Small- and medium-sized enterprises, in particular in a growth market like the United Arab Emirates, have traditionally had a tougher time securing loans from banks who perceive them as less transparent and therefore as more risky and costly to do business with. Nevertheless, as this category of companies constitutes a large chunk of the U.A.E. economy, interest from both local and international lenders has been on the rise in recent years.
- Standard Chartered is dropping out of the race for SME business in the U.A.E. in favor of higher-margin services.
Understandably, when one of largest foreign banks like Standard Chartered decides to scale down its SME exposure in the U.A.E., the country’s central bank is not amused, warning of a potential litigation backlash against the U.K. bank with emerging markets focus. In a similar move last year, HSBC also closed a number of SME client accounts in the U.A.E..
For the local banks, who have been steadily recovering from the global financial downturn, StanChart’s decision to cut ties with an estimated 1400 to 8000 clients may present a unique opportunity on the other hand.
“We would always expect local lenders to take on the vast bulk of local SME lending. They are truly vested in the local market, have a greater stake in supporting the SME sector and no lending or capital adequacy restrictions placed on them from parent organisations abroad,” said David Hunt, chief executive of Gulf Finance Corporation, a subsidiary of Dubai-based Shuaa Capital.
A number of domestic banks have already been gaining ground in the SME space. Abu Dhabi Commercial Bank in April said it bought a portfolio of local SME loans from Mubadala GE Capital for $122.5 million. Other banks have also announced plans to try to capture more of the SME market.
“The potential is huge, more so given the recent developments,” said Aarthi Chandrasekaran, a senior banking analyst at NBK Capital. “The banks who will benefit the most are those that are less conservative and more aggressive in the retail and SME lending space,” she noted.
Besides banks, the U.A.E. government too, has been putting in efforts to boost the SME sector, recognizing its important economic role.
Earlier this year, ministry of finance officials said they were drawing up a new law to encourage Emiratis to start their own SMEs as part of a plan to simulate the country’s economy by creating new jobs. Minister of Economy Sultan Bin Saeed Al Mansoori said then he hoped the government plan would increase the SME’s contribution to gross domestic product to 70% by 2020 from 60% in 2011.
Despite the apparent opportunities and amid the rising pressure from regulators, StanChart had decided during the course of this year to largely abandon the SME space in favor of higher-margin services.
“We see sometimes less value in the middle to small clients whether on the commercial or retail side because local banks are very well equipped to cater to them and we continuously see that the game over there is margin compression. That’s not a war that we can win,” said Mohsin Nathani, chief executive of Standard Chartered’s U.A.E. business at a meeting with reporters earlier this month.
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(via WSJ Blogs)