THE development of the small and middle-ranking business sectors is seen by the government as a strategic goal. And with good reason. As one leading Saudi businessman put it the other day, it makes more sense to have 10 companies worth SR50 million apiece rather than one worth SR500 million: There will be more jobs and there is greater scope and support for down-the-line businesses.
This obvious fact may turn on its head all the arguments about efficiency and economies of scale. But from a national economic point of view, smaller has to be infinitely better than bigger. "If attention is given to middle and smaller companies," noted prominent Jeddah real estate developer Zaki Farsi, "the economy will do well."
Who can argue with that? But is sufficient practical support being provided? There are those who say they have their doubts. At the heart of the matter is the issue of funding. If would-be small and medium-sized businesses do not have the money to develop and expand, they are not going to get anywhere. Funding is the decisive factor.
Dr. Said Al-Shaikh, chief economist at the National Commercial Bank, candidly admits that new small businesses do not receive "much support" from the banks. Corporate lending, far from expanding, is diminishing, he says. "Year by year, the corporate loans portfolio is declining," he explained in an interview recently. "The shift is to consumer financing."
In 1998, the latter accounted for SR8 billion of bank lending. By mid-2001, it was worth SR35 billion. Corporate lending is still the main area of lending, but, whereas three years ago it was worth SR150 billion, this year it is down to SR135 billion. That is not an encouraging picture for the small and middle-ranking business sector.
The fault, Al-Shaikh says, lies with the businessmen themselves, and with the government. The biggest problem is the lack of an adequate legal system to protect banks in case of default. Because Shariah courts do not accept banking as a fully legitimate business, there is a tendency for the courts to take the borrower’s side if he defaults. Consequently, banks prefer to resolve disputes without going to court. At present there is a disputes settlement committee, set up by the banks; but it is voluntary. The banks feel they need stronger protection. "There is talk of commercial courts being established," Al-Shaikh noted, but so far nothing has been done. Similarly, there are reports that the authorities are thinking of a capital market law which would enable companies to issue bonds (although that will not help small and middle sized operators to raise funds; just the big ones). But again nothing has happened.
The result is the increasing reluctance to fund small and middle-sized businesses. "Everything hinges on what the government does. Saudi banking laws need revising," Al-Shaikh said. The authorities’ desire to help the sector grow is genuine enough, but without legal changes, it will be difficult to get the banks to unlock adequate funding, says the NCB’s chief economist. "Inability to recover debt puts the brakes on their plans." Until the government changes the law, "adequate help will not be provided to small and middle-sized businesses."
There are exceptions. Most small and medium-sized businesses, Al-Shaikh points out, concentrate on trade; and for that, they require short-term borrowing to cover imports. "The banks like that. It is a short-term risk with high return." There the banks will play ball. But when it comes to medium to long-term financing for expansion, the problem kicks in. "It’s too risky. There is insufficient legal protection."
There is a similar problem, he said, when it comes to lending to buy a home. "If mortgages were legally available, they would help banks to meet much of the housing demand in the country."
The attraction of consumer financing, on the other hand, is that repayments for individual borrowing are not made by the borrowers personally but are deducted directly from salaries. The borrower’s employer, often the state sector, agrees with the bank to do this. "Consumer financing provides a high return on equity," said Al-Shaikh. "Banks are focused on it. That’s another reason why banks are less interested in the corporate sector."
But businesses are also to blame for their problems in raising funds, says Al-Shaikh. "Most newcomers come to banks without adequate information which would allow us to make a judgment about lending," he said. "There are no audited accounts, no income statements, no balance sheets, no business plans." Newcomers do not appear to understand, he said, that the business environment has changed. Banks will no longer lend to someone simply because he is a member of an old merchant family.
There are those, of course, with a relationship with a bank built up over the years. In the past, things were different: Banking relationships were based on family links and established ties. But that has changed. Those with a proven track record are one thing — and have little difficulty obtaining finance. But, for newcomers, the relationship has to be "purely professional," Al-Shaikh said. It has to be based on company performance. The banks demand proper information, properly presented. The trouble is, he explained, is that too many small and medium-sized companies "have not yet learned this." They still think that contacts and a name are enough.
Stories of young men from prominent merchant families given a hard time by the banks when they tried to set up on their own confirm that explanation. "I didn’t have any problems raising funds from the banks when I set up a business 30 years ago," commented one leading Jeddah businessman. "And now, because I have a track record and am a major player in my field, my bank is constantly offering me more money," he added. "But they won’t lend to my son who wants to set up a business on his own. If you’re a newcomer today, it’s a nightmare."
So whither the small and medium business, on which so many hopes are pinned? There is no shortage of proposals and ideas coming from would-be businessmen. But without adequate funding, they are going to find it difficult to get far. Given the demands and attitudes of the banks, it is clear that perceptions need to change, both within the business community and in government. Businessmen need to think differently. Good accountancy, business plans, budgets and the like are not just for the big operators. Middle and small companies have to embrace them as well. This requires education and training. But most of all, new laws need to be introduced to protect lending.
The business community says that the banks need to provide venture capital to new businesses. They will if they feel adequately protected. They need to lend; that is how they make their money. But without changes in the law to provide them with adequate protection, and those changes implemented, it is clear that the banks are not going to provide the support that newcomers need. There is no point expecting the government to provide the cash. Those days are past.
But the government does not need to help. Resources are available through the banks. What is more, they can act as an invaluable means of bringing Saudi funds invested abroad back home and channeling them into venture capital for new projects here. What is needed is the legal framework to unlock the process. That hurdle has yet to be jumped.