The UAE’s legal and regulatory environment needs updating to be more conducive towards start-up businesses and small and medium enterprises, according to the head of the country’s largest SME funding body.
Abdullah Al Darmaki, chief executive of the Khalifa Fund for Enterprise Development, said that while the passing of this year's SME Law in April was a step in the right direction, further legal and regulatory developments were essential to the development of the SME sector.
“The UAE is such a young country, and the regulations haven’t caught up yet in terms of how to address the SME space,” said Mr Al Darmaki. “To be frank, we don’t have a bankruptcy law. That is something I believe if it is in place [it will be a positive step]. We’re also looking about how to mitigate risk for enterprise creation.”
The absence of a modern insolvency regime has long been cited as one of the main factors holding back the development of the UAE’s SME sector, with would-be entrepreneurs facing possible imprisonment in the case of bankruptcy.
But while modern insolvency rules are important to give a level of comfort to entrepreneurs and small businesses, the importance of the lack of such rules is often overplayed, according to Dave McClure, founder of the US-based business incubator 500 Startups.
“You don’t have bankruptcy rules in Japan, and yet people still start businesses there,” he noted.
“Real entrepreneurs think they’re going to succeed, and they don’t worry about the possible downsides until they happen. Yes it’s an issue, but it’s not an issue when you’re getting started. The issue when you’re getting started is can someone write me a cheque to fund me.”
While the development of the country’s SME sector has increasingly become a national priority for the UAE government, the funding of such enterprises, especially by the country’s banks, continues to lag.
While SMEs represent more than 90 per cent of registered companies in the UAE, they only account for about 3 per cent of total loans by banks.
“Financial institutes can do more, especially in the start-up space,” said Mr Al Darmaki.
“Banks look at start-ups as toxic assets and they don’t want to get involved, which is why [the Khalifa Fund] exists. If the banks would take an active stake in starting enterprises, I’d be doing something else.”
This month, Tecom, the organisation that runs Dubai Internet City, announced plans for a new 1.6 million square feet zone for small businesses, with Dh4.5 billion worth of funding for such initiatives.
But Mr McClure, whose company has funded about 15 companies in the Mena region, said that money had to be allocated in a smart way to have an impact on the economy.
“If you’re deploying, say, hundreds of millions of dollars to fund start-up businesses, the best way to deploy it would be to put that in maybe three to five US$10 million to $20m funds that are writing cheques of between $100,000 to $1m.”
Mr McClure noted that there were plenty of bodies in the region that acted as business incubators that could provide funding of $25,000 to $100,000 for start-up businesses, but relatively few that could provide higher levels of funding to help small business scale up to the next level.
“The region could easily support at least 10 $20m-$50m funds and probably three to five $100m to $200m funds catering to such needs. We’re talking incredibly small amounts of capital to have a real impact, compared to what we’re seeing spent on real estate projects and Formula One racetracks.”
Mr Al Darmaki and Mr McClure were speaking at the What’s Next? Navigating Global Challenges with the Innovation Generation, held in Abu Dhabi yesterday.
jeverington@thenational.ae
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