New government initiatives support Bahrain's small and medium-sized enterprises

Small businesses play an important and growing role in Bahrain’s economy. According to the Labour Market Regulatory Authority, more than 90% of licensed companies had less than 10 employees in 2016 and approximately 98% of them employed less than 50 people each. The activity of this prominent part of the economy has become easier to track in the last decade: the Ministry of Industry, Commerce and Tourism (MICT) established a working definition of small and medium-sized entities (SMEs) in 2006, becoming one of the first state bodies in the region to do so.

CURRENT STATE: The framework differentiates micro-, small and medium-sized businesses by their number of employees, capital investment and annual turnover, with micro-firms having fewer than 10 employees and medium-sized businesses starting at 51 people. Together, SMEs account for almost 30% of GDP and provide employment opportunities for nearly 75% of private sector workers. These places of business are therefore central to the government’s attempts to harness private investment to drive economic growth and provide more job opportunities to citizens (see analysis).

However, the economic slowdown that has focused the government’s attention on these goals has also had a disproportionally harmful effect on SMEs. Small businesses generally suffer the most during periods of economic turbulence, as they lack larger firms’ capital buffers, and dwindling cash flows can quickly lead to a continuity crisis. Securing funding also becomes more difficult for smaller firms as banks tighten lending criteria and narrow their focus to the less-risky corporate segment. Therefore, government support efforts for SMEs are of central importance as the country seeks to shift its labour market towards the private sector.

SUPPORT STRUCTURE: Beginning in the 1990s Bahrain has grown an ecosystem of state institutions whose purpose is to encourage the growth of SMEs. Support available in Manama range from entrepreneurial assistance and start-up help to incubation and acceleration facilities, advisory services and intensive mentoring. The Bahrain Development Bank (BDB) has offered financing to SMEs since 1992 and has more recently developed incubators with specialised mandates – such as ICT-specific or women-focused – as well as a general purpose incubator at Al Hidd that caters to more than 150 early-stage companies, called the Bahrain Business Incubator Centre (BBIC). The MICT is one of numerous state or quasi-state bodies offering a SME start-up toolkit, and it runs the BBIC in collaboration with the UN Industrial Development Organisation. In 2013 the Bahrain Chamber of Commerce and Industry (BCCI) launched its SME Development and Support Centre, which provides regulatory advice, export operations, business processes, access to funding, and establishing partnerships with regional and international SMEs.

TAMKEEN: Established in 2006, Tamkeen is one of the government’s most important SME development tools. The semi-governmental body pursues a dual mandate of encouraging the creation of enterprises and providing the support necessary to increase the productivity of existing companies. Perhaps Tamkeen’s most important work was the financing framework it developed in collaboration with Bahraini banks, by which SMEs are granted access to sharia-compliant facilities at favourable rates. Since its inception Tamkeen’s finance programme has expanded from providing loans only for fixed-asset collateral to include credit for working capital and trade financing. By 2015 Tamkeen had spent around BD22m ($58.3m) in profit and guarantee payments to provide more than BD350m ($928.1m) in funding through partner banks. In doing so, the programme has helped grow many young businesses.

While the finance programme remains a central activity, Tamkeen has recently placed increased emphasis on skills improvement and practical assistance. An enterprise support programme, for example, offers experience building through international placements for employees and a wide range of support for start-ups. The professional certification programme, meanwhile, allows Bahrainis to receive accreditation from global institutions such as the Association of Chartered Accountants. By the end of 2015 Tamkeen had trained nearly 95,000 individuals and formed relationships with over 50 professional institutes, according to the organisation’s most recent annual report.

RECENT ADDITIONS: The SME support environment continues to evolve. State bodies have a strong track record of cooperating with each other, non-profit organisations and private sector entities to produce new programmes aimed at tackling specific issues in the segment. One of the most significant of these has been the launch of a $100m fund that will invest directly in SME development. The initiative, unveiled in May 2017, is the result of a joint effort between Tamkeen, Bahrain’s Idbar Bank and Saudi Arabia’s Islamic Corporation for the Development of the Private Sector. The fund will target the consumer goods, industrial, ICT, education and health care sectors, and is based on a sharia-compliant, mezzanine model. The new initiative will complement the BDB’s SME Fund 1, another sharia-compliant instrument that targets small business prospects in the health care, education, infrastructure, renewable energy, tourism and manufacturing sectors.

Perhaps the most interesting innovation of 2017, however, is the new regulatory framework for SME crowdfunding released by the Central Bank of Bahrain (CBB). The regulator has long been aware of the difficulties small businesses experience in securing bank loans, and it therefore hopes that crowdfunding platforms will provide a viable alternative source of funds. The CBB’s framework uses a person-to-business financing model with conventional and sharia-compliant options, and allows crowdfunding platform operators to establish with BD50,000 ($133,000) minimum capital. Foreign and domestic SMEs with paid-up capital not exceeding BD250,000 ($663,000) are eligible to showcase themselves to potential investors. If the SME is unable to raise at least 80% of its offer size, the attempt is considered unsuccessful and the monies raised return to investors – a regulatory hurdle that helps narrow down the field of candidates to those that the investment community considers most promising. Successful candidates can raise a maximum of BD100,000 ($265,000) in a single year, with the financing tenor capped at five years.

These changes have been well received by industry players. “Bahrain has a robust regulatory framework in comparison to the rest of the region, and recent reforms undertaken by the CBB show its adaptability,” Stephen Vineburg, CEO of ASMA Capital, told OBG. “Effective interaction between the regulator and the market players is an important part of this, and of keeping pace with developments in the sector.”

The CBB has included a number of investor safeguards in its crowdfunding framework, most significantly a prohibition on retail investors taking part in the process. Only accredited investors will be allowed to provide financing through the new platforms, and these will be limited to directing a maximum of 10% of their net assets to a single borrower. Despite the limitations, the ability of Bahraini companies to raise funds directly from the investment community may prove useful over the coming years. In markets where crowdfunding is already established, its growth has been impressive. Global crowdfunding platforms generated an estimated $2.1bn in investment for young companies in 2015, according to Forbes, and the World Bank predicts that such investments will hit $96bn per year in developing countries alone by 2025.

LOOKING AHEAD: Bahrain’s efforts to grow its SME segment have been based largely on establishing support institutions and networks. The resulting ecosystem of incubators, accelerators and advisory bodies have made it easier for small businesses and start-ups to navigate the difficult early years of operation, but despite the best efforts of the BDB and Tamkeen, the principle challenge to SME development in Bahrain remains unaltered: a recent report commissioned by the BCCI found that access to finance remains the single-biggest concern for young companies seeking to grow.

What effect the arrival of new crowdfunding platforms will have on this issue remains to be seen, but the government has a number of other regulatory options available should it feel that further intervention is necessary. Other jurisdictions, for example, have introduced laws by which a certain percentage of tendered public contracts must be fulfilled by domestic SMEs. Central banks in the MENA region have also begun to stipulate how much SME lending should be present on banks’ balance sheets, the most notable recent example of this being Egypt’s 2016 decision to limit interest rates applied to microenterprise loans and require banks to direct 20% of their lending to SMEs.

These regulatory measures have resulted in both supporters and detractors, and global ratings agencies have raised concerns regarding their effect on asset quality. However, the coming years may see more intervention by the CBB in the Bahraini banking sector to support SMEs in a similar way, should the need arise.