SMEs in KSA

CompetitiveGovernments

Context and opportunities

Small and medium enterprises (SMEs) including microenterprises play an important role as a cornerstone in fostering growth, employment and income generation in most economies. In KSA, the role of SMEs is pivotal to supporting many national priorities e.g.,

• Creating a more resilient and diversi�ed economy with more dynamic private sector participation.• Enabling innovation and helping transition to a knowledge-based economy, through home-grown champi-

ons that can compete internationally.• Achieving a more balanced and inclusive growth, by addressing bottom of the income pyramid, which

include microenterprises.

SMEs in KSA are at the heart of the economy as they account for %99 of establishments and %62 of total employment which is in line with global averages of %75-60. The ICT sector has become vibrant for SMEs especially after deregulation and the e-commerce market becoming one the most advanced in the region. Although SMEs are mostly dominating the technology sector, they have also had major contributions to the agricultural output, especially in the eastern provinces. Having SMEs contribute to the development of speci�c sectors is important in moving them to become key players within the value chain of bigger corpora-tions.

SMEs in KSA have untapped potential that can be unlocked by addressing a number of challenges that they face, primarily around access to talent, information, government requirements, and �nance. A survey carried out by the Council of Saudi Chamber of Commerce and Industry (CSCCI) and the United Nations Industrial Development Organization documents that the main challenge facing SME owners in KSA is the lack of credit, �nance and capital. Less than %2 of KSA banks’ total lending goes to SMEs compared to over %14 in non-GCC countries. Without the right incentives for lenders to increase the �ow of credit to SMEs or the proper policy tools to manage their risks, banks cannot be expected to give to SMEs a larger share of their lending portfolios.

Government initiatives

The government has devoted signi�cant resources to extend development programs to SMEs in recent years (see Exhibit 1). There are currently +50 government and non-pro�t entities that directly or indirectly engage in SME promotion activities that span a large spectrum of services (e.g., �nancing, capability-building, networking and mentoring) and o�er investors relevant investment opportunities.

SMEs in KSA

EXHIBIT +50 :1 GOVERNMENT AND PRIVATE SECTOR ORGANIZATIONS IN KSA SME ECOSYSTEM

Co-Investing with Public sector funds to finance SMEs:The government had previously launched government sponsored lending through the Kafala program. Today, the government is looking to launch SME focused funds of more than SAR 3 Billion in value to be jointly invested with private sector investors and funds. Additionally, there are plans for building a match-making program between investors (local and foreign) and SMEs and entrepreneurs for investment opportu-nities.

Developing the expat employment market: The government has introduced regulation to organize and develop the expat employment market through large employment companies. The total investment in the industry currently exceeds SAR 2 Billion (around 20 companies with SAR 100 Million capital each). In addition, the government has launched the Ajeer program to govern the relationship between expat employment companies and customers, as well as to create higher demand for employment services.

Upskilling the KSA labor force: HRDF has a large suite of programs to develop capabilities of the KSA workforce (e.g., Ha�z, employment subsidy programs for SMEs). In addition, a number of other entities have invested in developing a vibrant education sector to train talents (e.g., Doroob, TVTC, Colleges of Excellence). Additionally, public universities (e.g., Price Nora University) are establishing new programs speci�cally in innovation, entrepreneurship and �nance to foster innovation and entrepreneurship in KSA. Opportunities exist to invest in these programs (e.g. college and school operators).

Developing support services for SMEs:The government is investing in developing back-o�ce capabilities that SMEs can leverage and plug into to facilitate their operations speci�cally in (e.g. HR and procurement systems).

Call to action

In spite of this, performance of SMEs and their contribution to the country’s economic development agenda, has been lagging. For instance, contribution to non-oil GDP is below comparable international benchmarks (~%35-30 vs. average ~%45 for comparable economies). While some of this variation may be due to produc-tivity di�erences, it is largely driven by low employment levels in the SME sector compared to benchmarks. Also, majority of SMEs are concentrated in low-productivity sectors (e.g., over %50 of establishments in retail and trade) and a very large portion (estimated to be ~%30) operate in the informal sector.

Additionally, the initiatives are being undertaken by various government and non-government entities without a holistic and integrated approach, which results in many challenges arising from this approach. For instance, there is a duplication of e�orts and lack of focus on priority areas speci�cally in access to �nancing, and the adoption of technology and operational best-practices.

How can this energy all be invested in achieving greater success in developing a vibrant SME segment of companies? Some paths for consideration include an action plan for a nationally coordinated e�ort to boost SMEs and strengthen and build on existing initiatives and could include:

• National SME strategy/masterplan across Ministries and agencies with a de�ned common vision and stated goals.

• National SME council, with policy-making authority, to set strategic direction for government policies on SMEs and ensure coordination and e�ectiveness of government programs

• High-priority programs and initiatives for a select number of priority areas e.g.,

– Capability and skill building– Human capital development– Access to market – Access to �nancing: e.g., guarantee programs, availability of non-banking avenues