Inspecting the SME playing field in the UAE

6 April 2017 Category:
SME

There’s an expression in sporting circles – ‘walking the course’. It describes visiting a competition venue before your event takes place to scope out opportunities and make yourself aware of any possible dangers. Golfers do it, jockeys and show jumpers do it, and it’s the same logic that makes boxers spend hours reviewing old videos of their next opponent.

Understanding the ‘playing field’ as a business is essential too – if you’re to make a success of it. There are lots of compelling statistics about small and medium-sized enterprises (SMEs) in the UAE: one recent report puts the overall number as high as 350,000, accounting for 94% of companies. However, according to the Khalifa Fund for Enterprise Development (KFED), set up 10 years ago to champion the cause of SMEs, the failure rate of UAE-based startups is around 30-40%.

There are lots of compelling statistics about small and medium-sized enterprises (SMEs) in the UAE: one recent report puts the overall number as high as 350,000, accounting for 94% of companies.

While there are definitely opportunities to hit full speed, there are also tricky corners and hidden dips to negotiate. With that in mind, let’s explore the terrain, both favourable and hostile, for UAE startups. 

How the land lies for SMEs in the UAE

SMEs have been described as the ‘backbone’ of the UAE’s economy. It’s a phrase that has become popular in recent news stories, although it originates from a 2013 report by Dubai SME, part of the Department of Economic Development (DED). The report notes that SMEs account for 42% of the Dubai workforce and contribute around 40% to the total value add generated in the economy. The numbers are impressive: some 16,688 licences were issued to small businesses in 2012 and by the end of 2015 the figure was closer to 23,000. Sentiment is positive too – confidence on revenues and profits is higher among small businesses than larger ones, particularly in manufacturing. That matches sales figures, in which SMEs registered a net balance of 45% compared to 43% for large companies for the fourth quarter of 2016.

Beyond Dubai, it’s a similar story across the wider UAE. According to industry research, the UAE takes the lion’s share of investor interest for the Middle East and North Africa (MENA) region at 69% and 2016 saw the most investment on record in MENA startups at over USD 870m, an increase of 424% since last year.

Looking at individual businesses, there are some shining examples of what is possible. In 2016, USD 625m in funding went to two companies. First, Souq.com, the Dubai-based e-commerce marketplace, became the most valuable online company in the MENA region and this week it emerged that Amazon will pay between USD 650m and USD 750m to acquire it. The other flagship of SME success is Careem, a ride-hailing app launched in 2012, which this year raised USD 350m in foreign investments. These are both extreme examples, but they show what can be achieved. 

Advantages of the UAE’s free zones

A major draw to the UAE for new businesses is the package of benefits associated with trading from one of the many free zones. There are now more than 40 of these industry-specific hubs of commerce and industry, with giants like the Dubai Multi Commodities Centre (DMCC) and the Jebel Ali Free Zone (JAFZA) home to thousands of companies. At present, 13,000 firms operate from the DMCC, with 170 joining each month.

And they offer some great incentives: you get to keep 100% ownership of your business and enjoy exemption from import and export tax, as well as corporation tax. In the first half of 2015, total UAE free zone trade was worth AED 297bn and last year free zones accounted for 32% of Dubai’s total direct trade.

The key with navigating free zones is to get expert advice – much depends on which zone you choose and what type of business you are conducting. With this information, it’s then possible to better understand minimum capital requirements and stipulations around office space – whether you need a physical office or if there are flexi-desk options. 

The key with navigating free zones is to get expert advice – much depends on which zone you choose and what type of business you are conducting.

Getting in on the action

At the moment there are plenty of signs that the UAE is a good place to do business: the World Bank, for example, ranks the country at number 53 among the world’s economies for ease of starting a company – 12 places higher than last year.

There’s also a lot of attention focused on supporting new businesses. The KFED has put AED 2bn towards helping local enterprises, while other government backed ‘accelerators’ like StartAD in Abu Dhabi and Dubai Future Accelerators, which aims to ‘accelerate the relationship between companies and government’, play an important role. New businesses are part and parcel of Dubai Plan 2021 and, more recently, March 2017 saw the launch of the UAE Centennial 2071 plan which aims to ‘establish an economy based on innovation, leadership and advanced industries, developing a national economic and industrial strategy that envisions future sectors and places the UAE among the world’s major economies’.

The message is clear: the country is behind innovative new businesses, both now and in the long term.

It’s not all plain sailing, though, and the fact that Careem’s investment came mostly from Saudi Arabia and Japan is telling. Funding a new business from within the UAE is still not without challenges. Those World Bank rankings saw the UAE drop four places this year in ‘ease of getting credit’ and while the ranking for starting a business is at number 53, for doing business it’s up at 26 – implying that the landscape is rougher for startups than for established firms. 

Conventional financing remains tricky

Dubai SME’s 2013 report looked deep into the state of funding for new businesses and found that 80% of those surveyed relied on their own money to set up. Only 23% of respondents had accessed bank financing in the last five years and, historically, getting backing from banks in the UAE has been tricky for SMEs. Research commissioned by the KFED notes that although SMEs are recognised as a growth area, the rejection rate is between 50% and 70%. When SMEs are successful in getting the funding they need, interest rates are very high compared with elsewhere in the world.

Things are improving, though. Forty of the 52 banks in the UAE offer SME banking and there have also been moves to reform the relationship between banks and startups, specifically to exempt them from the requirement for bank guarantees. But the longstanding difficulties may well explain why other sources of backing have sprung up. Dubai is now home to several crowdfunding platforms, such as Eureeca, and angel investment sites like Envestors, Venture Souq, and Women’s Angel Investment Network (WAIN). 

A big leap forward in legislation

A key drawback for entrepreneurs until very recently has been the harsh and inflexible approach to bankruptcy, which has generally led to people (whose businesses face liquidation) simply fleeing the country for fear of incarceration, giving business owners very little opportunity to put things right. However, since December last year, a new approach has been put in place. In future, bankruptcy proceedings will focus on restructuring struggling companies, rather than simply penalising the owner.

There are other helpful initiatives too. Dubai SME has launched a voluntary framework of ratings for companies with a turnover of between AED 1m and AED 200m. It doesn’t provide money but it does give some semblance of dependability, which is very hard for investors to judge in the UAE. Those volunteering will receive a score, giving lenders a means by which to judge their trustworthiness, potentially making them more attractive. 

Dubai SME has launched a voluntary framework of ratings for companies with a turnover of between AED 1m and AED 200m.

The intent is there – the reality is playing catch-up

In 2017, the playing field for SMEs is becoming more favourable, but it’s still not completely level. The best way to summarise the situation is that while the intent is there, both from the government and from private initiatives, the infrastructure is lagging slightly behind.

But wide-ranging policy statements, be it UAE Vision 2021, Abu Dhabi Vision 2030 or Dubai’s Expo 2020, all nod towards encouraging SMEs for the creation of jobs and boosting exports. The government aims to increase the contribution of SMEs to 45% in 2021, within which it plans to help 40,000 startups, create 370,000 jobs and add AED 65bn to the economy.

However, finding your feet remains a challenge and that’s where the entrepreneurial part comes in. The funding is available but you may have to look beyond banks. The expertise and support networks exist but deciding on the right area to set up is vital. Failure rates remain noticeably high but the rewards can be huge and, after all, you’re not setting out to fail.

Ultimately there are two key ingredients for success: opportunity and determination. The first is getting better all the time; the second is down to you.

About the author: Neil Petch, Chairman at Virtugroup
About the author: Neil Petch, Chairman at Virtugroup

With a history of business successes, Neil Petch is well known in the UAE and beyond as a visionary entrepreneur with a passion for helping others establish and grow their own businesses. Neil founded Virtuzone in 2009 and quickly established it as the region’s leading company formation expert, before launching Virtugroup, a holding company that has a wider mandate of supporting startups from establishment; to successful market entry; and all the way through to exit.