
But while SMEs in other countries tend to get good financial support from financial institutions, Saudi enterprises are suffering from lack of financing.
SME loans typically account for more than 25% of the banking sector's portfolio in high-income OECD countries, and around 15% in non-GCC countries in the Middle East North Africa reigon. But loans to SME in Saudi Arabia and other Gulf states account for less than 5% of their banking sectors' loan portfolios.
"Saudi Arabia has over the past few years been substantially scaling up programs to alleviate financing obstacles for SMEs," notes the International Monetary Fund in its latest report on Saudi Arabia. "The Saudi Industrial Development Fund supports bank lending to SMEs, and several specialized credit institutions provide additional lending. In addition, the Saudi Credit and Saving Bank, with about USD10-billion in capital, has recently launched a SME lending program."
However, the Fund believes that Saudization quotas are posing a special challenge for SMEs. The Kingdom fast-tracked its Saudization last year with a programme called Nitaqat, which rewards and penalises companies depending on how they have met their Saudi-hiring quotas.
"[The] danger of relying on an extensive system of quotas for employment of nationals is that it is difficult to enforce and costly to administer, could impose large extra costs on businesses, and might retard progress on diversifying the economy," notes the IMF.
Making sure that prices provide the right incentives would be a more efficient way of reaching employment objectives, the Fund notes. "This would entail focusing on increasing the productivity of prospective national workers, e.g. through targeted education initiatives and stepped-up training programs, to drive down their cost and make them more attractive for employers."
Still, the government believes Saudization is bearing fruit. Adel Fakieh, Minister of Labour believes Nitaqat has helped create jobs for 380,000 Saudi since its launch 10 months ago.
The Nitaqat move was aimed at addressing the high unemployment rate among the Kingdom's youth. At 25.9%, the unemployment rate among the youth in Saudi Arabia is nearly double the global average.
"Governments should look at other long-term viable solutions to deal with unemployment," noted Al Masah Capital in a report. "Our suggestions for solving the unemployment dilemma are: (1) Assist self-employment/entrepreneurship, (2) Encourage investments from the private sector, (3) Continue to give greater emphasis to education, (4) Nationalization, and (5) Diversification."
The Kingdom is making efforts to address theses issues and investing heavily in education. Saudi Arabia's spent 24% of its total expenditure on education last year - the highest in the world.
The country is also looking to invest SAR81.5-billion which includes the creation of 18 university cities and academy complexes, 167 male and 161 female colleges and hundreds of other education-related infrastructure and support projects.
In addition the country has increased the number of students studying abroad to around 120,000, with a strong focus on computer science, mathematics, physics and medicine.
Meanwhile, its technical and vocational training corporation programme has seen 250,000 students enrol in courses that match the skills required by the private sector.
"Effectively boosting Saudi employment depends on several elements coming
together," notes the IMF. "On the supply side, nationals with the needed skills must be available and at a competitive wage. In addition, to ensure labour demand, the economy needs strong growth."
SME growth also offers opportunity for Saudi banks that are sitting on oddles of cash. Lending to SMEs not only presents banks with a new revenue stream but it will also deepen the financial framework and encourage the development of credit bureaus.
At the moment Saudi Arabia is in the narrow band of emerging economies where lending to SMEs is restrained by lack of information, even though there is tremendous appetite for lending and the banking network is deep and sophisticated.
Of course, moving from a hydro-carbon based economy managed by state-owned companies to that driven by the private sector will take a while. But Saudi Arabia seems to be positioned well to take the leap: a strong financial cushion, strong banking sector and the sheer willingness and support by the government to create employment for its citizens.
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