Why Banks in the UAE are Reluctant to Finance SMEs?

Successfully navigating the funding landscape while forming a company or expanding the business has been the core challenge faced by the Small and Medium Enterprises (SMEs) in the UAE. However, securing finance has proven to be the biggest challenge small and medium businesses face in the UAE. In the UAE, SMEs account for around 53% contribution to the GDP and constitute 94% of the total number of companies and 94% of the workforce. The UAE banks started cutting lending to the SME sector after the slowdown in economic growth that resulted from a collapse in oil prices a few years ago.

Reasons Why Banks Are Uncertain to Lend to SMEs?

Local banks in the UAE generally show a positive attitude while lending loans to the retail sector, large corporate and government-related entities. However, their exposure to SMEs has not been adequate.

The Khalifa Fund for Enterprise Development had stated in 2013 that the SME share of bank lending in the UAE was only 4%. This is less than the average of the MENA region, which was around 9%.

Bankers in the UAE consider the SMEs as business entities that are not bankable. Weak business plans, unsystematic financial records and a lack of collateral are the key hurdles that banks cite for not lending loans to SMEs. The following are some of the key issues that banks cite while SMEs

1. Lack of Financial Transparency

Banks cite a lack of financial transparency as one of the key reasons why they are reluctant to lend to SMEs. Bankers consider it risky to provide loans to SMEs that lack robust business formation planning and transparency in financial records in UAE.

2. Lack of Proper Credit History

Small businesses fail to win the confidence of the lenders mainly due to their size and lack of proper credit history. This is an area where the big-sized firms score over the SMEs and secure loans. Many of the SMEs fail to convince the bankers that their strategy is strong.

3. Failure to Maintain Proper Books

Most entrepreneurs set up small businesses in the UAE with the primary goal of growth and profitability. However, while running the businesses they often forget to maintain proper financial records. Some SMEs maintain such records but even such companies ignore the requirement of auditing the financial statements. According to a recent survey by support and information platform Dubai SME, only 50% of small businesses maintain audited financial statements.

4. Lack of Real Assets

Banks look at tangible or real assets while extending loans but most of the SMEs lack such assets. Real assets are important to lenders as they can latch on to it in case of loan defaults.

5. Vulnerable to Market Fluctuations

In comparison to the large Multinational Companies (MNCs), SMEs have a higher degree of exposure to the local market they have set their base. This makes them highly vulnerable to economic downturns in the market thereby shattering their loan repayment schedules, which eventually push them into debt burden.

6. The Reputation of Bad Debts in the Sector

SMEs hold a reputation of a history of bad debts that forced some banks to hold back provides loans to the sector. There were several cases in the past where business owners left the UAE after making default in payments in a bid to avoid a jail term for bounced checks, and some banks are even tightening credit lines for good customers.

Non-performing loans surged from 2.5% of total loans in 2008 to 7.5% by the end of 2010. The ratio slipped to 6.4% by 2016, however, it shot up to 6.7 % by the end of 2017.

How Banks Can Promote SMEs in UAE?

1. Simplifying The Account Opening Process

The stringent regulatory processes that are in place to comply with local and international regulations have made the bank accounting process cumbersome for many SMEs. Banks are required to comply with the UAE’s tough regulatory measures like Anti Money Laundering (AML) programs and Combating the Financing of Terrorism (CFT), which presents multiple hassles to the SMEs while opening bank accounts.

2. Providing Support through Consultations

Banks can offer support to SMEs if they share their data openly so that the lenders could spot the bottlenecks in the business. Using the data, financial institutions would be able to develop products that address these problems. The lenders could assess the state of finances and offer better-consulting services for small businesses.


SMEs, the powerhouse of every economy, need to be encouraged in the form of enhanced access to finance. SMEs play a big role in driving innovation, creating employment healthy competition. The UAE Vision 2021 aims to increase the contribution of SMEs to the economy to 60% from the current 53 by offering them all the possible facilities to start a new business in UAE. Banks need to provide SMEs greater access to finance by implementing various measures by simplifying the processes and offering better consultation on how to improve financial transparency.

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