Roadblocks To Innovation: UAE Small Businesses Sound Off On Working With Banks
Small business owners in the UAE sound off on their experience working with the country's financial institutions.
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The relationship between banks and small-scale ventures in the UAE has always been close (by its very nature), but also quite intense- by choice, apparently. On one hand, the local banking sector often loudly trumpets its support to SMEs, shrugging off practices that have left those ventures feeling sidelined by more established business players. On the other hand, almost two-thirds (65%) of UAE entrepreneurs find banking services very challenging, according to a recent whitepaper by Dubai Startup Hub (DSH), the entrepreneurship support arm of Dubai Chamber of Commerce and Industry, in partnership with global consulting firm Roland Berger.
In order to analyze the reasons behind this discontent, we at Entrepreneur Middle East put together an online survey that sought responses from UAE-based entrepreneurs on their experiences with banks in the region. The feedback was then analyzed to identify the important themes and issues emerging, after which a few of the respondents were additionally interviewed via phone or email. In addition, we contacted a number of locally-based banks requesting them to comment on how challenging they find working with entrepreneurs and small businesses; the responses of those who replied have been reproduced in this article.
The DSH whitepaper stated opening a bank account as being the number one obstacle faced by entrepreneurs here. The majority of entrepreneurs and founders surveyed by DSH noted that it took them one to three months just to open a bank account. Rachel McArthur, the founder of Digital Ink Media, a digital content provider, conducted a thorough research of all the available options when opening a bank account. This process started with her requesting assistance from the free zone in which Digital Ink Media was registered. "As far as I am aware, free zones believe it is not their responsibility to give financial advice; therefore, you may ask, but don't expect to get any information on what banks to go for," McArthur says.
"During my search, which just involved visiting different banks, a friendly customer service representative of a bank told me that there's no point even applying, because my business was too small for them to care. I thought that was hilarious. Some banks are definitely anti-SMEs. They see them as a waste of time, because they cannot make much money from them. From personal and friends' experiences, UAE-owned banks are better for SMEs than international brands, because you'll find those that offer a reasonable minimum amount, plus they're more clued in to free zone regulations, and connect some services to their online banking system."
Rachel McArthur, founder, DigitalInk. Source: DigitalInk.
As the co-founder and CEO of ChefXChange, an online platform to search and hire chefs locally for private or corporate events, Karl Naim led the processes of setting up his business in three different markets- the UAE, the UK, and Lebanon. From his experience, the process of opening a bank account in the UK is straightforward and quick, often lasting only a week, whereas he describes the same as painful in Lebanon since he was requested to submit a lot of paperwork, previously obtained from different ministries, and to deposit share capital of LBP30 million (US$20,000) in cash- wire transfer or other payment options were not accepted.
When asked about the UAE, Naim says, "It is straightforward, provided that you have already registered your company and have all the requested documents. However, depending on whether the UAE company is owned by individuals or a foreign holding company, the needed documentation can become complex and require certification that comes at a cost. The whole process can take up to a month."
Karl Naim, cofounder, ChefXChange. Source: ChefXChange.
Jimmy James, founder of Plantshop.ae, a green online store launched in the UAE in November 2015, points out to a lack of expertise amongst bank employees when dealing with more complex startup cases. Plantshop. ae was initially registered as a UAE mainland company, but earlier this year it was re-registered as a holding company under ADGM in Abu Dhabi in order to receive investment from 500 Startups. That was when James' challenges started.
"We had to open a holding company account, because investors outside the UAE will invest only in a holding company which is registered in a free zone," James says. "So, when we went to a bank to open a holding company account, their compliance department failed to understand our business model. The officer who took our application didn't know that this kind of company existed in the UAE. I had to educate him what it actually was. Then, the compliance department rejected it again, also because they weren't able to understand it. We talked to other banks, and eventually we found one person in one of the banks who understood our business model."
Jimmy James, founder, Plantshop.ae. Source: Plantshop.ae.
The DSH whitepaper also shed light on the difficulties arising from insufficient guidance and lack of clarity relating to often complex documentation and verification processes, as well as limited empathy and competence of bank staff. One of the report's recommendations was to urge banks to focus on emerging business banking procedures, and help build a (better) system that helps foster innovation. However, Charles Wright, founder of Geem, a digital e-sports platform, established in April 2017, says that a limited awareness on startups is not limited to the banking sector, but extends to payment gateway services providers as well, who, ironically, are often startups themselves.
Wright says, "The payment gateway system here is fundamentally flawed, in such that some of them will only accept new companies, if they've got minimum transaction orders every month. But how can somebody who has just set up a business have a minimum transaction amount? So, I think that the whole ecosystem is flawed and very tentative around startups, and I personally don't think that entrepreneurs of today should be punished for the errors of the entrepreneurs from the years gone by."
Charles Wright, founder of Geem. Source: Geem.
Back to the banking sector, another similar issue –banks failing to keep pace with UAE's innovative decisionmakers and regulators– was raised by an Entrepreneur reader who requested to remain anonymous. TECOM Group and Dubai Creative Cluster Authority recently launched the Go Freelance initiative, offering a freelance permit to education and media experts for an annual fee of AED7,500. However, local banks' capabilities to enable its implementation, in terms of staff training and clear guidance, appears to be questionable at the moment.
"I went to them to request a reference letter for my freelancer permit application, and I explained what I needed the letter for, asking about the procedure that would take place once my current company cancelled my visa. All that was explained clearly, meaning that once my final salary would be sent to my account, the account would be frozen. Once we got to the next part, it was a bit hazy. New documents for the unfreezing would be required, and a salary certificate/contract was mentioned. I pointed out I would not have a salary certificate, because I was not going into the traditional full-time employment, but would be freelancing. I then had to go through the painful exercise of explaining what a freelancer actually is. I then had to hear vague answers about what would happen with unfreezing, what happens to credit cards, timelines, with the answer, "Well, just get all the documents and then let's see. We must have other customers like this.'"
Shelina Jokhiya, a former corporate lawyer, was also put in an awkward position when founding DeCluttr Me, the UAE's only licensed home and office professional organizing service, five years ago. She set up the business in a free zone in which, she later learnt, local banks did not place great trust in, and thus rejected her application to open a bank account with them on those grounds. Eventually, she found a bank that accepted her application. "There is an issue there with banks not trusting a lot of free zones," Jokhiya says.
"I went to several banks, and, in the end, opened with a bank I was happy with, and also because they had the best minimum balance requirement, which was AED 1,000 for an SME account. However, last year, we were suddenly informed that the minimum balance had to be AED50,000, and if you don't meet it, you'll have to pay AED250 per month. Obviously, I'm a micro SME, and I'm not making AED50,000 a month, and thus I have to pay that fee every month. It has all become onerous. For micro-SMEs and SMEs, a lot of them won't reach that minimum amount every month, so it's an issue."
Shelina Jokhiya, founder and CEO, DeClutter Me. Source: DeClutter Me.
Jokhiya's experience is in line with a note in the DSH whitepaper saying that requests relating to minimum balance requirements left room for significant improvement, which was reconfirmed by all our interviewees. Wright adds, "We are a product-based business, so we needed to set up an account, and we needed some kind of a payment gateway, and to open a payment gateway, we again needed to work with a bank, so I began the pursuit of finding a bank account I would be happy with. I looked at online portals, comparing the accounts, and there were some which had very low minimum balance. We are a startup, and cash is king at that stage. So, the last thing I needed was to lock a large portion of money away in a bank account, which, I thought, completely defied the object of starting a business. Basically, it was giving the bank my money for them to sit on. That is difficult when you don't have funds to burn, and that can really stifle what you are up to."
Eventually, Wright chose a bank with the lowest minimum balance requirement (AED25,000); however, as in Jokhiya's case, he is obliged to pay an AED400 penalty per month when he is not able to maintain it. "We were looking for a bank that was going to give us the most fertile ground for growth, and by that, I mean having cash in the position in which we can use it," he says. "I have put a lot of money into the business myself to be told that GBP5,000 to GBP7,000 worth of money will be blocked, and I couldn't touch it. But at the same time, we need a bank account, so what is one to do? It's binary. You either get one or you don't, so you are almost forced into this position. I have a lot of friends in the UK who have set up their businesses with GBP5,000 or GBP10,000, and they have grown their businesses immeasurably over the years. But if you have only that amount of money here, it would be impossible to set up the business. In terms of entrepreneurship as pushing boundaries and taking risks, with this, you really limit the opportunities for people to enter the market."
McArthur agrees that to be asked for a minimum balance of a certain amount is not convenient for most small business owners, since they usually start off with very little capital. "Some people wait a few months, using a savers account in their personal bank account in the meantime, to make some cash before opening their account," she says. "Bear in mind though, that the sooner you open your account the better, particularly if your free zone requires for you to submit a financial audit report every year. It certainly makes accounting easier. The downside to the minimum balance is that you can consider it as cash you cannot use. Go under the balance and you'll have to pay a fine."
Another issue raised by the DSH whitepaper relates to high transaction fees. Naim has found those services to be very expensive in the UAE. He states that local transfers are free or AED1, whereas international transfers can cost up to $50, and this is in addition to a monthly fee of AED200 charged by his bank. In both the UK and Lebanon, these services are much cheaper, he says. McArthur agrees and adds, "This is where they make their money," she says. "You also need to pay a monthly fee for the privilege of having an SME account. Another thing to look out for is that your bank will try to sell you things you probably don't need. Like some types of insurance, or an investment portfolio. They will make you think that you cannot legally run a business without certain add-ons, but check with your accountant before signing up to anything. A lot of the time, it's just a sales pitch. At the end of their day, they're doing their job, but the process can be so overwhelming that you might think it's critical to sign up to add-ons. Take your time."
There is one more explanation for the lack of motivation of bank staff to service startup and freelance clients properly. Namely, banks hardly see new ventures as commercially attractive as other customer segments, due to their low initial business volume and unproven ability to survive and expand. Wright notes: "We are in the beta stage, and our numbers are not going to be good for some time, and I told them that from the outset, but I've been with my bank for 12 months now, and I've had only one call from our relationship manager," he says. "I have a friend who has a recruitment company, and is putting a lot of money in his account, and he is getting a call once a week or once a month. So, there is a clear focus on the accounts that are bringing in cash, as opposed to fledging businesses that are really trying to do something progressive, and which haven't quite hit the jackpot yet. In my opinion, the whole ecosystem for banks is geared towards protecting themselves with very little leeway towards entrepreneurs and businesses who are trying to do something a little bit different."
In 2014, Standard Chartered made headlines when it announced it was winding up thousands of SME accounts in the UAE. It aimed to almost entirely exit the SME banking sector in the UAE, retaining only a small number of high value customers. Jokhiya warns that a similar action by locally-based banks would be detrimental to the UAE's economy after the VAT introduction. "In my case for example, I am at a threshold of AED135,000 to pay VAT, and if you meet that threshold, you have to open a bank account, and so firstly, what if banks don't want to open a bank account for you?" she says. "And secondly, what if banks choose to close our bank accounts? I paid my VAT a few weeks ago, so I'm trying to do everything legitimately, but if they choose to close our bank accounts, how can I pay my VAT then? The banks are trying to alleviate their risk, but don't know how to help the SME sector."
Overall, Naim explains that he has found the UAE banking system to still be lagging behind the UK, especially in terms of technology and costs, but to be much more advanced than Lebanese banks. He adds, "Most of the UAE banks have decent online banking which is a must for a startup like ours. We do a lot of transfers to our suppliers (chefs) on a regular basis. The ability to do this from your laptop, adding beneficiaries and local/ international transfers, is vital. Having to have to go to the bank for these would be detrimental. The only downside of UAE banks we have dealt with is they do not provide credit facilities to startups. A corporate credit card can only be issued after six months of operations and acts more as a debit card given you need to have an amount blocked on your current account. That's not ideal for cash flow purposes."
In conclusion, Wright is keen to offer practical advice to the country's banking sector. "They are very happy to offer gym membership to their credit card holders, but when it comes to entrepreneurs, there is nothing," he says. "For example, one bank can say, "We'll give you $5,000 Google AdWords credit or similar.' I would be all over that. But nobody is doing anything progressive here to try and lure entrepreneurs in. If it was me, I would incentivize, and try to be a bank that is incubating the best startups in the region."
Rehan Ali, Head of Business Banking, Corporate and Institutional Banking, National Bank of Fujairah (NBF), on working with the UAE's small businesses
"SMEs represent over 60% of the GDP growth in the UAE, and as such, they are considered as the economy's backbone. Due to many reasons shaping the macroeconomic climate, we have seen entrepreneurs voicing their concerns over the lack of funding to the sector. The reality is that many banks have exited the sector completely, and many have still not returned to SME lending, often citing the risks associated with the sector. As for NBF, we pride ourselves for being the best financial partner for our clients focused on supporting their needs and growth aspirations. Testament to this, the bank has continued with SME lending when a number of other banks stopped financing to the sector following massive losses, as the economy slowed due to the three-year slump in oil prices."
"As such, NBF has been the steady player in the segment, and this approach has benefited us very much as we see stress subsiding for the sector and growth opportunities emerging. Lending to small and medium-sized enterprises is one of the core pillars of our business with SME lending traditionally ranges between 20-25% of total loans. Given the consistent support we have provided to SMEs, we currently have 8-10% of the UAE's SME business in the banking sector as a whole. Based on our experience, we understand that each SME has its own set of challenges and needs. As such, the bank doesn't follow a one size fits all approach. Instead, we work closely with business owners to understand their challenges, and recommend products and services that help them meet their needs. This in-depth understanding builds towards trust-based relationships and take away the tension that other banks may face when working with SMEs, as we put transparency and client-centricity at the core of this relationship."
Wasim Saifi, Deputy CEO - Consumer Banking and Wealth Management, Emirates Islamic Bank, on working with the UAE's small businesses
"SMEs and startups play a critical role in the UAE economy, representing over 90% of the total number of companies in the country. As a leading Islamic financial institution and as part of our efforts to contribute towards the growing entrepreneurial ecosystem in the UAE, Emirates Islamic is committed to supporting startups and SMEs with best in banking solutions, supported by superior customer service. The bank provides financing solutions to manage cash flow, asset acquisition and expansion requirements for business owners with Business Banking Packages ranging from Business Platinum, Business Gold to Business Premium, to suit the needs of different business types."
"As part of our commitment to SMEs and startups, we recently signed an agreement with Dubai Economy to offer a customized banking package for e-traders with lower balance requirements, no monthly fees and reduced transaction charges. Emirates Islamic also provides online banking solutions under the smartBUSINESS platform to facilitate on-the-go banking. Via smartBUSINESS, transactions such as local and international remittances, requests for Demand Drafts, telegraphic transfer etc. are all made possible with the click of a button, aimed at enhancing the productivity and efficiency of businesses."
Hussam Alhashimi, Executive Vice President, Head of Priority Banking and Business Banking, Emirates NBD, on working with the UAE's small businesses
"SME customers can help facilitate the process of opening a new bank account better by ensuring availability of clear documents required to start a new banking relationship such as a valid trade license, board resolutions where applicable, operating instructions and information on ownership. Potential borrowers can make the loan application process quicker and easier by maintaining clear and transparent book keeping and accounting practices, regular preparations of annual audited balance sheets, ensuring routing of all transactions through the banking system, robust financial planning and budgeting processes, a well thought out strategy and business plan, and strong corporate governance in place to provide the right level of information and added comfort. Maintaining adequate capital to meet both working capital requirements and long-term commitments are also important requirements to ensure continued financial health of the business."