SMEs to spur diversification of the Qatari economy

SMEs are often at the forefront of innovation and experimentation. However, encouraging a thriving small-business culture is a challenge in economies that are heavily concentrated in single, vertically integrated industries such as oil and gas. The path of economic development in such countries typically crowds out smaller enterprises, leaving markets dominated by a handful of larger corporations.

Changing this situation requires intervention and development of carefully considered policies promoting SMEs in potentially unfavourable environments. In recent years authorities have taken the first steps in providing a policy framework that aims to foster a climate promoting small-business growth.

Banking On It 

In 2006 the state-owned Qatar Development Bank (QDB) – established by Emir Hamad bin Khalifa Al Thani in 1997 to diversify the industrial base – gradually expanded its activities beyond the industrial sector. In 2008 the QDB saw its capital increase from QR200m ($54.9m) to QR10bn ($2.7bn) and two years later the bank launched a new strategy to grow local SMEs.

A major part of this is the Al Dhameen programme, a loan guarantee scheme geared towards start-ups. Working with 14 partner banks, the QDB acts as overall guarantor, allowing SMEs to access funds up to QR15m ($4.1m) or 85% of a project’s total finance value, whichever is lower. Loans for the manufacturing sector have an eight-year term with a two-year grace period, while loans for the services sector have five-year maturities with a one-year grace period. Both local companies and joint ventures with foreign investors are eligible for the scheme, provided turnover does not exceed QR30m ($8.2m).

While the QDB also provides direct loan facilities, the Al Dhameem programme works with the local finance sector to reach out to SMEs, avoiding the crowding-out effect sometimes seen in government-backed sponsorship programmes. According to QDB figures, total loan provision to SMEs reached $374.6m at the end of 2015. Ten months into 2016, $346m of loans had already been disbursed, suggesting that the QDB would end the year with 20% more funds released than in 2015.

Despite strides made to ensure greater access to funding, some entrepreneurs have been left out and many still struggle to establish basic operations. “Entrepreneurship in Qatar can be a costly business for a self-starter,” Mohammed Jaidah, executive director of Jaidah Group, told OBG. “Capital is cost prohibitive because banks require a lot of collateral, and barriers to entry are high due to the cost of labour and office space. The country needs an enabling financial and legal framework so that start-ups do not face so many obstacles to growth.”

Additional Aid 

The government has expanded efforts beyond financing, with the QDB supporting SMEs to penetrate new markets, and Tasdeer, the QDB’s export development agency, was launched in 2011, one year after Al Dhameen. Tasdeer’s services are available to all domestic companies regardless of size, providing both marketing assistance and financial services to would-be exporters, including export financing and export credit guarantees.

The QDB’s initial efforts to assist SMEs fell within the scope of Qatar National Vision 2030 and the first National Development Strategy (NDS), which ran from 2011 to 2016. While the government was evaluating the success of the NDS 2011-16 and preparing its successor, which will run from 2017 to 2022, a multilateral consultation was held involving various institutions and stakeholders to establish a national definition of SMEs.

The conclusions of the consultation divided SMEs into 18 subcategories: three pertain to size – micro, small and medium – and six further divisions pertain to sector – agriculture, manufacturing, creative industries, construction, trade and other services.

The definitions set a maximum limit for each subcategory in terms of headcount and annual turnover, with an additional set of parameters establishing maximum limits for foreign or subsidiary ownership for autonomous, partner or linked enterprises.

Policies targeting specific aspects of the SME sector have also been developed. In 2016, for instance, the QDB launched a five-year SME equity fund, with total capital of QR365m ($100.2m). Ticket amounts for small enterprises range in value from QR1.5m ($411,900) to QR7m ($1.9m), while allocations for medium-sized enterprises range from QR3.5m ($961,200) to QR18m ($4.9m). By the first quarter of 2017 around 5% of funds had been distributed.

In January 2017 the launch of a debt-to-equity seed funding initiative gave SMEs access to funding via convertible notes. Through this scheme SMEs can obtain short-term financing of up to QR1m ($274,630) which is later converted into an equity stake in the company, typically in conjunction with a future financing round.

Institutional Support

The QDB and other governmental institutions have also been implementing programmes to help build capacity among new start-ups. Among the first schemes was the QDB’s SME Toolkit, an online resource launched in 2012 to provide advice and practical guidance for companies. The QDB has since expanded its offering to a so-called “multi-faceted strategic roadmap for start-up development.” The roadmap has five components: specialised consultancy, legal support, assistance with financing and auditing, marketing and promotion, and matchmaking support with importers abroad. The launch of a one-stop shop, which provides full-service offices in various government ministries, has also streamlined support.

For more specialised assistance in collaboration with the Social Development Centre, the QDB launched the Qatar Business Incubation Centre (QBIC) in 2014. The goal of the QBIC is to develop the next generation of QR100m ($27.5m) companies by offering “space, support, industrial workshops for light manufacture, smart financing, mentoring and coaching.” Start-ups are offered space at the QBIC free of charge, equity financing of up to QR300,000 ($82,400) and the opportunity to upgrade to the Al Dhameen programme. The QBIC advertises itself as the region’s largest dedicated start-up incubator and, as of July 2017, it had incubated 59 start-ups from over 1870 applications.

In addition to assisting new businesses, the QDB works to help develop existing SMEs in the industrial sector. The Jahiz initiatives aim to lower barriers to entry across a number of high-tech manufacturing sectors, and thereby help diversify the economy and accelerate private sector development. Jahiz I – which focuses on eco-friendly projects in the chemicals, electronics, plastics and wood-based industries – lets over 30 plots of commercial land at competitive rates. Meanwhile, Jahiz II, which focuses on the food and beverage industry, provided 14 plots. Both measures offer a range of additional assistance, including consultation, business plan development and feasibility studies.

Looking Ahead

As an estimated 97% of Qatar’s companies fall within the SME category, policies that benefit these businesses could have tremendous knock-on effects, stimulating growth and productivity in the wider economy. Looking forward, the NDS 2017-22 is likely to focus on improving growth rates in the tradeable sector and the knowledge economy.

The coming years will see further solidification of existing policies to help SMEs, as well as the gradual rollout of tools to plug gaps in the funding cycle and assist targeted growth segments. The Qatar Stock Exchange has been preparing to launch a venture market aimed at helping SMEs further along in their investment cycle. As such, the exchange will apply its own definitions and constraints regarding eligibility.

Meanwhile, the QDB is exploring the possibility of launching an in-country value scheme regarding targeted growth segments. The structure of these schemes help retain a greater portion of spending of an existing value chain within the country.

Typically, these include a framework of targets and incentives for larger corporations operating in the oil and gas segments to work with local SMEs to source their supply chain. In November 2016 the QDB and Qatar Shell announced that 26 local SMEs had been shortlisted for a tender in six business opportunities in the supply chain for Pearl GTL, the world’s largest gas-to-liquids plant.

With further opportunities available in existing incubators – such as the Qatar Science and Technology Park – and recent shifts in legislature easing the costs associated with starting a business, the overall environment for SMEs in Qatar has improved considerably. Though work remains to be done, most notably on the framework for insolvency and exiting the market, the main building blocks are in place.