In a region where small and medium sized enterprises (SMEs) are being promoted by governments as strategic economic motors of the future, there is a certain irony that the entrepreneurs behind them still cite financing as one of their main obstacles, writes Mark Lazell in the February 2014 edition of The Gulf.

Their frustrations are backed up by data. According to KPMG, the global audit, tax and advisory services firm, finance to SMEs currently accounts for no more than four per cent of total bank loans in the Gulf region.

Entrepreneurs in Bahrain, the Gulf’s smallest economy, complain of the lack of financing options available to them, even though 99 per cent of businesses in the kingdom are classified as SMEs and almost one third of national economic output is generated by these private entities.

“An entrepreneur here can’t go with a solid business plan to a venture capitalist and trade his proprietary knowledge for equity in the start up,” explains Robert Ainey, chief executive of the Bahrain Association of Banks, which represents the interests of licensed financial institutions in the country. He recalled a recent meeting with two entrepreneurs, who told him how frustrated they were having to deal with the day-to-day running of the business, chasing invoices and dealing with stock problems.

“In a typical venture capital environment, the venture capitalist will bring a whole team in to manage and market the venture. I asked whether they had considered hiring a general manager to run the business while they went off to do their next big thing, but this is totally non-existent in Bahrain,” says Ainey, speaking on the sidelines of an entrepreneurs’ financing seminar in Manama, organised by KPMG, last month.

Bahrain-based bank executives argue that the institutions remain hampered by strict regulations on asset quality and impairments, and a ruling, which prevents them from taking equity in commercial ventures.

Shaikh Hesham bin Mohammed al Khalifa, deputy general manager of non-financial services at Bahrain Development Bank (BDB), a government lender which helps support SMEs, told the seminar audience that many of the entrepreneurs coming into his office had no clear vision and roadmap for their ventures, and that lending criteria were not always being met.

“Take the issue of export substitution. You have a merchant who imports, and another who wants to manufacture locally. We ask the manufacturer how their venture will add value to the country by importing materials and machinery and receiving subsidised land, financing and electricity. We have to ask whether he is costing the government a lot more than the import merchant.

“Almost every day I meet someone who says ‘I know what I want to do, just give me the finance and the incubation’,” he continues.

“Three years down the road they are stuck, they owe everybody. And then they’ll turn around and say ‘the government encouraged me to go into this. Now you have to bail me out.’”

Professor Filipe Santos, an associate professor of entrepreneurship at the Abu Dhabi campus of INSEAD, the graduate business school, believes banks’ mindsets are still rarely compatible with entrepreneurial ambition, and thinks entrepreneurs should seek alternative avenues of financing where possible, particularly during the early stages of an enterprise’s life.

“If you don’t have clarity on your cash flows, a predictable set of revenues to count on, it is very difficult [for entrepreneurs],” he told the seminar. “An issue for an entrepreneur is the lack of credibility. So, associate yourself with a successful equity investor who can accelerate your development and give you credibility,” he advised.

Businessman Mohammed Fakhro, who has set up personal and family businesses across the GCC, says entrepreneurs in a small market like Bahrain should think regionally.

“The options for getting money at an attractive valuation are very limited in Bahrain, so you should always think regionally to attract the funding from places like Dubai and Saudi Arabia,” he notes.

“If you have a business idea it is better to scale it up and get investors with you, because you end up with less debt. If your idea is to start a factory, get investors with you and start a proper factory, rather than do it yourself, take on a lot of debt and create something small where you won’t be able to compete.” He said one option to manage costs was to consider giving employees stock options to reduce payroll.

“This is especially true if you are looking at a big project with good future potential and especially if you are planning to bring in equity investors.”

While Bahrain’s government remains a strong advocate for building the capacities and competitiveness of local SMEs through bodies like the BDB and Tamkeen, the semi-autonomous Labour Fund, Fakhro believes more venture capital needs to be made available. He believes the kingdom’s Mumtalakat sovereign wealth fund could have a role to play, particularly in providing more venture capital for technology or other high growth companies with regional or global potential.

“By having a venture capital arm with, say, a capital of BD100 million ($261 million) Mumtalakat could really pump money into the business community,” he says. One financing option, which looks likely to remain limited for the foreseeable future is commercial banks, who are understandably nervous about exposure to high-risk ventures and a central bank cap on interest charges they can levy.”

Fakhro points out that there are precedents in other parts of the world. “Commercial banks should be allowed to invest in companies, following a hybrid model, which has proved successful in places like Japan and South Korea,” he says.

Talk at the seminar also drifted towards other non-financing challenges facing entrepreneurs in Bahrain. Many participants believed it was necessary for a change in attitudes towards entrepreneurship and the concept of failure.

“We need to make it culturally acceptable to fail,” says Fakhro. “Many successful people you see today have failed, but in this part of the world they never talk about it. We need to decriminalise business failure, which disincentivises entrepreneurship. And we also need to teach positive thinking at schools, encourage our children to take chances, teach them that success is possible and that failure is a step towards success.”

Shaikh Hesham says his institution takes a similar view.

“In 2014, the BDB wants to create an entrepreneurial, innovative and enterprising society, ONE in which parents encourage their kids to start up their own businesses,” he explains. – TradeArabia News Service