Oman set to boost SME growth

As part of the effort to diversify Oman’s economy, the authorities are keen to boost growth in the small and medium-sized enterprise (SME) segment, which is comparatively underdeveloped. The segment is thought to contribute 16-20% of national GDP, which the Central Bank of Oman (CBO) in a 2014 report described as “indicative of a sector with limited contribution to the overall economy”.

Where Credit Is Due

Accessing credit was the business challenge most cited by SMEs surveyed for a study published by the CBO in 2014, and only 13% said they had borrowed from banks or other financial institutions. In response, the CBO introduced a requirement for all banks to allocate at least 5% of their total loan books to SMEs by the end of 2015. In 2014 the proportion of loans allocated to SMEs stood at 3%, compared to 2.8% two years previously, so raising it to 5% will not be easy.

Abdullah Al Jufaili, the general manager of the Sharakah non-profit initiative to support the development of local SMEs, said that the requirement was equivalent to providing 1700 SMEs in Oman with OR500,000 ($1.29m) in credit each year. “It’s debatable whether there are that many small firms in Oman that require such investment,” he told OBG. According to Rashad Jaffar Al Shaikh, the deputy head of retail banking at Oman Arab Bank, reaching the target will be particularly challenging for larger banks. “SMEs usually require fairly small facilities and it will not be easy for larger banks to build up multibillion-riyal loan books in the segment.”

He added that bank lending was also not always the most suitable form of financing for smaller companies. “Part of the problem for SMEs here is that many are start-ups and are more in need of equity financing, and business guidance and advice, than borrowing; however, there is a lack of angel investors and venture capital, and banks don’t fund start-ups.” He said several initiatives had been put in place to provide start-up and early-stage financing, but that this is constrained in part by a reluctance on the part of SMEs to share equity.

Helmi Haruna Rashid, the general manager of wholesale banking at Bank Nizwa, also suggested that equity participation (rather than debt-based financing) would be a promising avenue for the sector. He told OBG that banks are currently forbidden from taking direct stakes in SMEs but that he believed the government was looking at changing this. “Equity financing would be a good fit for the Islamic banking sector in particular,” he told OBG. However, he added that SMEs in Oman need to improve their management to attract more funding, saying that the sultanate’s SMEs are “still relatively unbankable”, often lacking proper accounting and auditing mechanisms.

On Record

For better-established and well-run small and medium-sized firms, funding is already often readily available. “Securing loans is a challenge for companies without the proper documentation, but firms with it in place do not face major problems; indeed, financiers are keen to lend to them,” said Al Jufaili. Several major institutions, including Bank Muscat and Oman Arab Bank, have established dedicated SME-focused lending departments. “SMEs are also the backbone of the leasing market as banks tend to be more risk-averse, so finance firms have built up expertise in this area,” Sunil Pherwani, the general manager for marketing and sales at Oman Orix Leasing Company, told OBG.

While non-performing loan rates are higher among SME customers than large corporates, the higher interest rates that banks charge the sector cover this, Al Shaikh said, adding that there is plenty of liquidity in the market to finance smaller firms. “Money isn’t an issue; the problem relates more to ensuring that SMEs understand what business entails and that they put the money to good use.”