Jan 31, 2011
JEDDAH: In its SME sector analysis released on Sunday, Capitas Group International (CGI), a management consultancy and advisory firm, has recommended a framework for the establishment of an SME authority in the Kingdom.
CGI focuses its practice on initiatives that are of strategic importance to the SME (small and medium enterprise) and housing sectors. Last year, CGI was retained by the government of Qatar to launch, “Enterprise Qatar”, the country’s stand alone, centralized SME authority.
According to CGI, a Saudi SME authority is needed to monitor the interests of SMEs, facilitate the development of policies that encourage SME sector growth, enable accurate evaluation of the sector through regulatory and financial reforms, and help in the collection of data on the sector.
“The Shoura Council recently gave its approval to the creation of an SME authority in Saudi Arabia,” said Naveed Siddiqui, CEO of Capitas Group International. “This is a critical development for the Kingdom. Today, there is no single body responsible for policy formulation and coordination within this vital sector. The launch of an SME authority will be the most effective means to enhance the contribution of SMEs to Saudi Arabia’s economy.”
The study underscored the importance of the sector for the development of the national economy, as SMEs constitute 90 percent of all Saudi companies. In addition to expanding employment opportunities, SMEs contribute to economic diversification and increased productivity within the labor force.
Nonetheless, statistics indicate that the sector yields limited impact on the Kingdom’s overall economy. Despite their vast numbers, and the availability of numerous SME support programs and initiatives, SMEs contribute only 25 percent to total employment and only 33 percent to the GDP. This places the sector at odds with the majority of advanced economies.
For example in Spain, SMEs contribute to 64.3 percent of GDP and in Austria they contribute 44 percent. Given the size and growth of Saudi Arabia’s economy and the nation’s focus on economic diversification, according to CGI, SMEs should contribute to more than 50 percent of the country’s GDP.
CGI suggests that foremost among SME challenges is their inability to secure capital. “Being able to access both debt and equity is crucial for SMEs. There is a scarcity of venture capital and angel investor funds that are targeting early stage companies,” said Tariq Hameed, senior vice president at CGI. Meanwhile, on the debt side only two percent of banks’ total lending is going to SMEs compared to over 14 percent in non-GCC countries.”
Both the Saudi government and the private sector have recognized the potential of SMEs and their need for a wide base of support including capital (debt and equity), training and business support services. The recently announced Ninth Economic Plan seeks to expand SME support by increasing the ability of specialized funds and financial institutions to provide credit to SMEs, along with providing various forms of technical assistance.
“Saudi Arabia has the largest number of public and private sector SME support programs of all GCC countries,” said Siddiqui. “But more is not necessarily better. In order to capitalize on the true potential of the SME sector, a targeted and well-coordinated program must be put in place in a bid to increase the flow of capital to the SMEs. The most effective method of overseeing this is through a centralized SME Authority,” Hameed added.
In the case of Saudi Arabia, according to CGI, the SME authority should be allocated clear oversight powers with designated focus in the areas of policy setting, capital deployment and services allocation. Within the realm of policy, the SME authority must be the steward of SME interests by defending relevant policy matters and developing regulatory frameworks, which lower barriers to SME development and foster an enabling environment for SME growth. The stewardship mission of a Saudi SME authority should commence with setting a national SME definition. An SME definition alone can provide a common starting point on which stakeholders and those concerned can develop programs and services for SMEs.
Along with its policy functions, CGI’s study states that the proposed Saudi SME authority must serve as “traffic control” for coordination of services in the multi-stakeholder SME landscape. The programs it develops will leverage existing services in the public and private sectors and package them for SMEs. This happens on several tracks to create a seamless set of services for SMEs at all stages of their business lifecycle.