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Can new legislation boost SME growth in the UAE?

Dubai, June 18, 2014

The recent approval by Sheikh Khalifa Bin Zayed Al Nahyan, President of the UAE, of Federal Law No 2 of 2014 for Small and Medium-sized Enterprises (SME) is viewed by many as a positive step towards stimulation of the SME sector in the UAE.

It is certainly a move towards achieving the goal expressed by Sultan Al Mansouri, the Minister of Economy, to elevate the contribution of SMEs to the non-oil GDP of the UAE from its current sixty per cent to seventy per cent by 2020.

Whether or not the introduction of Federal Law No 2 of 2014 (the SME Law) will assist in achieving this goal remains to be seen, but in order to be able to assess its potential impact, it is necessary to examine the SME Law, and in particular its applicability.

The SME Law does not, at this stage, define what constitutes an SME. Section 3 of the SME Law states that the SME Council will determine what constitutes an SME based on factors such as number of employees, turnover, capital investment, and any other criteria, given the nature of activities undertaken, which may be recommended by the SME Council.

Until such time as this definition of what constitutes a SME has been determined, it is not possible to ascertain to what businesses the SME Law will apply. However, there are further application limiting criteria which will apply to those business undertakings which do, once the definition of SME is determined, constitute SMEs and accordingly fall within the ambit of the SME Law.

The SME Law tasks the Ministry of Economy with establishing a national SME program which it is intended will provide a supporting role to SMEs by, amongst other factors:

•    Liaising with various authorities to devise incentives for projects and canvass support;

•    Developing awareness programs to identify opportunities and stimulate project development; and

•    Establishing a register or database of projects.

Unfortunately the SME Law provides that only SMEs owned entirely, that is one hundred percent, by UAE nationals will be able to register with the Program and benefit from it. For those SMEs which do fall within this category, the benefits include:

•    A commitment by the federal authorities that not less than 10 per cent of their supply and service needs will be procured from these SME’s;

•    A commitment that companies in which the federal government owns at least 25 per cent that at least 5 per cent of their supply and service needs will be procured from these SME’s;

•    Possible Customs tax incentives;

•    Discounted license fees and simplified administrative procedures;

•    Allocated space at exhibitions abroad in which the UAE participates;

•    Access to local specialized exhibitions; and

•    The assurance that the UAE Development Bank is obliged by the SME Law to ensure that at least 10 per cent of its annual lending is to these SMEs, and that the Central Bank will further issue regulations pertaining to SME financing.

The question then arises whether the restrictions, in so far as access to the Program and the resultant benefits thereof, will have the effect of stimulating the non-oil GDP contribution of SME’s from its current sixty per cent to the seventy per cent goal as expressed by the Minister of Economy by 2020.

According to figures cited by the chief executive officer of Dubai SME, Abdul Basit Al Janahi, of the approximately three hundred thousand SMEs registered in the UAE, only three per cent are locally owned.

Mathematically, expecting this three percent, assuming the entire three percent  fell within the definition of an SME, were 100 per cent owned by UAE nationals, and all registered with the Program, to be able to elevate the SME contribution to the non-oil GDP from 60 per cent to 70 per cent is highly improbable.

The SME Law itself cannot therefore realistically be seen as the sole or exclusive vehicle through which this target can be achieved. Having said that however, it is submitted that notwithstanding the fact that the SME Law is effectively directed at benefitting a rather small segment of the SME market.

The benefits of the SME Law to SMEs not able to participate in the Program should not be underestimated. The focus on, and interest in, this sector of the economy which the SME Law has and will bring, can only assist the business development of all SMEs. In addition, as financial institutions lending to SMEs enrolled in the Program increases, these financial institutions may look at the creation of innovative new products to offer to other SMEs.

Further, as the businesses of Program registered SME’s grow, so should their need for supplies, services and the like which may well be supplied by other non-Program registered SMEs. Finally, it is probable that as certain of the Program registered SMEs are awarded more of the government and quasi-government contracts and business, other SMEs will be able to procure contracts and work which has now become available because of the commitment of the Program registered SMEs to these government and quasi-government obligations.

It would be naïve to expect the SME Law, particularly given its application limitations, to be the sole vehicle through which the desired 10 per cent increase in the SME contribution to GDP by 2020 can be achieved. It is, however, when one considers the potential indirect benefits to non-Program registered SMEs, a decent initial step. Perhaps in time, when the benefits of the SME Law start to manifest themselves, the legislation will be amended to include SMEs which are only partially owned by UAE nationals. – TradeArabia News Service

Ken Dixon is partner in the corporate and commercial practice at Dubai-based law firm Galadari, Advocates & Legal

Tags: UAE | Legislation | GDP |

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