Spot the disconnect
Banks in the UAE will soon have assets to the tune of AED 2 trillion, while SMEs are ‘stifled by funding shortage.’ It’s a disconnect that must be addressed, thinks Kipp.
December 29, 2010 3:46 by Samuel Potter
But judging by the news on their growing assets, Kipp can’t see why banks are unable to meet SME demands through existing channels.
Of course, the assets of the bank are anything it holds or that is due to it, so the total asset figure includes outstanding loans. In that case, we can forgive the banks for being a little tight over the last two years or so, because they have watched carefully as the non-performing loan to gross loans ratio for the nine largest banks increased to 4.3 percent from 1.7 per cent at end-2008, according to Emirates 24-7.
Whoa, sorry, we lost ourselves in a whirl of jargon there. Basically, banks have been reluctant to lend until they see the number of non-performing loans (ie loans that aren’t being paid back) settle down a bit.
They have also been cagey because outstanding loans have exceeded deposits for much of the past two years, meaning there is a funding shortfall in the system. But that state of affairs is expected to have come to an end in 2010, with deposits likely to have grown to AED 1,124 billion compared to loans totaling AED 1,121 billion. So banks should have a liquidity surplus of around AED 4 billion. Predictions are that the trend will hold, and deposits will increase to AED 1,348 billion in 2013 while loans will get as far as AED 1,344 billion.
True, that gap will reverse in 2014 if projections are correct, but it seems to Kipp that UAE banks have few excuses for not lending to SMEs in the coming two years at least, and that investment would pay off for everyone. According to a Regus survey, globally two fifths of entrepreneurs said they intended to increase head count in the next six months. Mark Dixon, Chief Executive of the workspace solutions provider, says: “In the UAE, where SMEs account for at least 90 percent of business, we see strong signs that the entrepreneurial sector is preparing to grasp the full momentum of the recovery by investing in staff. Rather than cutting human resources SMEs are choosing to increase flexibility of location and reducing fixed office space in order to attract and reward top staff such as returning mothers who will benefit from a better work-life balance.”
Future economic growth is tied up with SMEs, but we won’t see much of it if they can’t get funding for expansion.
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