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SME Funding – The Quintessential Dilemma 10 th World Islamic Economic Forum Dubai 29 th October 2014 1.

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Presentation on theme: "SME Funding – The Quintessential Dilemma 10 th World Islamic Economic Forum Dubai 29 th October 2014 1."— Presentation transcript:

1 SME Funding – The Quintessential Dilemma 10 th World Islamic Economic Forum Dubai 29 th October 2014 1

2 2 CONTENTS I.Introduction and Observations II.SMEs and UAE Banks III.Life Cycle of SMEs IV.The 5 issues which challenge banks V.Brief on Alvarez & Marsal

3 3 SME – A Distinct Segment SMEs are a very distinct segment; they lie between classical retail and established corporates My involvement....with SMEs since 1995 and in three countries – Canada, UAE and Kenya Very similar issues in all markets Access to funding Access to markets “Unbankable” Lack of corporate governance, business planning and appreciation of risk Government initiatives have mixed results There is a growing demand for Sharia compliant products by SMEs in GCC, Sub Saharan Africa and Pakistan. We expect this to extend to North Africa as soon as enabling legislation is passed in Morocco, Tunisia and Algeria A significant number of Sharia compliant banking customers are first time borrowers Alvarez & Marsal (A&M) is a multi-disciplinary consulting firm with a team of practitioners, and is committed to helping develop & implement SME finance strategies

4 4 Personal Observations – a Macro View SMEs are the most critical contributor to economic growth No debate on SME’s importance to the economy – although contribution numbers vary in relation to contribution to GDP and employment creation No debate on the need to “do something” or “do more” Number of advisory initiatives at various levels with varying success SMES cover a wide spectrum – early stage vs established SMEs Balance between expat and locally owned SMEs Anecdotal evidence, and discussion with bankers, indicates that SMEs fared better than corporates in the last downturn, with the exception of o trading companies o businesses with heavy real estate exposure o where working capital lines for utilized for purposes other than core business activity

5 5 Personal Observations – The SME Client To an SME customer, deadlines of time and excellence of service provided is as critical as it is to a very large corporate SME customers tend to be much more passionate about their business There is often more than one generation involved Their lifestyle is very closely linked to the business There tends to be a mix of personal and corporate assets Audited information not necessarily complete or sufficiently detailed Management is thin, decision making is centralized, business planning is not regimented They tend to be very loyal to their bankers ((Does not usually work the other way!) Not all successful SMEs dream of becoming large corporates Successful SMEs tend to find niches where they have relative advantage of cost, service quality, even innovativeness SME banking is fundamentally relationship management; close and regular contact is critical It is not – as sometimes perceived – a high risk proposition

6 6 CONTENTS I.Introduction and Observations II.SMEs and UAE Banks III.Life Cycle of SMEs IV.The 5 issues which challenge banks V.Brief on Alvarez & Marsal

7 7 IMPORTANCE OF SME S SMEs contribute directly towards sustainable development and growth of a country’s economy and human capital, while being of strategic importance for the growth of commercial banks FOR MARKET & ECONOMY Create a knowledge-based society Breed innovation Diversify the economy Promote international trade Create new sources of employment Form a competitive marketplace FOR BANKS Vendor financing of existing large corporates, which leads to larger wallet share Deal flow for traditional corporate lending, as SMEs grow Diversifies risk with small-ticket exposure, while providing high fee income through transaction banking and trade finance Cross-sells Wealth Management products to owner-operators Strategic & sustainable development of the human, social and economic capital of the UAE

8 Common SME Hurdles Universally, particularly in developing economies, SMEs face the same issues and hurdles 8 Type Observations Social Entrepreneurship not seen as prestigious. Comfortable government jobs preferred over the hustle of entrepreneurship Capital Limited availability of capital, especially seed & VC funding. Banks unwilling to lend to smaller enterprises and impose onerous requirements Policy Lack of policies that are supportive of SME formation and growth (e.g. long registration & licensing times) Labour Scarcity of skilled workforce and restrictions on importing talent is an impediment to growth Education & Training Even for the limited capital destined for investment in private enterprise, there is an acute shortage of qualified proposals, and by extension, entrepreneurs Essential Services Basic services (e.g. utilities) can take months to secure, burdening newly-formed companies Business Support Costly business support services limit the ability of SMEs, especially start-ups, from availing such services Opportunities Limited domestic market size and not enough access to international markets

9 Challenges Faced by UAE Banks in Lending to SMEs Majority banks in the UAE are reluctant to lend to SMEs because of the high perceived risks, particularly credit risk. The growth opportunity for banks lies in a better understanding of the SMEs and their risks 9 Almost three quarter of banks in the UAE refuse to lend to SMEs because of the high perceived risk of business failure. Another major reason is a view that management of the SMEs are not competent enough to run the business. Source: Dubai Economic Council ‘Understanding the SME financing dynamics’ 2014 Almost half of the SMEs in UAE do not have sufficient collateral for banks to feel secure to lend to them. Other reasons that cause banks to shy away from lending to SMEs is lack of sufficient working capital and lack of financial strength of SMEs.

10 Areas of Importance to Banks for Lending to the SME The number 1 and 2 areas of importance to banks lending to SMEs is Collateral and Business Risk 10 Collateral Business Risk Financial Risk Legal & Regulatory CollateralInsufficient collateral No security coverage Business Risk Industry sector Viability of business model Operations of SME business in general Financial Risk Financial stability of the SME Quality of cash flow Ability to withstand losses Legal & regulatory concerns Absence of credit bureau in the country Limitations with legal enforcement in case of defaults Source: Dubai Economic Council ‘Understanding the SME financing dynamics’ 2014

11 Size of Opportunity is Immense in the UAE Despite the strong desire amongst banks to lend to SMEs, almost 40% do not have an SME business 11 Source: Dubai Economic Council ‘Understanding the SME financing dynamics’ 2014 Many SMEs initially rely on internal sources of funding but, once they are in a position to grow, they need to find other sources of capital. The challenge faced is not many banks in the UAE lend to SMEs and, of those that do, only a small portion of their book is allocated to SMEs

12 UAE Banking Sector & the SME Segment The UAE has entered a new phase of development and, recognizing the role SMEs play, some banks are gearing up to help promote a robust SME segment & further support job creation & economic activity 12 Business InitiativesMajor InitiativesConstraints Core Business Areas Internal capacity building to increase their SME lending portfolio Technical assistance and training to enhance awareness for the needs of the sector SME finance technology SME credit risk mitigation products and systems Development of SME finance training modules Assistance to selected firms in development of project finance proposals Business environment that is not prone to small-scale investments Limited financing from the banking sector - current rejection rate stands at 75% Insufficient regulatory support with respect to SME finance Large number of SMEs are unaware of their being “bankable” Quality and standardisation of business processes and services Managerial and technical skills IT and information support (MIS) Research and development of under-developed business sectors Private equity and investment climate

13 13 CONTENTS I.Introduction and Observations II.SMEs and UAE Banks III.Life Cycle of SMEs IV.The 5 issues which challenge banks V.Brief on Alvarez & Marsal

14 SME Requirements Across Life Stages In creating solutions and products for the SME segment, it is important to understand the changing needs of SMEs and how these interact with each other, as the SME evolves across life stages 14 Concept StageInitial FormationEarly StageGrowth / ExpansionEstablished / Maturity Proof of Concept / Proof of Value AngelVenture Capital (Stage1) VC (stage 2)/ Private Equity Private Equity (0 – 3 years)(3 – 5 years)(5+ years) Limited debt (e.g., physical assets) Basic suite (e.g., factoring) Broader suite (e.g., trade finance) Full suite (e.g., term finance). Equity Programs Debt Programs Debt products required Equity sources Evolving finance needs Knowledge transfer Hand holding Mentoring Monitoring / Relationship Management Business services (e.g., ICT, Real estate) Networking Knowledge Advisory Information Global access Monitoring Business services Information Global access Monitoring Supporting services needed Markets served LocalLocal & national National & explore exports National, regional/ international Life Stage

15 Borrowers Life Stages and the Funding Gap There is a large gap between Consumer and Wholesale banking, the customers as their business grows will change banks or will be continued to be provided consumer banking products who now will require more sophisticated wholesale products 15 Consumer Banking <50m borrower turnover Emerging Corporates / SME Banking 50 - 250m in borrower turnover Wholesale Banking >250m in borrower turnover Typical Customer’s Lifecycle Current GAP Client centricity is diminished as there is a break in the clients journey Creates a loss in revenue & clients Cost of retaining existing customers is more cost effective than acquiring new customers Current Gap Consumer Banking Wholesale Banking

16 16 CONTENTS I.Introduction and Observations II.SMEs and UAE Banks III.Life Cycle of SMEs IV.The 5 issues which challenge banks V.Brief on Alvarez & Marsal

17 Borrowers Life Stages and the Funding Gap It is important for banks to better understand the need of SMEs, as a segment rather than a sector 17 The desire to force fit into Retail or Wholesale The presumption that characteristics of SME are the same as that of top end retail or low end wholesale Pre disposition that SME is highly risky Non availability of granular MIS to manage the business Lack of documented underwriting policy Unclear procedures for handling any exceptions Lack of a robust remedial function (as opposed to Recovery) Not having the right skillsets in the team

18 Understanding the SME Segment’s Needs A hybrid approach for the SME segment is the most effective for banks, combining the personalized touch of Retail Banking (relationship management) with the depth of Wholesale Banking (risk management) 18 Credit Extension Relationship Management Approach to Market Product Type Repayment & Collections Strong relationship focus – individual relationships more important than institutional RMs must understand SMEs; be focused on finding solutions; hand hold clients; very strong on ethics – building trust is key for relationship management Individual RM driven / Team Leader override - Previous relationship helps Service providers (accountants/lawyers) are key referral sources Reliance on audited accounts not sufficient Business Account Bouquet, with Overdraft & Short Term Loans (asset backed) Transaction Banking and Trade Finance (LC/TR) LBD/EBD Zero tolerance on overdues; tolerance on reporting delays. Clarity of underwriting criteria essential Detailed – but not heavy – analysis required Short form credit application plus clarity of essential information that is required Depending on size of loan and type a mixture of Classic Retail and Wholesale Handholding may be required; Skill set of “problem solver” needed not that of recovery

19 19 CONTENTS I.Introduction and Observations II.SMEs and UAE Banks III.Life Cycle of SMEs IV.The 5 issues which challenge banks V.Brief on Alvarez & Marsal

20 A&M OVERVIEW For three decades, Alvarez & Marsal (A&M) has set the standard for working with organizations to tackle complex business issues, boost operating performance and maximize stakeholder value 20 – Performance Improvement – Turnaround and Restructuring – Transaction Advisory – Islamic Finance Advisory – Global Forensics and Disputes – Tax Advisory – Valuation Services – Regulatory and Risk Management – Corporate Governance – Executive Benefits Consulting – Automotive and Suppliers – Consumer Packaged Goods – Energy – Financial Services – Healthcare – High Tech – Insurance – Islamic Banking & Finance – Manufacturing – Media and Entertainment – Private Equity – Public Sector – Real Estate – Retail – Small & Medium Enterprises – Transportation and Infrastructure GLOBAL CAPABILITIES INDUSTRY EXPERTISE As a leading, independent, global professional services firm, Alvarez & Marsal: Has been owner-operated and privately held since inception Puts the needs of business and their investors first – without competing interests or audit-based conflicts A&M Approach Clients have trusted A&M to work with them to help solve their most important business problems. We have earned this trust by: Giving every problem the utmost senior-level attention Researching and understanding the facts before drawing conclusions Making a steadfast commitment to objectivity, quality and integrity Demonstrating time and again that leadership makes all the difference Taking a business approach and ensuring execution & implementation of strategic plans A&M employs a hands-on approach to solving problems and creating value – with a bias toward action and results. At Alvarez & Marsal, we: Hold ourselves accountable to delivering results Provide leadership by rolling up our sleeves to get the job done Believe in the importance of collaboration with our clients and their constituencies

21 Global Reach A&M has taken a measured approach to add to its service lines and geographic coverage to now offer full turnaround, performance improvement and business advisory capabilities across the globe 21 LONDON (EUROPE HQ) SÃO PAULO (LATIN AMERICA HQ) HONG KONG (ASIA HQ) NEW YORK (GLOBAL HQ) NORTH AMERICA New York (Global HQ) Atlanta Birmingham Boston Calgary Charlotte Chicago Dallas Denver Philadelphia Phoenix San Antonio San Francisco Seattle Toronto Vancouver Washington, D.C. ASIA Hong Kong (Asia HQ) Beijing Mumbai Seoul Shanghai LATIN AMERICA São Paulo (Latin America HQ) Mexico City EUROPE AND THE MIDDLE EAST London (Europe HQ) Amsterdam Athens Dubai Frankfurt Hamburg Milan Detroit El Segundo Greenwich Houston Kansas City Los Angeles Miami Nashville Madrid Moscow Munich Paris Prague Warsaw DUBAI (MIDDLE EAST HQ)

22 A&M History 22 For three decades, Alvarez & Marsal has set the standard for working with organizations to tackle complex business issues, boost operating performance and maximize stakeholder value. 4,000+ ENGAGEMENTS | 140 INDUSTRIES | 30 YEARS

23 Across all Sectors of the Finance Industry Including the Support Functions 23 Capital Markets Financial MarketsEquities Structured Finance Complex Derivatives Distressed AssetsRegulatory Transaction Banking Cash & PaymentsTradeCustody Corporate Finance M&A Equity Capital Markets Debt Capital Markets Debt AdvisoryFDD / ODD Retail & SME Banking Mortgages Loans Liabilities Products Payment Cards SME Strategy / Execution Risk & Compliance AML & KYCFATCABasel 3Capital AllocationStress TestingOperational Risk Others Strategy Formulation Lending/Portfolio Management Asset Management Private EquityIslamic BankingInsurance Support Operations COO Office OperationsITProcurementSecurity & Corporate Services CFO Office Financial AccountingManagement AccountingAsset & Liability ManagementOffshore Functions Others HRCommunication / Investor RelationsCredit Policies & ProceduresLegal

24 European & Middle East Offices 24 A&M Europe HQ Alvarez & Marsal Europe LLP 1 st Floor, One Finsbury Circus London EC2M 7EB United Kingdom Tel: +44 207 715 5200 Fax: +44 207 715 5201 www.alvarezandmarsal.eu Other European Locations Alvarez & Marsal Deutschland GmbH Bürkleinstrasse 10 D-80538 München Germany Tel: +49 89 71040 600 Fax: +49 89 71040 601 Alvarez & Marsal Italia S.r.l. Piazzale Luigi Cadorna, 4 20123 Milano Italy Tel: +39 02 8596 411 Fax: +39 02 8596 4150 Alvarez & Marsal CIS LLP 14/2, Sadovnicheskaya Str., Moscow 115 035 Russia Tel: + 74 959 887 745 Fax: + 74 959 887 745 Alvarez & Marsal France SCS 24, rue Royale 75008 Paris France Tel: +33 1 44 50 01 11 Fax: +33 1 44 50 01 35 Alvarez & Marsal Europe Limited Strawinskylaan 3127 1077 ZX Amsterdam The Netherlands Tel: +31 20 30 17 441 Fax: +31 20 30 17 475 Alvarez & Marsal Europe Limited Calle de Velázquez 17 – 2º D 28001 – Madrid Spain Tel: +34 91 781 5521 Fax: +34 91 435 9185 Alvarez & Marsal Poland Sp. z o.o PI. Trzech Krzyży 3 00-535 Warszawa Tel: +48 22 397 82 00 Fax: +48 22 584 71 60 Alvarez & Marsal Greece 50, Agiou Konstantinou St. 151 24 Maroussi Athens, Greece Tel: +30 210 61 54 500 Fax: +30 210 61 54 501 Alvarez & Marsal Europe Limited 20 Harcourt Street Dublin 2 Ireland Tel: +353 (0) 1 400 7523 Alvarez & Marsal Middle East Limited Gate Precinct 3, Level 5 Dubai International Financial Centre PO Box 506729 Dubai, UAE Tel: +971 4 567 1000 Fax: +971 4 567 1001 Dubai-MEA@alvarezandmarsal.com Alvarez & Marsal Deutschland GmbH Alte Rothofstrasse 2-4 60313 Frankfurt am Main Germany Phone: +49 69 710487100 Fax: +49 69 710487101 Alvarez & Marsal Europe Václavské náměstí 823/33 110 00 Prague 1 Czech Republic tel.: +420 212 240 905 fax: +420 212 244 355


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