Financing is a key challenge in the Gulf region, where many banks have been known to be reluctant to lend to the sector for a variety of reasons. In Bahrain’s SMEs facing tough financing options, Trade Arabia shared the following:
“In a region where small and medium sized enterprises (SMEs) are being promoted by governments as strategic economic motors of the future, there is a certain irony that the entrepreneurs behind them still cite financing as one of their main obstacles, writes Mark Lazell in the February 2014 edition of The Gulf. Their frustrations are backed up by data.”
The dearth of financing for family businesses
In Bahrain, SMEs contribute 28% to GDP, 73% to employment, and constitute more than 90% of total businesses. And even though family-owned businesses and SMEs contribute significantly to the GDPs of the Gulf region, their access to financing is very low and is estimated to be anywhere between a marginal 2-4% of total bank loans.
“Entrepreneurs in Bahrain, the Gulf’s smallest economy, complain of the lack of financing options available to them, even though 99% of businesses in the kingdom are classified as SMEs and almost one third of national economic output is generated by these private entities. Bahrain-based bank executives argue that the institutions remain hampered by strict regulations on asset quality and impairments, and a ruling, which prevents them from taking equity in commercial ventures.” ~ Bahrain’s SMEs facing tough financing options
Challenges facing entrepreneurs in Bahrain
According to Robert Ainey, chief executive of the Bahrain Association of Banks: “An entrepreneur here can’t go with a solid business plan to a venture capitalist and trade his proprietary knowledge for equity in the start up.” Ainey recalled a recent meeting with two entrepreneurs, who told him how frustrated they were; having to deal with the day-to-day running of the business, chasing invoices and dealing with stock problems.
“In a typical venture capital environment, the venture capitalist will bring a whole team in to manage and market the venture. I asked whether they had considered hiring a general manager to run the business while they went off to do their next big thing, but this is totally non-existent in Bahrain.” ~ Bahrain’s SMEs facing tough financing options
Shaikh Hesham bin Mohammed Al Khalifa, Deputy General Manager of Non-Financial Services at Bahrain Development Bank, delivered the keynote address. He told the seminar audience that many of the entrepreneurs coming into his office had no clear vision and roadmap for their ventures, and that lending criteria were not always being met.
No equity for small business ventures
“Take the issue of export substitution. You have a merchant who imports, and another who wants to manufacture locally. We ask the manufacturer how their venture will add value to the country by importing materials and machinery and receiving subsidised land, financing and electricity. We have to ask whether he is costing the government a lot more than the import merchant.
Almost every day I meet someone who says ‘I know what I want to do, just give me the finance and the incubation’. Three years down the road they are stuck, they owe everybody. And then they’ll turn around and say ‘the government encouraged me to go into this. Now you have to bail me out.’” ~ Bahrain’s SMEs facing tough financing options
Entrepreneurs and alternative financing avenues
Professor Filipe Santos was another keynote speaker, and he believes many banks’ mindsets are still rarely compatible with entrepreneurial ambition, and thinks entrepreneurs should seek alternative avenues of financing where possible, particularly during the early stages of an enterprise’s life:
“If you don’t have clarity on your cash flows, a predictable set of revenues to count on, it is very difficult. An issue for an entrepreneur is the lack of credibility. So, associate yourself with a successful equity investor who can accelerate your development and give you credibility.” ~ Bahrain’s SMEs facing tough financing options
The Entrepreneurship Club has been set up to provide support, guidance, and help mentor the entrepreneurs and young leaders of Bahraini family businesses and SMEs. For more information, read Entrepreneurship Club launched in Bahrain and Bahrain’s SMEs facing tough financing options.