For The MENA Startup Ecosystem To Grow, A Regulatory Framework For SMEs To Become Creditworthy Is Needed If SMEs want to grow and create jobs, an ecosystem needs to be put in place that assures confidence in their financial health.
By Qais Sabri •
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I began my career in entrepreneurship 13 years ago, and I have never looked back. I am passionate about building companies from the ground up, and seeing them grow to become sustainable businesses. Through my business ventures, I am supporting the growth of the startup market in the Middle East, and further developing the landscape by creating new jobs and an environment that nurtures future leaders. And for other business owners and leaders looking to do the same, raising funding and investment is paramount to their journey towards success.
Eon Aligner, a medtech company that I co-founded focusing on dental clear aligner solutions, has just completed a US$26 million Series B financing round with a premier group of investors. Securing this additional capital was an important resource in accelerating Eon's growth, with it aimed at further advancing manufacturing automation and clinical services capabilities, investing and innovating in enterprise and clinical software solutions, and strengthening commercialization and distribution. However, not all companies are able to harness such opportunities within the MENA region.
Despite being built on the foundation of enterprising individuals and startups, the Middle East faces one of the largest unemployment ratios in Asia. Thus, the region is at a critical juncture, facing the imperative need to create jobs for the 20 million young people expected to join the workforce by 2025. And, with this in mind, small and medium enterprises (SMEs) could and should play an instrumental role in tackling this challenge, given their potential to create jobs, foster innovation and contribute to growth. Currently, SMEs form the backbone of the region's economies, and yet are among the worst-funded globally, with only 3% having access to funding.
To put this further into perspective, MENA-based SMEs represent 94% of registered companies in the region; however, they are also the lowest recipients of bank loans globally, at 8% of total bank lending, and this lack of access to finance severely impacts integral SME growth and employment. So, with this in mind, what is an actionable approach to getting funding and investment in the region, especially for SMEs? Beyond friends and family, bootstrapping your business, crowdfunding, and business accelerator and incubators programs, to name but a few, small business loans remain the key for many. However, banks are historically careful about giving money to smaller companies and it can be difficult to qualify.
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To explain further, one of the reasons many SMEs struggle is the lack of an organized audit or regulatory framework through which to gauge creditworthiness and risk. If SMEs want to grow and create jobs, an ecosystem needs to be put in place that assures confidence in their financial health. Such an ecosystem would benefit the growth of the private sector for the greater good of the economy. But how can a SME's creditworthiness be established?
I believe that the first step involves setting up a uniform regulatory framework for SMEs, which makes them adhere to a singular credit readiness system. Through a region-wide coalition, stakeholders such as government and related entities (GREs), auditors, financial institutions, and private investors will be able to standardize the regulatory framework for SMEs to become creditworthy. This will encourage SMEs to formalize their bookkeeping process and adhere to the financial readiness expected by formal banking systems for better access to capital expenditure and supply chain finance. This in turn could create 15 million new jobs by 2025, as outlined in a report by the IMF's Middle East and Central Asia Department.
Recently, the UAE adopted a series of world-class regulatory reforms to streamline processes and give greater control to companies operating at the intersection of finance, technology, and consumer behavior. Such a favorable entrepreneurial ecosystem has made the UAE an ideal destination to pilot such an actionable idea for the wider region- I hope this will see traction soon. After all, the growth of SMEs is critical in creating more job opportunities and building a resilient economy, and setting this right is a must. And to leave you with one final thought: increasing the 3% of SMEs with access to funding to 20% by 2025 will directly impact job creation and stakeholder value creation, while yielding substantial macro-financial benefits and boosting annual growth rates by up to 1% over the medium term.
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