Just like other parts of the world, it is quite difficult for small and medium enterprises (SMEs) in the Gulf Cooperation Council (GCC) to access funding from traditional sources such as banks. Some of these difficulties include extensive and time-consuming documentation, overwhelming fines on early and late repayments, high-interest rates, and short repayment periods. These challenges have driven several economically-advanced countries to develop innovative funding methods so as to establish a balance between protecting borrowing regulations and encouraging entrepreneurship.
To increase the amount of capital being injected into the SME sector via equity participation of angel investors, venture capitalists and private equity companies.
There are signs that innovative funding methods are gradually being adopted by SMEs within the GCC. In September last year, Dubai SME, an agency tasked to develop the SME sector in Dubai, launched the Equity Investment Initiative (EII). The main target of this initiative is to increase the amount of capital being injected into the SME sector via equity participation of angel investors, venture capitalists and private equity companies. The agency is also preparing an angel equity investors’ domestic directory that is dedicated to SMEs.
There are also other similar global initiatives that the GCC can customize and implement. These include the European Union’s InnovFin, India’s non-institutionalized participation, allowing SMEs to invest in stock exchanges, and allowing banks in the public sector to issue promissory stocks to SMEs.
One of the possible challenges likely to face the GCC’s efforts in encouraging private equity in the SME sector is that the investors may perhaps be more interested in tech-based companies or companies in the digital sector. This may leave the SMEs from the other sectors, such as manufacturing, with the same problem of accessing capital. To mitigate this challenge, GCC governments need to develop policies to assist SMEs that cannot attract private equity investors. One such way is through the employment of “Fund-of-Funds”; this is where the government does not invest directly into SMEs but invests into venture capitals which in turn identifies viable financing opportunities.
Aflamnah, the first UAE-based crowdfunding platform that allows people from the Middle East to raise money to finance new ideas in various areas
SMEs in the GCC can adopt crowdfunding, the practice of raising funds from two or more people through the internet towards a common investment. This concept is not new in the GCC as there is Aflamnah, the first UAE-based crowdfunding platform that allows people from the Middle East to raise money to finance new ideas in various areas such as games, films, television, music and art.
SMEs in the GCC region have also acknowledged that peer-to-peer lending will enable them to access capital rapidly at lower interest rates and with reduced penalty risks. This will be beneficial in developing their businesses throughout the early stage phases. Islamic financing options can also be strengthened if proper risk management structures are put in place to protect and address the rights and concerns of lenders. This will also increase banks’ confidence in lending to SMEs.
Featured Image: Mall in Dubai