The Government of Oman has taken many exemplary steps to strengthen the SME sector in Oman in the recent years. Though the sector is showing growth trends it still remains at the beginning of the growth curve.
Small and Medium Enterprises (SMEs) are critical to all economies and the Sultanate is no exception. They constitute 90 per cent of the corporate sector and have become a priority sector for the government of the Sultanate, which is giving the much needed push to create self-employment opportunities for the youth.
Much has changed since an exclusive SME development symposium was held at Seeh Al Shamikhat, Bahl as a response to the Royal Directives of His Majesty Sultan Qaboos Bin Said. Another symposium to assess the implementation of the decisions of Seeh Al Shamikhat was held at Sultan Qaboos University’s Cultural Centre in January 2015 as per the Royal directives. The outcomes of the symposium were raised to His Majesty.
These steps stand testimony to the fact that Government has taken many laudable initiatives to strengthen the SME sector and is trying its best to create an enabling environment for them as part of its commitment to provide employment opportunities for the youth.
But despite the Government of Oman extending liberal help, the SME sector in Oman is still at the beginning of the growth curve. The contribution of SMEs to Oman’s GDP is significantly low compared to their role in developed economies. Employment provided by SMEs to Omani youth could go up.
Says, Sami Al Hassan, General Manager of GroFin Oman, SME sector is a growing sector, receiving unlimited support from the government, with a clear goal to make it one of the leading sectors. It is also a key contributor to the economic growth of the country, not to mention a source for job creation for Omanis.
As per the norms in Oman, SMEs are enterprises which employ workforce up to 99 and turnover not exceeding RO1.50mn. The latest data indicate that 40 per cent of the workforce is employed in SME firms while their contribution to the GDP ranges between 15 and 20 per cent. The key point to note here is that in developed markets, SME workforce ranges between 50-60 per cent and on an average GDP contribution from this segment is 50-55 per cent. Hence it is important to expedite growth of the SME sector in Oman considering the limited employment opportunities for citizens in Government sector and also to scale down the country’s reliance on hydrocarbon sector.
Youth constitute more than 50 per cent of the Sultanate’s population. At the current level of population growth, the Sultanate needs to create at least 50,000 jobs annually to reduce unemployment, which is estimated at 15 per cent. Thus, it has become imperative that employment opportunities are created to enable young Omanis to establish their own businesses.
The government’s focus on developing SMEs has a potential for improving economic diversification and creating employment. The government has initiated a number of measures to give this segment a boost, including tying up soft loans and extending financial guarantees through the Oman Development Bank (ODB), allocating a share of public tenders and sourcing a share of procurement by large contractors of government projects to SMEs, providing mentorship and assistance to entrepreneurs and setting up a development fund to target college and university students entering the job market.
Pioneering initiatives
Initiatives such as the Al Raffd Fund, funding through Oman Development Bank (ODB) as well as other financial institutions, five per cent minimum lending target imposed on Banks by the Central Bank of Oman (CBO), the creation of the Public Authority for SMEs and the planned launch of the SME Exchange among others augur well for the growth of SME sector, which contributes around 15 per cent to the GDP. The Fund for Development of Youth Projects, known as ‘Sharakah,’ established by a Royal Decree in 1998 shows the on-going commitment and support of the government to entrepreneurs.
According to Tariq Bin Sulaiman Al Farsi, CEO of Al Raffd Fund, “The Al Raffd Fund, which was set up in 2013 with a capital of RO 70 million for project financing of start-ups and overall development of the Small and Medium Enterprises (SME) sector, is keen to develop a vibrant SME sector benefiting the country’s youth and also promoting jobs for locals.”
The Al Raffd Fund, which is a pioneering initiative to unify the resources of financing the small enterprises and development of individual initiatives, will add seven million rials annually to its capital to support and assist young Omani entrepreneurs to establish SMEs.
The Fund is currently engaged in financing four programmes and more are scheduled to begin in areas such as tourism, industries and seasonal agriculture soon.
The SME Development Fund will be supporting SMEs with accounting software, BPO style accounting, monitoring and mentoring, providing finance at a subsidised rate for eligible SMEs and working with major stakeholders to create business opportunities for SMEs. Riyada – The Public Authority for Small and Medium Enterprise Development, which was constituted following the symposium, has set an objective of raising SME representation to 20 per cent of the economy in three years and has succeeded in its effort to a great extent.
Private Sector Support
Complementing the initiatives of the government, the private sector too is contributing in no small measure to the growth of the SME sector – Zubair Small Enterprises Centre (Zubair SEC), Bank Muscat, National Bank of Oman (NBO), Intilaaqah Oman to name a few, have come out with funding initiatives to support the SMEs.
Says Lina Hussain Communications head at Zubair SEC “We take pride in offering our members an ecosystem of support that extends beyond the Centre’s direct advisory, coaching, training, and acceleration services, to also offer a network of solid partners inside and outside the Sultanate, and a line-up of top-notch mentors from across diverse business sectors who are offering their time and expertise to our members.
“We also believe in the importance of networking and collaboration amongst the members themselves and between our members and other stakeholders; as such, we facilitate different activities and functions to bring our members together and exchange expertise, knowledge, and potential business cooperation,” she notes.
Since June 2013 the Centre has welcomed 240 members, attracted 22 mentors, and built 12 strategic partnerships.
She adds, “Our efforts for the past two years since establishment have been rewarded by being the first and only private sector initiative to receive the Business Entrepreneurship Award for Best Private Sector Initiative Supporting SMEs in Oman; this prestigious award is managed by The Public Authority for SMEs Development (Riyadah).”
Banks and other financial institutions in Oman have special products now to cater to the needs of SMEs. Adil Abdul Hussain Al Saleh, head of SME division of NBO says, “We have five different products for SMEs to cater to their different needs. Our Working Capital Loans provide financial aid by taking security from customers. We also provide working capital loans without security. In this case, the stock has to be registered jointly in the name of the customer and the bank and the receivables that come from the business are to be deposited in NBO.”
“Our professional loans are specially designed products which do not need collateral security for professionally qualified Omanis. The limit for the loan is fixed based on the cash flow of practicing professionals for at least six months. Based on the cash flow, if we see business there, we will fix the loan limit. We will take as security the asset bought using the loan.
Our contracting loan product which doesn’t need security is aimed at SMEs that receive contracts directly from the Government or receive sub-contracts for government work from category A contractors. This contracting product was specially created in 2014 after the government, conforming to the Vision of His Majesty to promote SMEs. As per His Majesty’s vision the Government had announced a ten per cent quota for SMEs in the contracts approved by the Tender Board. Our construction loans are available to those firms that undertake Government, own or third party projects. Our fifth product for SMEs is asset finance. Anybody who needs asset finance, whether machinery, vehicles, or any other assets, can approach us,” he adds.
Addressing challenges
While these efforts are laudable, there are certain issues that still need to be addressed. Questions like – whether SME initiatives are in sync with the needs of entrepreneurs and are they promoting job creation, growth and development? – still remain unanswered. Considering the government’s keenness to bring down unemployment rates, it has become imperative to encourage the job-seekers to either join the private sector or start their own enterprises.
Entrepreneurship is not the just the initial idea. Ideas have to be developed continuously. Entrepreneurship calls for total dedication and continuous learning. Another important thing is, SMEs need to be very careful when expanding. Those who want to become entrepreneurs should have the minimum required educational qualification in their field. One should have a master plan and should know his focus areas. It will be good if budding entrepreneurs selected areas that do not need huge capital and can turn profitable quickly.
Sustaining the business, minimising risks
A report of IMF on SME sector in Oman is quick to point out that SMEs in Oman face a number of constraints such as inadequate entrepreneurship, access to finance, lack of market support, and inadequate incubation support, which are being addressed by the authorities. It goes on to suggest that ‘active links with export-oriented corporates would provide much needed synergies in diversifying the economy and creating employment.
In high income countries, SMEs constitute 50 per cent or more of GDP and most of the employment creation. The Sultanate should aspire for higher SME penetration. The challenges in this regard are many. As a starting point, we need to survey the SME market, assess the baseline situation and the needs of the SME sector; regulation needs to facilitate SME formation. A number of SMEs complain about the processes and delays involved.
Women now have more options to start businesses. Getting finance was a cumbersome affair earlier, but it is no longer so. Institutions like Sharakah offers funding for Small and Medium Enterprises (SME) start up projects. Al Raffd too offers funding for start ups. But the larger issue is how to minimise risks and ensure that business is sustainable.
In the Sultanate, business is often considered to be an established players’ forte. Very often whom you know is a key factor as to where the orders will finally go, says a young entrepreneur. Some SME owners say they face several obstacles from the beginning and as they grow their business. Some of these include – difficulty in obtaining loans easily, not being invited to participate in the tendering process, inability to compete for orders (because
the bigger players have better credentials) and payment delays.
Experts say that access to business needs to be improved; important initiatives have been already made by the Tender Board and the Ministry of Oil and Gas. It is hoped these will come to fruition in the near future. One of the challenges that large corporations face while trying to subcontract businesses to SMEs is the lack of acceptable service standards and capability amongst the latter. The SME Fund will be helping large corporations to develop their SME vendor bases to facilitate the passing on of business to SMEs. This will involve both expanding the base of SMEs and strengthening their presence in the vendor network, with finance, support, training, and supervision.
Eliminating hidden trade
SMEs can definitely create vast employment opportunities in diverse sectors in the Sultanate including cottage industry. There are complaints that some SMEs are reluctant to employ Omanis and this is a matter of concern. Authorities are now taking action against those SMEs that fail to recruit the nationals. Employing at least one Omani in an SME is certainly a workable solution. The Al Raffd Fund, along with Ministry of Manpower are working out the modalities for introducing a path-breaking initiative for SMEs, which will significantly reduce unemployment in the country.
A proper understanding of why SMEs create more jobs, will help the government and private companies to look at what can or needs to be done to increase their role in the economy. Traditionally, SMEs thrive in businesses where bigger firms do not want to be present, as SMEs can offer the same product or service at a much lower cost due to lower overheads and profit expectations. SMEs also tend to be more labour intensive as their capital investment levels are lower. Jobs with SMEs pay lower (otherwise they cannot compete) and are seen to be more risky and of lower social status, they however offer the benefits of flexible working hours, part time employment and so on.
Wage Issues
While project funding has been taken care of by government, banks and other institutions, it’s the minimum monthly salary to be offered to local employees, which has become an obstacle for many entrepreneurs. Employing full time staff with the dictated minimum salary is challenging, for industries operating in certain segments where the business is seasonal.
There are areas like for example Carpentry where the availability of skilled local personnel is very low.
Experts point out that if an SME has in place the right budget and accounting system, it can definitely address the issue. Problems arise when they do not adhere to regulations.
This is indeed a frequent complaint from SMEs and a valid one as SMEs by definition use more labour per rial of output than do large corporations. There are a number of possible solutions to this. One possibility is for the Ministry of Manpower to show some flexibility in the application of quotas to SMEs. However, even better would be for the government to implement the decisions taken at the SME Symposium, to allocate 10 per cent of all contracts to SMEs. Thereafter, price preference can be given to SMEs with a higher proportion of Omani employees. This will make it worthwhile for SMEs to pay the higher price that employing Omanis entails and will also reward the SMEs that comply with Omanisation requirements.
According to some experts in SME sector, the issue pertaining to the minimum salary needs to be tackled intelligently. One possible solution is for SME owners to work in partnership with other Omanis rather than individually run the business. Cooperative societies can provide another solution.
The way forward
Are SMEs fulfilling their role of employment generation? If SMEs have to succeed and deliver on their employment potential; they also need to have the right enablers. While the Government in Oman has already taken many steps, implementing the following in future will also help: i) encourage back end collaboration between SMEs to cut back end and market access costs. ii) Deploy an online market place (with performance safeguards for the buyer) that would give access to other countries in the region including the UAE, Qatar, and Saudi Arabia, thus widening the market space iii) Set in place practical, affordable systems that will provide performance data to identify potential defaulters ahead of time If this happens, banks can also move away from pure asset based lending (which is what practically happens most of the time), and take a bigger, but more calculated risk, in financing SMEs, resulting in faster growth in the SME sector, and in turn helping realise its employment potential.
According to some SME owners, there are other issues and concerns which SMEs face. Initiatives are not well coordinated and as a result the entrepreneurs, in particular the startups, are left confused as to where to go for support. For example, a new restaurant owner who gets funding from one of the agencies, such as a bank or a financier, has got a property identified, furnished and is ready to start. However, he may face difficulties in getting municipal approval and will face delays getting clearance from Ministry of Manpower for not fulfilling the Omanisation policies. All this leads to delay and may render SME initiatives unsuccessful. Awareness and education are needed to overcome these obstacles.
SMEs are literally the best platforms for innovation provided they get the right support. Many large businesses with global footprint have grown from small beginnings as a result of an idea by one or group of individuals with little or no money. With good infrastructure, a young and educated populace, world class ports and the much awaited rail project expected to be on track, the Sultanate has all the enabling factors to develop a vibrant SME sector by suitably addressing the shortcomings. Roberto Azevedo, director general of the World Trade Organisation (WTO), who was on a visit to Muscat in 2014 said, “the WTO foresees a lot of potential for SMEs growth in the Sultanate. The Sultanate, which is a key partner in the WTO, is strategically positioned to be not only an international player, but also a hub for trade and transit.”
Encouraging entrepreneurship and building up an entrepreneurial attitude among the youth is the key to develop the SME sector. As funding for projects is no longer a concern, it’s time to build on the positives and engage the community in building up the sector and secure sustainable growth in the long term. Policy coordination and collaborative efforts between the government and the private sector and earmarking a certain percentage of contracts to SMEs will go a long way in addressing the concerns of the SMEs and this will enable them to operate with greater confidence. For young entrepreneurs, it’s an opportune time to invest and contribute to job creation and thereby create sustainable opportunities to ensure a win-win situation for all.