Economics Homework Help. SEU SMEs and The Financial Institutions Discussion & Responses
The Saudi Arabia Vision 2030 stated SMEs (Small-Medium Size Enterprises) struggles to access adequate funding from the financial institutions. Offer two recommendations specific to how this struggle should be effectively addressed and be in alignment with Saudi Vision 2030.
The First:
Overhauling Specialized SME’S Credit Institutions
Several Saudi Arabian institutions have been modified to make bank lending to SMEs and retail consumers easier. “The government and its specialized credit institutions (SCIs), such as the Real Estate Development Fund (REDF), the Saudi Industrial Development Fund (SIDF), and the Agricultural Development Fund, have historically accelerated economic development in the kingdom”. These would provide financing for the kingdom’s cement factories and petrochemicals sector, as well as housing and agricultural stipends. Commercial banks would concentrate their funding on complex projects, eschewing individual and SME loans.
“With three significant outcomes, these SCIs filled the gap. First, they solidified the government’s central role in key economic sectors; second, and more concerning, they maintained banking industry exclusion from these sectors by removing any incentive for legal advancement; and third, because SCI terms were more magnanimous than bank terms, there was little demand for banks to enter these sectors”. As a result, the government pushed private actors out as both investors and lenders, impeding the development of a flexible and transparent financial environment.
“The economic reform of Vision 2030 is centered on promoting economic development away from oil, in part through encouraging a more active SME sector and small-scale business”. This is where most of the Vision’s anticipated economic and job growth will occur, but it’s also where banks will confront the biggest fundamental challenges. With barely one in every 20 SMEs using commercial banks, there is still a lot of work to do.
“In 2019, the SIDF issued 77 percent of loans to SMEs through banks, despite the fact that the total amount of these loans was only one-eighth of the funds approved by the SIDF that year World Bank, 2021)”. To encourage bank investment in critical areas, the SIDF should develop “specific financing packages as incentive solutions for private sector SME’s [emphasis added].” NCB, Saudi Arabia’s largest creditor to the SME sector, was one of the major benefactors, stating that supporting this sector was a “strategic priority” for the bank. It’s reasonable to expect that this will remain the case following the merger with Samba to become SNB (ABUNAYYA, 2021).
Collaborating with the government to improve private sector financial support
Businesses who have taken advantage of Saudi Arabia’s welcoming business climate have been able to get back on track as Vision 2030 guides the private sector through the Covid-19 rehabilitation projects. Similarly, SMEs have benefited from the opportunity provided by the kingdom’s reform initiative. “The Red Sea Project and the hypermodern metropolis NEOM, two of the most eye-catching mega-projects under the Vision 2030 umbrella, are expected to cost tens or hundreds of billions of dollars”. No Saudi bank had the balance sheets or knowledge to make these initiatives a reality when “Crown Prince Mohammed bin Salman” (MBS) came to power, but “Saudi National Bank (SNB)” is now one of the world’s top 150 banks, thanks to the merger of NCB and Samba.
References
- ABUNAYYA, M. (2021). Mega-projects and Small Enterprises: Understanding Saudi Arabian Banks’ Role in Economic Development. Middle East Institute. Retrieved 14 October 2021, from https://www.mei.edu/publications/mega-projects-and-small-enterprises-understanding-saudi-arabian-banks-role-economic.
- World Bank. (2021). Small and Medium Enterprises (SMEs) Finance. Worldbak.org. Retrieved 14 October 2021, from https://www.worldbank.org/en/topic/smefinance
The second
Small and Medium Enterprises (SMEs) are non-dependent firms with less number of employees than the required figure. SMEs are widely acknowledged in developing and developed economies to play a significant role in economic growth through the utilization of resources, creating job opportunities. In Saudi Arabia, 98% of the companies in the private sector are Small-Medium Size Enterprises which contribute around 19% of GDP to the economy and 46% among nations worldwide. While the industry still lags, it is expected to play a vital role in diversifying the economy from oil and contributing to industries’ growth, hence increasing job opportunities for the growing population in Saudi Arabia.
Small-Medium Size Enterprises’ major challenge, especially business start-ups, is gaining access to adequate funding from financial institutions. Most entrepreneurs complain about the numerous hardships they must go through before securing loans from banks and other financial institutions. Saudi Arabia is still structured to support large corporations, which is a significant disadvantage to Small-Medium Size Enterprises since they do not benefit from economies of scale. Recent research showed the crucial reasons for not accessing finance by SMEs are inadequate lending standards (Osama & Osama, 2019), insufficient guarantees, and incapability to prepare credit files.
The following recommendations address how the Saudi Arabia government can go about the financial struggles of Small-Medium Size Enterprises. The funding of Small-Medium Size firms needs an encouraging policy with a unified definition (Osama & Osama, 2019). The favorable policy should specify a particular percentage of funds to fund them, creating a legislative and legal basis. It should also initiate a particular mechanism for the development of the firms. Secondly, considering the establishment of financial institutions which are specialized in the funding of Small-Medium Size Enterprises. The firms’ financing should be conforming to time and sector with the probability of setting up the financial institutions of crafts and trades or the financial institution of medium and small industries. Suppose Saudi Arabia is to achieve its ambition of Vision 2030. In that case, it must increase the effort in supporting SMEs in easing access to financing and developing an environment of innovation among the youths.
Reference
Osama.E., & Osama.M. (2019). Obstacles and Problems Facing the Financing of Small and Medium Enterprises in KSA: Journal of Finance and Accounting 7(5): 168-183 DOI:10.11648/j.jfa.20190705.16
