Size matters: Efforts are under way to ensure SMEs have the support they need

Supporting small and medium-sized enterprises (SMEs) is near the top of the agenda for Oman’s government, as they are seen as a crucial element in the long-term goal of enlarging the private sector and creating jobs within it for Omanis. The sultanate’s leadership recognises that these grassroots businesses are key drivers of economic development, and is looking to foster an environment in which they can flourish and increase their contribution to revenue streams.

Serious Business

Oman has already put into place some of the key ingredients necessary for SMEs to flourish, including a supportive legal environment, and improved public sector data collection and analysis to help identify major trends and opportunities. The government also offers several lending mechanisms in which it shares risk with banks to make them more willing to extend credit to SMEs. The question, however, is not whether SMEs can thrive – many already have – it is more a matter of what types of businesses can both succeed and create jobs for Omani nationals.

Supporting the growth of the type of SMEs that can help to diversify the economy means finding the right mix of incentives and opportunities. The entrepreneurial spirit in Oman has been impacted by the local preference for government jobs, which are seen as lucrative and secure.

Workers in the public sector benefit from shorter hours, often starting early and ending by around mid-afternoon. This often means that entrepreneurial Omanis can manage both a government job and a private business; however, this is also likely to prevent more people from taking the leap and reaping the full rewards of the private sector.

In addition to the difficulty of convincing Omanis to invest more in the private sector, there is the obstacle posed to entrepreneurs in the local economy by the higher costs resulting from the need to import many basic materials. Thus, few industrial supply chains develop in the sultanate in which local firms can provide needed services. Additionally, competing on price on a regional basis can be difficult as labour costs are often lower elsewhere and free trade agreement between GCC member countries allows for the tax-free flow of goods across borders.

Finding Niches

Despite the challenges, several areas have been identified as having high potential, including tourism, construction and health care. Oman’s long-term economic diversification plan includes an increased focus on tourism. The sultanate’s mix of sunshine, sand and ocean means it can offer international travellers an opportunity to take advantage of both the country’s unique cultural offerings and more traditional beach getaways.

The market for tourists from within the GCC region is already performing strongly. Oman’s south-western governorate of Dhofar often receives mist-like rain and cooler weather during the summer, a unique seasonal occurrence on the peninsula. This period often sees thousands of Gulf tourists seeking respite from the region’s summer heat.

An increase in tourism would allow Omani investors the opportunity to delve into services ranging from car hire and renting out holiday flats on a short-term basis to providing for transportation and logistical needs, and catering, among other things.

Opportunities in the construction sector are sure to increase as the government is in the midst of an infrastructure drive. New roads and ports will create room for subcontracting and vehicle leasing. Oman’s financial services sector already boasts strong infrastructure for asset-backed lending, leaving plenty of space for SMEs in the logistics and construction services segments. Longer-term opportunities will open up once the raft of planned projects are completed, such as the rail link to the rest of the GCC, Muscat’s new airport and a direct road to Saudi Arabia that is likely to lower costs for shipping raw, semi-finished and finished goods to the rest of the region.

In the medical sector private health insurance is proving to be increasingly lucrative. Roughly 90% of the Omani workforce is employed by the public sector, and therefore reliant on the public health care system for their medical needs. However, insurers are now offering health policies to Omanis that give them supplemental coverage, which includes private sector clinics and hospitals. As the health care industry continues to expand, SMEs can seize opportunities for growth in the form of small clinics, diagnostic centres and service provision.

Exploring New Avenues

SMEs are also getting a boost from the public tendering process, in particular in the energy sector. Bidders for government contracts are now being evaluated on the basis of the in-country value (ICV) they offer. The ICV strategy emphasises how much a project benefits the local economy, including giving preference to Omani-operated SMEs for subcontracting.

As the largest firm of any kind in the country, state oil company Petroleum Development Oman (PDO) has taken the lead by citing ICV to be an integral element in its tendering process since 2011. For PDO contractors this can mean hiring Omanis or Omani-run SMEs to provide necessary services and increasing local content in procurement processes. PDO’s incremental goals include adding $100m per year in spending on in-country goods and a target of 50% market share by 2020, and adding $100m per year on spending on in-country services and reaching a 75% market share by 2020.

Getting Credit

One of the government’s most visible strategies for supporting SMEs, however, is the multi-pronged approach to improving access to financing. A survey jointly conducted by the Union of Arab Banks and World Bank in 2011 illustrated that while the average credit share of SMEs across all middle-income countries was 18% and 22% in high-income states, SMEs received 8% of lending in the Middle East and North Africa region and only 2% in the GCC region. The Central Bank of Oman (CBO), which is also the regulator for the country’s banking sector, has mandated that all banks increase their lending to SMEs to 5% of their outstanding credit by December 2014. In addition, the central bank has relaxed prudential requirements for SMEs by reducing their risk weights by 25%.

The new regulation is expected to lower the cost of borrowing. SMEs that can offer an asset as collateral can typically secure financing from non-bank financial companies in Oman, widely referred to as leasing companies. However, interest rates for such loans are generally several percentage points higher than the market average, which was 5.2% at the end of 2012. The CBO’s mandate is expected to put banks and leasing companies in more direct competition than they have been.

Subsidised financing is available through the Oman Development Bank (ODB), which has a mandate to offer soft loans at a rate of 3% for an eight-year term, and up to OR1m ($2.59m), to Omani entrepreneurs or to expatriate businesses proposing to employ at least 30% Omani workers. Financing has been split into two categories: working capital, or credit sales converted into cash by discounting bills receivable, and inventory finance, or a loan against trust receipts to purchase raw materials and meet production expenses that is repaid out-of-sale proceeds.

New Initiatives

The government has also established a pilot programme in which it guarantees 50% of a loan to SMEs up to OR250,000 ($647,500). These loans are now available through Bank Muscat or Oman Arab Bank (OAB); however, it is the latter bank that has more fully taken advantage of the programme. The rates on offer are not particularly low, at 5%, and with fees the effective rate is 6.5%, which compares favourably with current rates of 7-9% available to SMEs. The qualification process is also more burdensome, with paperwork taking up to a month to process, though the programme is capable of ensuring that more Omanis qualify for loans.

The OAB wrote OR9.6m ($24.8m) in loans in 2012, in the first year of the pilot programme, and OR13m ($33.6m) in the first eight months of 2013. As of September 2013 there was another OR6m ($15.5m) in applications in the process of being evaluated. The majority of these loans have been extended to firms in the retail or trade sectors, closely followed by firms purchasing heavy machinery. A pickup in industrial SMEs is expected and OAB’s pipeline includes makers of items such as paper cups, electrical switches for power lines, storage supplies used in aquaculture, plastics and marble processors.

For both ODB-granted and private sector loans covered by the 50% guarantee, restrictions have been put in place to avoid concentration in sectors that are seen as already being crowded, including real estate and construction. The CBO is planning to end the guarantee programme’s pilot status by allowing all banks to participate, but as of late 2013 it had not yet indicated when this was likely to happen.