Roughly 5,000 medium to large family firms exist in the Middle East, with net assets totaling USD600 billion.
Constitute 75% of the private sector economy and employ 70% of the labor force in the GCC region
Dubai, United Arab Emirates - Flourishing family businesses have in the past taken a large slice of the economic benefit in the MENA region standing shoulder to shoulder with giants of the corporate world. But there are now concerns over the survival of these identity driven businesses with the relaxation of government policies, the liberalization of financial rules and the lifting of protectionism. Or will the recent socio-economic changes hand them more power as local governments look to spend their way out of trouble?
A research study done by Al Masah Capital shows that family business success in other parts of the world is more sharply reflected in this region. Family businesses still account for nearly 70 per cent of the commercial infrastructure and offer the primary employment option to the population. They have been efficient, driven by a traditional value based work ethos that has wedded seamlessly with cutting-edge technology and strengthened by pride in the family name. Today, roughly 5,000 medium to large family firms exist in the Middle East, with net assets totalling USD600 billion. These companies constitute 75% of the private sector economy and employ70% of the labor force in the GCC region.
Telling examples of such success stories include the Al Rajhi family (Saudi Arabia), the Al Ghurair and Al Futtaim families (UAE), the Al Kharafi family (Kuwait), the Kanoo family (Bahrain) and the Sawiris family (Egypt).
All these entities share a common history in that when the region was undeveloped they came off as pioneers and gradually but sturdily built their empires, relying on their bloodlines to form the management cadre. The family name was central and this provided impetus and a deep and abiding sense of loyalty and trust. Since they were also politically privileged they were able to gain concessions and create a viable commercial frontline. The average worth of such family businesses in the MENA region is now about $600 million .
While they did enjoy the positive fallout of the boom years they are now in need of revamping their priorities and facing the challenges of globalisation and the competition from the monolithic multinational corporations. Also, the closed door approach that worked well in the past is now in need of different skill sets that are only available on the open market and family businesses have to invest in them.
As a result of this growing awareness to change the paradigm almost three-quarters of family-owned businesses in the Middle East are likely to move from the second generation to the third, according to the Al Masah Capital report.
The worrying part is that surveys conducted in the past indicate that just one of ten family-owned businesses survive to the third generation. In addition, families in the MENA region are large by global standards; the average family size is almost double that of comparable enterprises in the US and the UK.
In the new context a large family base could lead to conflicts or disputes that, in turn, could adversely impact the family business or even threaten to split it. Such fragmentation weakens the base. By that token, credit defaults have also raised the issue of transparency or the lack of it for several family-owned businesses in the region. As a result, business houses are finding it far more difficult to avail easy credit.
"There was a time where only the family name was sufficient to open doors but that is not a guarantee anymore," added Shailesh Dash, Founder and Chief Executive of Al Masah Capital.
"To stay in the race and hold their position the decision-makers in these very powerful commercial houses have to bring on board a more 21st century approach. This includes modernization, the need to put in place proper compliance, risk management and accounting platforms and factor in talent with authority even if it is not from within the family. Those who can blend the past with the future are the ones that will weather the changing pattern," he said.
Another pattern emerging in this region is governments encouraging public listing of more businesses as this move has the potential to significantly add to the breadth of capital market if they list on regional stock exchanges. This will have the spill-over effect of attracting more (foreign) investor interest into regional markets and eventually drive liquidity.
In terms of recent regional socio-economic developments, this becomes even more relevant. Infrastructure, education, healthcare and job creation are now the main goals of regional governments as they respond to the demands of a restive population. As the holders of the majority of wealth, commerce and trade, family businesses will fall into a greater spotlight, according to the report.
So while they contend with internal changes and the need for modernization, they do so in a period of immense opportunity. The families that strike the right balance between this internal and external juxtaposition will become the business leaders of the new generation.
"As the region prepares to face the new world and governments change policy to compete effectively, they will turn to these influential families for support to help them execute their strategy. It is this position of strength that makes them the real power brokers," added Dash.
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© Press Release 2011
