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Occasional Paper
Central Bank of Oman Occasional Paper: 1 August 2014
Towards a Growing,Competitive and Dynamic Smalland Medium-Sized EnterprisesSector in Oman:
Strategy and Policies
Khalfan Mohamed Al Barwani* Mohammed Rashid Al Jahwari*
Abdallah Said Al Saidi* Fatma Salim Al Mahrouqi*
Central Bank of Oman Economic Research and Statistics Department
Website: http//www.cbo.gov.om Email: [email protected]
*The views reported in this study are those of the authors and do not represent and should not be reported as those of the Central Bank of Oman.
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Foreword Growing and dynamic Small and Medium-Sized Enterprises (SMEs) are critical for the
development and sustainability of any economy, particularly given their flexibility to adapt to
changing economic dynamics, among other reasons.
Data from emerging and developed economies, as discussed in this study, point to a significant
contribution of SMEs in terms of job creation and value addition to the economy. Equally important
is the fact that SMEs in these economies hire more people than larger firms or the public sector.
Among the European Union (EU) member states, SMEs employed 68 percent of the workforce and
their value addition to the economy was about 58 percent in 2012. In the United States of America
(USA), SMEs account for about 50 percent of the workforce with value addition to the economy
estimated at about 51 percent. While these data may vary from year to year, they have, for many
years, continued to indicate the key role played by SMEs in the EU and US economies. In Oman,
latest data indicate that 40 percent of the workforce is employed in SME firms with less than 5
percent consisting of Omanis while the contribution to the GDP ranges between 15 percent and 20
percent.
Given the two key statistics cited above, namely contribution to employment and value addition to
the economy, besides the proven critical role played by SMES in emerging and developed
economies, it is clear that while this sector is still at its infancy in the Sultanate of Oman, it holds
significant potential for growth and more so if supported by relevant infrastructure and accessibility
to financing in addition to the development of required skills and promotion of entrepreneurship
culture to name a few. Accordingly, the government of Oman along with the Central Bank of Oman
have recently introduced a number of initiatives, all aimed at supporting and promoting the SME
sector in the country.
To that effect, this study provides a comprehensive picture of the current state of the SME sector in
Oman through multiple questionnaire surveys that targeted key stakeholders. Moreover, following
the analyses of these surveys and learning from experiences of other countries, the study provides
an inclusive strategy that accounts for key major stakeholders as well as a list of policy
recommendations which I hope interested parties could benefit from.
Hamood Sangour Al-Zadjali The Executive President Central Bank of Oman
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Foreword Growing and dynamic Small and Medium-Sized Enterprises (SMEs) are critical for the
development and sustainability of any economy, particularly given their flexibility to adapt to
changing economic dynamics, among other reasons.
Data from emerging and developed economies, as discussed in this study, point to a significant
contribution of SMEs in terms of job creation and value addition to the economy. Equally important
is the fact that SMEs in these economies hire more people than larger firms or the public sector.
Among the European Union (EU) member states, SMEs employed 68 percent of the workforce and
their value addition to the economy was about 58 percent in 2012. In the United States of America
(USA), SMEs account for about 50 percent of the workforce with value addition to the economy
estimated at about 51 percent. While these data may vary from year to year, they have, for many
years, continued to indicate the key role played by SMEs in the EU and US economies. In Oman,
latest data indicate that 40 percent of the workforce is employed in SME firms with less than 5
percent consisting of Omanis while the contribution to the GDP ranges between 15 percent and 20
percent.
Given the two key statistics cited above, namely contribution to employment and value addition to
the economy, besides the proven critical role played by SMES in emerging and developed
economies, it is clear that while this sector is still at its infancy in the Sultanate of Oman, it holds
significant potential for growth and more so if supported by relevant infrastructure and accessibility
to financing in addition to the development of required skills and promotion of entrepreneurship
culture to name a few. Accordingly, the government of Oman along with the Central Bank of Oman
have recently introduced a number of initiatives, all aimed at supporting and promoting the SME
sector in the country.
To that effect, this study provides a comprehensive picture of the current state of the SME sector in
Oman through multiple questionnaire surveys that targeted key stakeholders. Moreover, following
the analyses of these surveys and learning from experiences of other countries, the study provides
an inclusive strategy that accounts for key major stakeholders as well as a list of policy
recommendations which I hope interested parties could benefit from.
Hamood Sangour Al-Zadjali The Executive President Central Bank of Oman
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Table of Contents
1. Introduction ................................................................................................................................................... 1
2. Selected Studies on Small and Medium-Sized Enterprises ........................................................................... 4
2.1. Definition of SMEs ................................................................................................................................... 4
2.2 Contribution of the SME sector to the larger economy .......................................................................... 5
2.3 Challenges in the SME sector ................................................................................................................... 6
2.4 Opportunities for the SME sector ............................................................................................................ 7
2.5 The role of governments in promoting the SME Sector .......................................................................... 9
3. Small and Medium-Sized Enterprises in Oman ........................................................................................... 11
3.1 Contribution of the SME sector to the Omani economy ....................................................................... 11
3.2 Challenges faced by the SME sector in Oman ....................................................................................... 12
3.3 Growth opportunity for the SME sector in Oman ................................................................................. 15
4. Data Collection and Methodology ............................................................................................................... 17
5. Findings and Data Analysis ........................................................................................................................... 18
5.1 Surveys on Small and Medium-Sized Enterprises in Oman ................................................................... 18
5.1.1 Selected SME descriptive statistics .................................................................................................. 18
5.1.2 Overall challenges faced by SMEs in Oman .................................................................................... 23
5.1.3 SME financing in Oman ................................................................................................................... 27
5.2 Survey on financial institutions and SME lending .................................................................................. 29
6. A Strategy for a Growing, Competitive, and Dynamic SME Sector in Oman ............................................... 36
6.1 Policy and institutional support ............................................................................................................. 38
6.2 Legal framework .................................................................................................................................... 39
6.3 Access to financing and opportunities ................................................................................................... 39
6.4 Infrastructure support ........................................................................................................................... 40
7. Policy Recommendations for Oman ............................................................................................................ 42
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Table of Contents
1. Introduction ................................................................................................................................................... 1
2. Selected Studies on Small and Medium-Sized Enterprises ........................................................................... 4
2.1. Definition of SMEs ................................................................................................................................... 4
2.2 Contribution of the SME sector to the larger economy .......................................................................... 5
2.3 Challenges in the SME sector ................................................................................................................... 6
2.4 Opportunities for the SME sector ............................................................................................................ 7
2.5 The role of governments in promoting the SME Sector .......................................................................... 9
3. Small and Medium-Sized Enterprises in Oman ........................................................................................... 11
3.1 Contribution of the SME sector to the Omani economy ....................................................................... 11
3.2 Challenges faced by the SME sector in Oman ....................................................................................... 12
3.3 Growth opportunity for the SME sector in Oman ................................................................................. 15
4. Data Collection and Methodology ............................................................................................................... 17
5. Findings and Data Analysis ........................................................................................................................... 18
5.1 Surveys on Small and Medium-Sized Enterprises in Oman ................................................................... 18
5.1.1 Selected SME descriptive statistics .................................................................................................. 18
5.1.2 Overall challenges faced by SMEs in Oman .................................................................................... 23
5.1.3 SME financing in Oman ................................................................................................................... 27
5.2 Survey on financial institutions and SME lending .................................................................................. 29
6. A Strategy for a Growing, Competitive, and Dynamic SME Sector in Oman ............................................... 36
6.1 Policy and institutional support ............................................................................................................. 38
6.2 Legal framework .................................................................................................................................... 39
6.3 Access to financing and opportunities ................................................................................................... 39
6.4 Infrastructure support ........................................................................................................................... 40
7. Policy Recommendations for Oman ............................................................................................................ 42
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7.1 Policy and institutions ............................................................................................................................ 42
7.2 Legal basis .............................................................................................................................................. 43
7.3 Access to financing ................................................................................................................................. 44
7.4 Opportunities ......................................................................................................................................... 48
7.5 Infrastructure ......................................................................................................................................... 49
8. Concluding Remarks ..................................................................................................................................... 52
Appendix 1: Aggregate Findings on SMEs Survey ............................................................................................ 53
Appendix 2: Aggregate Findings on Commercial Banks Survey ....................................................................... 60
Appendix 3: Selected Non-Banking SMEs Support Avenues in Oman ............................................................. 63
References ....................................................................................................................................................... 64
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1. Introduction
The growth and vibrancy of Small and Medium-Sized Enterprises (SMEs) are critical in the development and sustainability of any economy. The SME sector constitutes a backbone for a number of developed and emerging economies given the sector inherent flexibility to adapt to changing economic dynamics and the vital role it plays in supporting and complementing larger firms. More importantly, SMEs have significantly contributed to job creation in that for many developed and emerging economies, more people are employed in these enterprises than in the public sector or large firms. More jobs are also generated in this sector than in the rest of the sectors among these economies. The importance of growing and vibrant SMEs has also been affirmed by the value addition they create, their contribution to upward social mobility through reduction in income disparity.
It is important to note that for the SME sector to grow and contribute meaningfully and effectively to any economy; it requires appropriate physical, human, and institutional infrastructures not to mention effective policies. The development of required and relevant infrastructure has allowed a number of economies to unlock the potential of the SME sector, resulting in their overall development and growing contribution to these economies. Effective infrastructure should be able to address the challenges from the demand as well as the supply sides of the SME sector as well as founded on sound policies.
With respect to Oman, the development of the SME sector is also of critical importance and requires some expediency, in particular as the country faces challenges in the forms of limited employment opportunities for citizens in the private sector and an economy that continues to rely mostly on the hydrocarbon sector. Available data suggests that the SME sector in Oman is indeed at its infancy and its potential for growth is impeded by many factors among which are bureaucracy, scarce financing and other critical supports that otherwise have allowed this sector to prosper in other countries. The current definition of SMEs should also be strengthened with additional clarity in determining the criteria. In an effort to diversify the Sultanate’s economy and address some of the challenges cited above, the government has recently introduced a number of initiatives aimed at promoting the SME sector in the country. Accordingly, the study sets out to analyze the SME sector in Oman and provide a strategy and policy recommendations based on the findings of surveys conducted on selected stakeholders, including SMEs owners and financing institutions. The purpose is to conduct this study by analyzing the sector in a broader context as far as Oman is concerned. The expected outcome is to identify both opportunities and challenges from different stakeholders and the goal is address policy gaps through a more inclusive approach. The study is based on the responses of a set of surveys sent to key stakeholders in the development of the SME sector in Oman. The surveys designed for the study have a number of objectives such as identifying the characteristics of the owners or entrepreneurs, the nature of challenges they face and
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7.1 Policy and institutions ............................................................................................................................ 42
7.2 Legal basis .............................................................................................................................................. 43
7.3 Access to financing ................................................................................................................................. 44
7.4 Opportunities ......................................................................................................................................... 48
7.5 Infrastructure ......................................................................................................................................... 49
8. Concluding Remarks ..................................................................................................................................... 52
Appendix 1: Aggregate Findings on SMEs Survey ............................................................................................ 53
Appendix 2: Aggregate Findings on Commercial Banks Survey ....................................................................... 60
Appendix 3: Selected Non-Banking SMEs Support Avenues in Oman ............................................................. 63
References ....................................................................................................................................................... 64
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1. Introduction
The growth and vibrancy of Small and Medium-Sized Enterprises (SMEs) are critical in the development and sustainability of any economy. The SME sector constitutes a backbone for a number of developed and emerging economies given the sector inherent flexibility to adapt to changing economic dynamics and the vital role it plays in supporting and complementing larger firms. More importantly, SMEs have significantly contributed to job creation in that for many developed and emerging economies, more people are employed in these enterprises than in the public sector or large firms. More jobs are also generated in this sector than in the rest of the sectors among these economies. The importance of growing and vibrant SMEs has also been affirmed by the value addition they create, their contribution to upward social mobility through reduction in income disparity.
It is important to note that for the SME sector to grow and contribute meaningfully and effectively to any economy; it requires appropriate physical, human, and institutional infrastructures not to mention effective policies. The development of required and relevant infrastructure has allowed a number of economies to unlock the potential of the SME sector, resulting in their overall development and growing contribution to these economies. Effective infrastructure should be able to address the challenges from the demand as well as the supply sides of the SME sector as well as founded on sound policies.
With respect to Oman, the development of the SME sector is also of critical importance and requires some expediency, in particular as the country faces challenges in the forms of limited employment opportunities for citizens in the private sector and an economy that continues to rely mostly on the hydrocarbon sector. Available data suggests that the SME sector in Oman is indeed at its infancy and its potential for growth is impeded by many factors among which are bureaucracy, scarce financing and other critical supports that otherwise have allowed this sector to prosper in other countries. The current definition of SMEs should also be strengthened with additional clarity in determining the criteria. In an effort to diversify the Sultanate’s economy and address some of the challenges cited above, the government has recently introduced a number of initiatives aimed at promoting the SME sector in the country. Accordingly, the study sets out to analyze the SME sector in Oman and provide a strategy and policy recommendations based on the findings of surveys conducted on selected stakeholders, including SMEs owners and financing institutions. The purpose is to conduct this study by analyzing the sector in a broader context as far as Oman is concerned. The expected outcome is to identify both opportunities and challenges from different stakeholders and the goal is address policy gaps through a more inclusive approach. The study is based on the responses of a set of surveys sent to key stakeholders in the development of the SME sector in Oman. The surveys designed for the study have a number of objectives such as identifying the characteristics of the owners or entrepreneurs, the nature of challenges they face and
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the required infrastructure to facilitate the development of this sector. Another expected outcome from the surveys is the identification of success cases and effective programs in Oman from which lessons can be learnt and policy recommendations will be suggested. The study also draws from the experiences of other countries from which the Sultanate can benefit. The surveys that target the financial institutions in Oman also seek to identify existing challenges and opportunities from their perspectives. The findings from the survey questionnaires targeting Omani SME owners as a cohort and local commercial banks as another cohort identified a number of characteristics related to the SME sector in Oman as well challenges from the perspective of the two cohorts. As regards key characteristics of the SME owners in Oman, a significant majority of these owners were of the age of 30 years or above in addition to holding a high school diploma or higher degrees. The findings also showed that most SME owners in Oman had prior work experience of at least one year while over 80 percent never received a formal training related to SMEs. Other notable findings include the fact that at least 55 percent of owners have full time jobs, over 55 percent relied on personal funds or family for source of funding and more than 50 percent never received professional advice. Equally important in the finding is the fact that over 50 percent of SMEs in Oman could be classified as micro based on the criterion of the number of employees. The survey also listed and identified a number of challenges faced by SMEs in Oman albeit at various degrees. These challenges range from lacking of required knowledge of business, finding customers, unfair competition, access to finance as well as high cost of finance, high cost of production including labor and rent, availability of skilled staff or experienced managers, regulations and administrative burdens. The findings also pointed to limited use of modern technologies by SME owners in terms payment to suppliers in addition to prevalent practice of not preparing financial statements to name a few. The perspectives from the commercial banks have also provided valuable insights regarding the SME sector in Oman. Commercial banks have various preferences on the type of SMEs to which financing are channeled. According to the finding the most preferred types of SMEs to receive financing from commercial banks are those owned by individuals and that are already established. Responding to the question on reasons for limited lending to the SME sector in the country, commercial banks identified lack of financial history or position through financial statements with a rank of over 85 percent while high risk was ranked the lowest at about 29 percent. Given the selected amount of lending in the questionnaires and depending on individual bank responses, the amount of lending to SMEs ranged from RO 10,000 to RO 1,000,000. On measures to enhance lending to SMEs, over 70 percent of commercial banks suggested that there was a need for a level playing field insofar as competition with large firms was concerned. All commercial banks surveyed ranked retail trade businesses as the largest recipients of financing from their lending portfolio. The survey targeting commercial banks also asked for success rates based on the repayment ability by SMEs in their lending and the finding in this case could be classified as inconclusive given that Others as a success based on percentage range received the highest response. In response to the survey-based findings and experiences from other countries, the study devised a strategy taking into account the specifics of Oman and aimed at promoting a growing, competitive, and dynamic SME sector in the country. This strategy is supported by four main components
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consisting of policy and institutional supports, a legal framework to govern the sector, access to financing and opportunities, and infrastructure support. Each of these four components is in turn anchored on respective sub-components. Drawing from the strategy is a set of policy recommendations that address challenges facing the SME sector in Oman as well as identifies opportunities. Against this background, section 2 of the study discusses selected studies on SMEs, section 3 elaborates on the prevailing state of the SME sector in Oman, section 4 explains the methodology used in the study, section 5 discusses the result of the surveys, section 6 proposes a dynamic strategy for Oman, section 7 lists a set policy recommendations and section 8 provides brief concluding remarks.
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consisting of policy and institutional supports, a legal framework to govern the sector, access to financing and opportunities, and infrastructure support. Each of these four components is in turn anchored on respective sub-components. Drawing from the strategy is a set of policy recommendations that address challenges facing the SME sector in Oman as well as identifies opportunities. Against this background, section 2 of the study discusses selected studies on SMEs, section 3 elaborates on the prevailing state of the SME sector in Oman, section 4 explains the methodology used in the study, section 5 discusses the result of the surveys, section 6 proposes a dynamic strategy for Oman, section 7 lists a set policy recommendations and section 8 provides brief concluding remarks.
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2. Selected Studies on Small and Medium-Sized Enterprises
The literature review section discusses various aspects of the SME sector, including its definition, its importance to economic growth and development, challenges and opportunities, and the role of governments and private sector. 2.1. Definition of SMEs The definition of SMEs varies from country to country depending on the criteria selected. These criteria reflect, among others, the structure and nature of the economy as well as the extent of industrial development. The number of employees, the scope of financial assets, or the level of sales turnover used to define SMEs are to a great extent a function of whether an economy is advanced, emerging, or developing. In other words, the definition of an SME in the advanced economies would consist of higher number of employees, larger financial assets or sales turnover than their counterparts in developing economies. However, the number of employees constitutes the main variation across national statistical systems (OECD, June 2000). More importantly, it is worth noting that SME definitions based on prevailing conventions may still be inadequate and may create distortions in terms of donations from advanced to developing countries (Gibson and van der Vaart, 2008). It can also be noted that distortions may also occur when it comes to devise domestic policies in the event SMEs are not adequately defined. The two authors suggest that in general, the volume of business turnover represents a more appropriate measure of an SME size than the number of employees or the value of assets. They also suggest that using a single definition of SMEs for an array of countries in various stages of economic development results to more distortions. A more universal definition, according to the authors who have also been cited by Kushnir (2010) is that “An SME is a formal enterprise with annual turnover, in US dollar terms, of between 10 and 1000 times the mean per capita gross national income, at purchasing power parity, of the country in which it operates”. According to Kushnir, while this definition appears sensible, the challenge for the developing economies is in obtaining relevant statistics and in particular those data pertaining to annual turnovers for SMEs. With respect to SME definitions and the criteria related to the number of employees, among the European Union (EU) member states, the most frequent upper limit consists of 249 employees while in the United States of America (USA) it 499 employees. Regarding the definitional aspect of financial assets for the EU, SMEs are defined as those firms that have an annual turnover of EUR 40 million or less and/or a balance-sheet valuation at no more than EUR 27 million. In the United States of America, the US Small Business Administration also takes into account the type of industry in defining SMEs and delineates a firm size based on the sector. For instance, in manufacture, small means less than 500 employees while in wholesale trade, small means less than 100 employees. Beyond the EU and USA, the paper selects a few examples among Asian economies. Singapore defines SMEs in terms of sales turnover or a number of employees. According to Spring Singapore,
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a government agency responsible for promoting economic growth and productivity, as of April 2011, SMEs were redefined as enterprises with annual sales turnover under $ 100 million, or as an enterprise with an employment size below 200. The latest SMEs definition in Singapore is designed to reflect the changing profile of the sector in the country from asset-based to sales turnover given that a number of them have minimal assets nowadays. More importantly, the exclusion of assets in the definition would ensure that small businesses qualify for government support, regardless of their fixed assets. In response to changing economic structure and dynamic in the country, Malaysia revised the definition of its SMEs. As of 2013, the definition of SMEs in Malaysia disaggregated between manufacturing on one hand and services and other sectors on the other. Moreover, flexibility has been maintained with respect to the number of workers. With respect to manufacturing, SMEs are defined as enterprises with the sales turnover not exceeding RM 50 million (about US$ 160 million) or full-time employees not exceeding 200 workers while services and other sectors consist of sales turnover not exceeding RM 20 million (about US$ 64 million) or full-time employees not exceeding 75 workers (SME Corp. Malaysia, 2013). On selected examples for the MENA and the GCC region, in Egypt, SME is defined according to the usage of a firm, its activities, and government policy objectives based on which the assigned criteria consist of the number of employees, size of capital, and the existence of some legal or institutional conditions (The Egyptian Ministry of Foreign Trade, 2003). Another example insofar as the definition is concerned is one from the Government of Dubai which defines SME as a firm that has a turnover of less than 250 million dirhams (US $ 65 million) and employs less than 250 people (Dubai SME, 2011). In Oman, SMEs used to be defined solely based on the number of employees but recently, the Ministry of Commerce and Industry introduced new criteria that provided more nuanced definitions that differentiate between micro, small and medium sized enterprises (Oman Daily Observer, June 20, 2012). The two key criteria are the number of employees and sales turnover. Micro-enterprises in Oman are now defined as establishments that employ less than 5 workers and having annual sales of less than RO 25,000 while firms with 5 to 9 workers with annual sales ranging between RO 25,000 and RO 250,000 are considered small. Medium enterprises consist of 10 to 99 workers with annual sales ranging between RO 250,000 to RO 1.5 million. The revised definitions in Oman are more in tune with the evolving characteristics of the sector in the country in that most these firms are limited in terms of assets.
2.2 Contribution of the SME sector to the larger economy Thriving SMEs have been instrumental in the economic growth of many countries at various stages of their developments. They add value to economic activities, represent a major source of job creation, promote financial inclusion, provide backward and forward linkage to larger industries, constitute a backbone in supply chain and contribute to upward social mobility. Moreover, they allow economies to perform efficiently, in particular given their inherent flexible nature in adapting to changing economic conditions. It is worth noting that SMEs are found and operate in almost all economic sectors from manufacturing to services, agriculture and others. SMEs can also be in domestic markets, export-oriented, or both.
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2. Selected Studies on Small and Medium-Sized Enterprises
The literature review section discusses various aspects of the SME sector, including its definition, its importance to economic growth and development, challenges and opportunities, and the role of governments and private sector. 2.1. Definition of SMEs The definition of SMEs varies from country to country depending on the criteria selected. These criteria reflect, among others, the structure and nature of the economy as well as the extent of industrial development. The number of employees, the scope of financial assets, or the level of sales turnover used to define SMEs are to a great extent a function of whether an economy is advanced, emerging, or developing. In other words, the definition of an SME in the advanced economies would consist of higher number of employees, larger financial assets or sales turnover than their counterparts in developing economies. However, the number of employees constitutes the main variation across national statistical systems (OECD, June 2000). More importantly, it is worth noting that SME definitions based on prevailing conventions may still be inadequate and may create distortions in terms of donations from advanced to developing countries (Gibson and van der Vaart, 2008). It can also be noted that distortions may also occur when it comes to devise domestic policies in the event SMEs are not adequately defined. The two authors suggest that in general, the volume of business turnover represents a more appropriate measure of an SME size than the number of employees or the value of assets. They also suggest that using a single definition of SMEs for an array of countries in various stages of economic development results to more distortions. A more universal definition, according to the authors who have also been cited by Kushnir (2010) is that “An SME is a formal enterprise with annual turnover, in US dollar terms, of between 10 and 1000 times the mean per capita gross national income, at purchasing power parity, of the country in which it operates”. According to Kushnir, while this definition appears sensible, the challenge for the developing economies is in obtaining relevant statistics and in particular those data pertaining to annual turnovers for SMEs. With respect to SME definitions and the criteria related to the number of employees, among the European Union (EU) member states, the most frequent upper limit consists of 249 employees while in the United States of America (USA) it 499 employees. Regarding the definitional aspect of financial assets for the EU, SMEs are defined as those firms that have an annual turnover of EUR 40 million or less and/or a balance-sheet valuation at no more than EUR 27 million. In the United States of America, the US Small Business Administration also takes into account the type of industry in defining SMEs and delineates a firm size based on the sector. For instance, in manufacture, small means less than 500 employees while in wholesale trade, small means less than 100 employees. Beyond the EU and USA, the paper selects a few examples among Asian economies. Singapore defines SMEs in terms of sales turnover or a number of employees. According to Spring Singapore,
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a government agency responsible for promoting economic growth and productivity, as of April 2011, SMEs were redefined as enterprises with annual sales turnover under $ 100 million, or as an enterprise with an employment size below 200. The latest SMEs definition in Singapore is designed to reflect the changing profile of the sector in the country from asset-based to sales turnover given that a number of them have minimal assets nowadays. More importantly, the exclusion of assets in the definition would ensure that small businesses qualify for government support, regardless of their fixed assets. In response to changing economic structure and dynamic in the country, Malaysia revised the definition of its SMEs. As of 2013, the definition of SMEs in Malaysia disaggregated between manufacturing on one hand and services and other sectors on the other. Moreover, flexibility has been maintained with respect to the number of workers. With respect to manufacturing, SMEs are defined as enterprises with the sales turnover not exceeding RM 50 million (about US$ 160 million) or full-time employees not exceeding 200 workers while services and other sectors consist of sales turnover not exceeding RM 20 million (about US$ 64 million) or full-time employees not exceeding 75 workers (SME Corp. Malaysia, 2013). On selected examples for the MENA and the GCC region, in Egypt, SME is defined according to the usage of a firm, its activities, and government policy objectives based on which the assigned criteria consist of the number of employees, size of capital, and the existence of some legal or institutional conditions (The Egyptian Ministry of Foreign Trade, 2003). Another example insofar as the definition is concerned is one from the Government of Dubai which defines SME as a firm that has a turnover of less than 250 million dirhams (US $ 65 million) and employs less than 250 people (Dubai SME, 2011). In Oman, SMEs used to be defined solely based on the number of employees but recently, the Ministry of Commerce and Industry introduced new criteria that provided more nuanced definitions that differentiate between micro, small and medium sized enterprises (Oman Daily Observer, June 20, 2012). The two key criteria are the number of employees and sales turnover. Micro-enterprises in Oman are now defined as establishments that employ less than 5 workers and having annual sales of less than RO 25,000 while firms with 5 to 9 workers with annual sales ranging between RO 25,000 and RO 250,000 are considered small. Medium enterprises consist of 10 to 99 workers with annual sales ranging between RO 250,000 to RO 1.5 million. The revised definitions in Oman are more in tune with the evolving characteristics of the sector in the country in that most these firms are limited in terms of assets.
2.2 Contribution of the SME sector to the larger economy Thriving SMEs have been instrumental in the economic growth of many countries at various stages of their developments. They add value to economic activities, represent a major source of job creation, promote financial inclusion, provide backward and forward linkage to larger industries, constitute a backbone in supply chain and contribute to upward social mobility. Moreover, they allow economies to perform efficiently, in particular given their inherent flexible nature in adapting to changing economic conditions. It is worth noting that SMEs are found and operate in almost all economic sectors from manufacturing to services, agriculture and others. SMEs can also be in domestic markets, export-oriented, or both.
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In the developed and emerging countries where SME statistics are effectively collected, available data corroborate the critical contribution of this sector in these economies. In the majority of OECD countries, over 95 percent of enterprises are classified as SMEs and account for 60 percent to 70 percent of employment (OECD Policy Brief, November 2006). According to the same OECD Brief, among the 27 European Union member states, SMEs represent 62 percent of workforce and 59 percent of value-added. According to Ecorys (2012), SMEs represented 68 percent of the workforce and 58 percent of value addition among the 27 member states. In the United States of America, SMEs employ over 50 percent of workforce, account for 98 percent of all enterprises and 51 percent of valued-addition to the Gross Domestic Product (GDP). While these figures may vary from year to year, they have yet to negate the critical importance and contribution of SMEs to these economies. The Policy Brief also noted that productivity growth and by implication economic growth, is significantly influenced by the competition that tends to be intrinsic to the creation and demise, entry as well as exit of small firms. The role of SMEs is significant in the emerging economies as well. Statistics from Singapore indicate that 99 percent of all enterprises in that country are micro or SMEs that they employ 70 percent of the working force and contribute over 50 percent of value-added to the GDP (Spring Singapore, October 2012). According to a 2012 McKinsey & Company report, in South Korea, SMEs comprises 99.9 percent of all enterprises and employ 86.8 percent of the total workforce, or 12 million workers while in Morocco, SMEs account for 93 percent of registered businesses, 46 percent of the workforce, and 83 percent of GDP. In Dubai, SMEs account for 95 percent of businesses, 42 percent of the workforce, and contribute 40 percent of value- added to the economy (Dubai SME, 2011). As illustrated by the selected aforementioned examples, the contribution the SME sector varies from country to country, depending to some extent on the level of economic development and the sophistication of the economy. Indeed, the significance of the SME sector increases with economic development and that its contribution to employment as well as value addition to the GDP point to a strong positive correlation with GDP per capita (Ayyagari, Beck, and Kunt 2005). In the case of the manufacturing sector, the study shows that as countries become richer, more labor force is employed by SMEs that specialize in this sector than in larger manufacturing enterprises with similar specialization. Moreover, the study shows that countries become richer as SMEs make larger contribution to GDP. In sum, statistics in many countries point to the key contribution of SMEs in promoting economic growth and economic development in addition to accounting for a major source of employment generation. 2.3 Challenges in the SME sector The characteristics and extent of challenges faced by the SME sector vary from country to country. However, generic challenges across countries range from scarce financing, limited abilities to exploit technology, constrained managerial capabilities, excess regulations, and low productivity (OECD Policy Brief, June 2000). Other challenges faced by SMEs that may be specific to some countries as is the case for Singapore include rising competition, difficulty in hiring, developing and retaining talented employees, limited access to business opportunities including new customers and markets (Abraham, 2007). Similar challenges are also prevalent in other economies such as Malaysia and Australia (Ahmad, 2009).
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Market power by large firms in some countries has also impeded the growth of SMEs and as such, regulatory frameworks have been introduced to prevent predatory behavior, price fixing, exclusive agreements and other forms of impediments. Japan has a regulatory framework for SMEs that among other things provide all forms of support and level playing field in addition to protection from unfair practices from other parties. The Competition and Consumer Act of 2010 for Australia includes specific measures designed to address issues that affect small businesses (Schaper, 2012). There is the “Small Business Act” for Europe adopted in 2008, which among other things, carves the needs of SMEs in the forefront of the EU’s policy. The Act aims at ameliorating the broad approach to entrepreneurship by permanently incorporating what they term “Think Small First” principle in policy making from regulation to public service. The Act also aims to support SMEs growth by assisting them in overcoming outstanding problems which hinder their development. Recently, the UAE approved a new SMEs law designed to support and develop the sector. The new law states that government entities as well as related entities are required to allocate 5% of their budget for goods and services provided by SMEs or entrepreneurs (Gulf Business, December 10, 2012). As regards to SME financing, while it is considered to be one of the key challenges that affect SMEs in advanced, emerging, as well as developing economies, it is more acute among the Least Developed Economies (LDCs), in particular given the weak capacity of the regulatory and supervisory bodies in these countries (IFC, 2011). In the case of OECD member states, the challenges that SMEs face as they try to access financing range from incomplete financial products and services to regulatory rigidities or gaps in the legal framework, and lack of information by both the financing institutions such as banks as well SMEs themselves (OECD, Policy Brief, November 2006). Financing institutions such as banks require a reliable a credit assessment body or a credit bureau that would allow them to assess the risk of the prospective borrowers who want to start a business or those who want to expand existing ones. The objective is to narrow the information asymmetry gap between lenders and borrowers.
2.4 Opportunities for the SME sector
With regard to opportunities, while SMEs have traditionally catered on domestic markets, prospects also exist in the global or regional markets for those firms that are willing, capable and competitive in the export market. Opportunities for the SME sector range from service sector to manufacturing, and all other sectors that can be exploited either domestically, regionally, or globally. In cases where SMEs enjoy technological capabilities, they can leverage advances in areas such as renewable energy, biotechnology, and an array of high-growth global industries (Bartlett, March 2011). The SME sector can also find opportunities in innovation, in particular given its inherent flexibility born out of smaller size when compared to large firms. Based on the survey data conducted among the OECD countries, between 30% and 60% of SMEs were classified as innovative in the broad sense, providing them with an edge over larger firms when it comes to cost efficiency, expanding customer base, or create new markets, according to Barlett (2011). Among the developing and emerging economies where the use of technologies in SMEs is less prevalent, opportunities exist in trade, services, handicraft, agriculture, and a number of areas that have yet to be exploited or are simply under-exploited. It is important to emphasize that these opportunities can only be realized and add more value with appropriate infrastructure and effective policies. Equally important is the role of innovation in promoting SMEs. While for the
Occasional Paper
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In the developed and emerging countries where SME statistics are effectively collected, available data corroborate the critical contribution of this sector in these economies. In the majority of OECD countries, over 95 percent of enterprises are classified as SMEs and account for 60 percent to 70 percent of employment (OECD Policy Brief, November 2006). According to the same OECD Brief, among the 27 European Union member states, SMEs represent 62 percent of workforce and 59 percent of value-added. According to Ecorys (2012), SMEs represented 68 percent of the workforce and 58 percent of value addition among the 27 member states. In the United States of America, SMEs employ over 50 percent of workforce, account for 98 percent of all enterprises and 51 percent of valued-addition to the Gross Domestic Product (GDP). While these figures may vary from year to year, they have yet to negate the critical importance and contribution of SMEs to these economies. The Policy Brief also noted that productivity growth and by implication economic growth, is significantly influenced by the competition that tends to be intrinsic to the creation and demise, entry as well as exit of small firms. The role of SMEs is significant in the emerging economies as well. Statistics from Singapore indicate that 99 percent of all enterprises in that country are micro or SMEs that they employ 70 percent of the working force and contribute over 50 percent of value-added to the GDP (Spring Singapore, October 2012). According to a 2012 McKinsey & Company report, in South Korea, SMEs comprises 99.9 percent of all enterprises and employ 86.8 percent of the total workforce, or 12 million workers while in Morocco, SMEs account for 93 percent of registered businesses, 46 percent of the workforce, and 83 percent of GDP. In Dubai, SMEs account for 95 percent of businesses, 42 percent of the workforce, and contribute 40 percent of value- added to the economy (Dubai SME, 2011). As illustrated by the selected aforementioned examples, the contribution the SME sector varies from country to country, depending to some extent on the level of economic development and the sophistication of the economy. Indeed, the significance of the SME sector increases with economic development and that its contribution to employment as well as value addition to the GDP point to a strong positive correlation with GDP per capita (Ayyagari, Beck, and Kunt 2005). In the case of the manufacturing sector, the study shows that as countries become richer, more labor force is employed by SMEs that specialize in this sector than in larger manufacturing enterprises with similar specialization. Moreover, the study shows that countries become richer as SMEs make larger contribution to GDP. In sum, statistics in many countries point to the key contribution of SMEs in promoting economic growth and economic development in addition to accounting for a major source of employment generation. 2.3 Challenges in the SME sector The characteristics and extent of challenges faced by the SME sector vary from country to country. However, generic challenges across countries range from scarce financing, limited abilities to exploit technology, constrained managerial capabilities, excess regulations, and low productivity (OECD Policy Brief, June 2000). Other challenges faced by SMEs that may be specific to some countries as is the case for Singapore include rising competition, difficulty in hiring, developing and retaining talented employees, limited access to business opportunities including new customers and markets (Abraham, 2007). Similar challenges are also prevalent in other economies such as Malaysia and Australia (Ahmad, 2009).
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Market power by large firms in some countries has also impeded the growth of SMEs and as such, regulatory frameworks have been introduced to prevent predatory behavior, price fixing, exclusive agreements and other forms of impediments. Japan has a regulatory framework for SMEs that among other things provide all forms of support and level playing field in addition to protection from unfair practices from other parties. The Competition and Consumer Act of 2010 for Australia includes specific measures designed to address issues that affect small businesses (Schaper, 2012). There is the “Small Business Act” for Europe adopted in 2008, which among other things, carves the needs of SMEs in the forefront of the EU’s policy. The Act aims at ameliorating the broad approach to entrepreneurship by permanently incorporating what they term “Think Small First” principle in policy making from regulation to public service. The Act also aims to support SMEs growth by assisting them in overcoming outstanding problems which hinder their development. Recently, the UAE approved a new SMEs law designed to support and develop the sector. The new law states that government entities as well as related entities are required to allocate 5% of their budget for goods and services provided by SMEs or entrepreneurs (Gulf Business, December 10, 2012). As regards to SME financing, while it is considered to be one of the key challenges that affect SMEs in advanced, emerging, as well as developing economies, it is more acute among the Least Developed Economies (LDCs), in particular given the weak capacity of the regulatory and supervisory bodies in these countries (IFC, 2011). In the case of OECD member states, the challenges that SMEs face as they try to access financing range from incomplete financial products and services to regulatory rigidities or gaps in the legal framework, and lack of information by both the financing institutions such as banks as well SMEs themselves (OECD, Policy Brief, November 2006). Financing institutions such as banks require a reliable a credit assessment body or a credit bureau that would allow them to assess the risk of the prospective borrowers who want to start a business or those who want to expand existing ones. The objective is to narrow the information asymmetry gap between lenders and borrowers.
2.4 Opportunities for the SME sector
With regard to opportunities, while SMEs have traditionally catered on domestic markets, prospects also exist in the global or regional markets for those firms that are willing, capable and competitive in the export market. Opportunities for the SME sector range from service sector to manufacturing, and all other sectors that can be exploited either domestically, regionally, or globally. In cases where SMEs enjoy technological capabilities, they can leverage advances in areas such as renewable energy, biotechnology, and an array of high-growth global industries (Bartlett, March 2011). The SME sector can also find opportunities in innovation, in particular given its inherent flexibility born out of smaller size when compared to large firms. Based on the survey data conducted among the OECD countries, between 30% and 60% of SMEs were classified as innovative in the broad sense, providing them with an edge over larger firms when it comes to cost efficiency, expanding customer base, or create new markets, according to Barlett (2011). Among the developing and emerging economies where the use of technologies in SMEs is less prevalent, opportunities exist in trade, services, handicraft, agriculture, and a number of areas that have yet to be exploited or are simply under-exploited. It is important to emphasize that these opportunities can only be realized and add more value with appropriate infrastructure and effective policies. Equally important is the role of innovation in promoting SMEs. While for the
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advanced economies and some emerging economies innovation can come from science-based technological progress, for LDCs, innovation can simply mean the acquisition, adaptation, and diffusion of existing technology (UNCTAD, 2011). Opportunities could also be generated through business clusters or business incubators. Harvard Business School defines business clusters as “geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region”1. Business clusters continue to have positive impact on productivity and are sources of comparative advantage for the companies that are located within, despite the era of global competition, rapid transport and high-speed telecommunications (Porter, 2009). More importantly, business clusters provide opportunities for market opening and cost reduction of doing business, according to Harvard Business School. Business clusters are found in many sectors from fishing to Information Technology (IT). One notable example in seafood cluster is the Bergen Seafood Cluster in Norway. Norway’s policy of harvesting on its fisheries natural resources has moved the country to the second largest seafood exporter after China. The Bergen Seafood Cluster includes fisheries, aquaculture, finance and a center for the world’s largest seafood companies namely, Lerøy Seafood Group, Marine Harvest, Grieg Seafood, Austevoll Seafood, Salmon Group, EWOS, IntraFish Media. The Cluster has 1100 firms employing 4500 people with a turnover of $62 billion (Eurofish Magazine 6, 2012). It includes support businesses such as fish ports, vaccines, feeds, finance and law services and media and technology facilities for the industry. Additional components of the Cluster include a research and innovation center specializing in fisheries management, seafood and health, marine technology and marine biotechnology, as well as ocean and coastal environment. Business Incubators have also assisted in the development of start-up firms and fledging companies by providing entrepreneurs with an array of targeted resources and services. The American National Business Incubation Association (NBIA) suggests that the services provided by incubators are often developed or orchestrated by incubator management and offered both in the business incubator and through its network of contacts.
In order for an incubator to be effective, its operating framework needs to be clearly mandated and articulated by its management. Each incubator must include a clear definition of its target market, admission and exit rules, and quality standards for client assistance and other elements of the incubator’s operations, all of which employees must be well aware of to ensure total effectiveness (EC, 2002).
1 The source of the definition is www.isc.hbs.edu/econ-clusters.htm
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Chart 2.3.1: Incubator Functions
Source: Concepts from National Incubator Network Association of Malaysia, 2009 and Chart by the Authors.
2.5 The role of governments in promoting the SME Sector The successes of the SME sector in many economies have been driven by governments, in partnership with the private sector. Governments can develop strategies and environment for the SME sector to grow and play the role of catalysts towards its promotion. What governments should not do is supporting the SME sector through ineffective and inefficient policies with detrimental effects on competition and innovation. Governments have also the responsibility of checking destructive market powers in certain instances where the growth of SMEs is impeded through various monopolistic or oligopolistic behaviors by large firms. Cases of the government role and public and private partnership in developing the SME sector are found in a number of advanced, emerging as well as developing economies. In effect, when the SME sector fails to grow, in particular where clear potential exists, this would be considered as a market failure for which effective government intervention could improve the market outcome. It is equally important to emphasize that government intervention, when initiated in an ineffective manner, could also lead to failure, or more specifically government failure with adverse outcome for SMEs. The objective is to have government intervention in the face of market failure where good behaviors by the SMEs sector such as competitiveness and innovation are
•Industrial Linkages •Exhibitions and showcases
Market Access
•Assistance to tenants •Grants •Networking and access to investors
Access to Finance
•Management training •Technology transfer •Technical training •Innovation development
Capacity Building
•Specialised incubators: - Women Incubators, IT incubators, Student Incubators, Agricultural incubators...etc
Promotion of New Incubation Sectors
Occasional Paper
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advanced economies and some emerging economies innovation can come from science-based technological progress, for LDCs, innovation can simply mean the acquisition, adaptation, and diffusion of existing technology (UNCTAD, 2011). Opportunities could also be generated through business clusters or business incubators. Harvard Business School defines business clusters as “geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region”1. Business clusters continue to have positive impact on productivity and are sources of comparative advantage for the companies that are located within, despite the era of global competition, rapid transport and high-speed telecommunications (Porter, 2009). More importantly, business clusters provide opportunities for market opening and cost reduction of doing business, according to Harvard Business School. Business clusters are found in many sectors from fishing to Information Technology (IT). One notable example in seafood cluster is the Bergen Seafood Cluster in Norway. Norway’s policy of harvesting on its fisheries natural resources has moved the country to the second largest seafood exporter after China. The Bergen Seafood Cluster includes fisheries, aquaculture, finance and a center for the world’s largest seafood companies namely, Lerøy Seafood Group, Marine Harvest, Grieg Seafood, Austevoll Seafood, Salmon Group, EWOS, IntraFish Media. The Cluster has 1100 firms employing 4500 people with a turnover of $62 billion (Eurofish Magazine 6, 2012). It includes support businesses such as fish ports, vaccines, feeds, finance and law services and media and technology facilities for the industry. Additional components of the Cluster include a research and innovation center specializing in fisheries management, seafood and health, marine technology and marine biotechnology, as well as ocean and coastal environment. Business Incubators have also assisted in the development of start-up firms and fledging companies by providing entrepreneurs with an array of targeted resources and services. The American National Business Incubation Association (NBIA) suggests that the services provided by incubators are often developed or orchestrated by incubator management and offered both in the business incubator and through its network of contacts.
In order for an incubator to be effective, its operating framework needs to be clearly mandated and articulated by its management. Each incubator must include a clear definition of its target market, admission and exit rules, and quality standards for client assistance and other elements of the incubator’s operations, all of which employees must be well aware of to ensure total effectiveness (EC, 2002).
1 The source of the definition is www.isc.hbs.edu/econ-clusters.htm
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Chart 2.3.1: Incubator Functions
Source: Concepts from National Incubator Network Association of Malaysia, 2009 and Chart by the Authors.
2.5 The role of governments in promoting the SME Sector The successes of the SME sector in many economies have been driven by governments, in partnership with the private sector. Governments can develop strategies and environment for the SME sector to grow and play the role of catalysts towards its promotion. What governments should not do is supporting the SME sector through ineffective and inefficient policies with detrimental effects on competition and innovation. Governments have also the responsibility of checking destructive market powers in certain instances where the growth of SMEs is impeded through various monopolistic or oligopolistic behaviors by large firms. Cases of the government role and public and private partnership in developing the SME sector are found in a number of advanced, emerging as well as developing economies. In effect, when the SME sector fails to grow, in particular where clear potential exists, this would be considered as a market failure for which effective government intervention could improve the market outcome. It is equally important to emphasize that government intervention, when initiated in an ineffective manner, could also lead to failure, or more specifically government failure with adverse outcome for SMEs. The objective is to have government intervention in the face of market failure where good behaviors by the SMEs sector such as competitiveness and innovation are
•Industrial Linkages •Exhibitions and showcases
Market Access
•Assistance to tenants •Grants •Networking and access to investors
Access to Finance
•Management training •Technology transfer •Technical training •Innovation development
Capacity Building
•Specialised incubators: - Women Incubators, IT incubators, Student Incubators, Agricultural incubators...etc
Promotion of New Incubation Sectors
Occasional Paper
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3. Small and Medium-Sized Enterprises in Oman
The prospect of the central role to be played by the SME sector in the development of Oman and its potential to add value to the economy were first paved by the Royal Decree No 19/2007, promulgated in March 2007 that established the Directorate General of the Development of Small and Medium Enterprises, at the Ministry of Commerce and Industry. According to the Directorate, the mission of the Ministry of Commerce of Industry through the established entity was “to create and enhance a private sector that may positively contribute to the development of the Omani economy by availing of favorable environment”. Acknowledging the role of SMEs in the development of the Sultanate and establishing an institution to support this sector were critical steps. In effect, the 2013 Royal Decree 36/2013 to establish the Public Authority for Development of SMEs in Oman further indicated the growing importance attached to SMEs. The ultimate success of the Public Authority for Development of SMEs would be in its effectiveness to gradually help the sector becoming a major contribution to the national economy. Failure to meet the objectives of the SME sector laid down in an approved strategy would render this institution into another layer of bureaucracy, further burdening public finances.
3.1 Contribution of the SME sector to the Omani economy Available statistics on SMEs in Oman point to a sector that has yet to grow and realize its potential contribution to the national economy. According to Oxford Business Group report issued in April 2012, the SME sector in Oman accounts for 16 percent of GDP and 90 percent of economic activities. A study conducted by the IMF and the WB in 2010 titled Financial Sector Assessment Program: Sultanate of Oman, it indicated that the SME sector accounted for 20 percent of GDP and 40 percent of the total workforce in Oman. These figures are indicative of a sector with limited contribution to the overall economy of the country. Based on the IMF and the World Bank estimate of 40 percent workforce in the SMEs sector in Oman, it is sensible to suggest that the proportion of the Omani workforce in this sector is much smaller than that of the expatriate workforce, in line with the prevailing trend in the overall private sector. Latest employment statistics show that about 10,000 nationals were working in the SME sector compared to 200,000 in firms that are classified as first class (Oman Observer, March 11, 2013). The 10,000 national working in the SME sector amounts to 2 percent of the total workforce and 3 percent of the total private sector in Oman which, when compared to figures in advanced or a number of emerging economies where over 90 percent of the workforce participate in the SME sector, amount to a negligible participation by the national workforce in the sector. Another crucial question pertaining to Omani SMEs is the issue of ownership and its implication to the national economy. Cases whereby nationals are registered as business owners exist whereas in reality, these nationals are simply agents of expatriate owners. This loophole in the current system amounts to rent-seeking behavior by some nationals and has a number of financial and economic ramifications among which are rising remittances, pressure in the labor market among nationals,
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fostered rather than impeded and when destructive behaviors by larger firms are curtailed or removed. A World Bank Study (2006) noted that governments could play the role by taking actions to mitigate market failure and eliminate policy biases. Among the number of recommendations provided in this regard, governments could address market failures that result to cost disadvantages for SMEs and limited access to markets. Governments could also ameliorate transactional efficiency related to financial, product, and input markets that are relevant to SMEs through easy access to information and develop mechanisms that would manage risks for SMEs. The World Bank study also emphasized the importance of reconsidering public policies and regulations that perpetuate discriminations against small firms.
Government policies could also be instrumental in promoting entrepreneurship, facilitating firm start-up and expansion, and improving access to venture capital and other types of financing (OECD Policy Brief, June 2000). Governments in OECD member states are now promoting the development of secondary stock markets, easing taxes on capital gains and dividends and allowing using of stock options as compensation for smaller firms, according to the Policy Brief. Moreover, they are promoting networks between SMEs owners and investors to bridge the information gap between them and facilitate cooperation.
Occasional Paper
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3. Small and Medium-Sized Enterprises in Oman
The prospect of the central role to be played by the SME sector in the development of Oman and its potential to add value to the economy were first paved by the Royal Decree No 19/2007, promulgated in March 2007 that established the Directorate General of the Development of Small and Medium Enterprises, at the Ministry of Commerce and Industry. According to the Directorate, the mission of the Ministry of Commerce of Industry through the established entity was “to create and enhance a private sector that may positively contribute to the development of the Omani economy by availing of favorable environment”. Acknowledging the role of SMEs in the development of the Sultanate and establishing an institution to support this sector were critical steps. In effect, the 2013 Royal Decree 36/2013 to establish the Public Authority for Development of SMEs in Oman further indicated the growing importance attached to SMEs. The ultimate success of the Public Authority for Development of SMEs would be in its effectiveness to gradually help the sector becoming a major contribution to the national economy. Failure to meet the objectives of the SME sector laid down in an approved strategy would render this institution into another layer of bureaucracy, further burdening public finances.
3.1 Contribution of the SME sector to the Omani economy Available statistics on SMEs in Oman point to a sector that has yet to grow and realize its potential contribution to the national economy. According to Oxford Business Group report issued in April 2012, the SME sector in Oman accounts for 16 percent of GDP and 90 percent of economic activities. A study conducted by the IMF and the WB in 2010 titled Financial Sector Assessment Program: Sultanate of Oman, it indicated that the SME sector accounted for 20 percent of GDP and 40 percent of the total workforce in Oman. These figures are indicative of a sector with limited contribution to the overall economy of the country. Based on the IMF and the World Bank estimate of 40 percent workforce in the SMEs sector in Oman, it is sensible to suggest that the proportion of the Omani workforce in this sector is much smaller than that of the expatriate workforce, in line with the prevailing trend in the overall private sector. Latest employment statistics show that about 10,000 nationals were working in the SME sector compared to 200,000 in firms that are classified as first class (Oman Observer, March 11, 2013). The 10,000 national working in the SME sector amounts to 2 percent of the total workforce and 3 percent of the total private sector in Oman which, when compared to figures in advanced or a number of emerging economies where over 90 percent of the workforce participate in the SME sector, amount to a negligible participation by the national workforce in the sector. Another crucial question pertaining to Omani SMEs is the issue of ownership and its implication to the national economy. Cases whereby nationals are registered as business owners exist whereas in reality, these nationals are simply agents of expatriate owners. This loophole in the current system amounts to rent-seeking behavior by some nationals and has a number of financial and economic ramifications among which are rising remittances, pressure in the labor market among nationals,
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fostered rather than impeded and when destructive behaviors by larger firms are curtailed or removed. A World Bank Study (2006) noted that governments could play the role by taking actions to mitigate market failure and eliminate policy biases. Among the number of recommendations provided in this regard, governments could address market failures that result to cost disadvantages for SMEs and limited access to markets. Governments could also ameliorate transactional efficiency related to financial, product, and input markets that are relevant to SMEs through easy access to information and develop mechanisms that would manage risks for SMEs. The World Bank study also emphasized the importance of reconsidering public policies and regulations that perpetuate discriminations against small firms.
Government policies could also be instrumental in promoting entrepreneurship, facilitating firm start-up and expansion, and improving access to venture capital and other types of financing (OECD Policy Brief, June 2000). Governments in OECD member states are now promoting the development of secondary stock markets, easing taxes on capital gains and dividends and allowing using of stock options as compensation for smaller firms, according to the Policy Brief. Moreover, they are promoting networks between SMEs owners and investors to bridge the information gap between them and facilitate cooperation.
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challenges related to the SME sector are elaborated in Box 3.2.1 in the form of a discussion with one Senior banking official in Oman. Box 3.2.1: A Discussion with a Senior Commercial Bank Official Within the context of supporting the SME sector in Oman, the official suggested that the Central Bank of Oman (CBO) could further enhance existing procedures insofar as lending to SMEs is concerned. As per the current procedure, banks are asked to classify any business loan as a non-paid loan in the event the business entity fails to service the loan for 90 days. It is therefore easy for banks to take non-payment cases to the court and recover the amount lent, in particular that these types of loans are backed by valuable collaterals such as lands, the business itself and retirement wages. Given the challenges faced by small businesses, the official suggests that the non-payment classification should be extended to 180 days.
Failure to meet regular payment to the banks is in some cases due to the fact that even successful SMEs face challenges with respect to cash flow. These small firms may be providing services to government entities or large companies which some time do not honor their payment on time, and more often in the case of government payments. This challenge usually translates into cash flow problem for SMEs and by default affecting the scheduled loans payments to banks. In order to mitigate this challenge, one way is for the Government to set up fast track payments systems for SMEs while encouraging large business to do the same.
As an incentive for large businesses to expedite payments to SMEs, the Public Authority for Development of SMEs or the Government Tenders Board could include in their annual reports public listed companies with average period of payment to SMEs. The performance pertaining to progress made in shortening the time period of payments could then be used as an indicator of support to the SME sector. While the Government Tenders Board is setting up an initiative to support SMEs, the ability to foster and expedite payments to SMEs should be a priority.
Other Challenges faced by SMEs in Oman include high costs of conducting professional feasibility studies, lack of collaterals needed to receive a line of credit. These challenges left Oman Development Bank (ODB) as the main lender in this sector. The business model of ODB is based on low cost of funding (government equity) together with large interest rate subsidies applied to the long-term loans that it extends3. The issue here, as correctly pointed by the IMF and the WB, is that the prevalence of low interest rates from ODB crowd out long-term lending to SMEs from commercial banks. At basic level the SMEs sector in Oman confronts challenges in the forms of marketing, administrative, technical, organizational and regulatory limitations (Al Belushi et al, 2012). The details pertaining to the basic challenges faced by the SME sector in Oman as discussed by Al Belushi et al are captured in Box 3.2.2 below.
3 The interest rate subsidies consist of 3 percent interest rates on loans together with a 6 percent subsidy.
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and incentives that are meant to assist nationals in their efforts to start or grow businesses being channeled to expatriates instead. This reality on the hidden economy is counter to the policy of promoting upward social mobility and entrepreneurship through starting a business or expanding an existing one. In order for the SME sector to thrive in Oman and realize its potential economic and social benefits, owners need to be fully invested in the startup as well as growth phases of the business.
3.2 Challenges faced by the SME sector in Oman
The SME sector in Oman faces a number of challenges that can be classified in three major categories, namely financial, institutional, and infrastructure. These challenges extend to both the demand and supply sides of the sector. According to a study by the World Bank in 2006, institutional constraints include incentive gaps for young nationals to work outside the public sector or large private companies, labor regulations in hiring expatriate workforce, excess bureaucracy to obtain permits, as well as poor business skills and education among prospective entrepreneurs. On the financial side, both the IMF study and the World Bank study found that that the banking sector in Oman faced a number of challenges from supply as wells as demand sides that limit the expansion of its lending to SMEs. On the supply side, the challenges include limited competition among banks as well as high margin required from lending to consumers which provides little incentives for banks to lend to SMEs and more so given the inherent high risks associated with these enterprises. Accordingly, banks in Oman have invested little resources required in the analysis of SMEs credit risks and credit evaluation tools. On the demand side, according to the studies, banks are presented with limited pool of viable projects. Moreover, there appears to be a lack of transparency and management expertise in addition to prevailing poor financial infrastructure, all of which provide little incentives for banks to lend to SMEs in Oman. As of December 2012, 2.8 percent of the total credit extended by banks was channeled to SMEs2. A notable challenge to SME financing in Oman that takes place through various government entities is on conditional lending that requires the beneficiaries of the loans to buy certain equipment from a given agent or buy required supplies from pre-determined agents. It is one thing to institute safety or reliability standards but another thing to impose vendors and suppliers to SME owners or entrepreneurs. This practice is paradoxical to the concept of entrepreneurship and more importantly, it prevents the beneficiaries of the loans to operate the business in a cost effective and flexible manner due to these impositions. Within the parameters of required standards, SME owners should be given the freedom to choose suppliers and vendors who are based in Oman or overseas. Another challenge faced by a number of SMEs is in the management of their cash flows and the ability to make scheduled payments of their loans to the banks. The challenge, in some instances, stems from delayed payments these firms face in dealing with government agencies or large firms to which the provide services through contractual agreements. This challenge, along with other
2 The data was sourced from CBO, Banking Development Department. It is assumed that the commercial banks classify their SMEs lending based on the definition of SMEs in Oman. We are not aware of any mechanism that validates or cross-check commercial banks’ lending and firms’ classifications.
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challenges related to the SME sector are elaborated in Box 3.2.1 in the form of a discussion with one Senior banking official in Oman. Box 3.2.1: A Discussion with a Senior Commercial Bank Official Within the context of supporting the SME sector in Oman, the official suggested that the Central Bank of Oman (CBO) could further enhance existing procedures insofar as lending to SMEs is concerned. As per the current procedure, banks are asked to classify any business loan as a non-paid loan in the event the business entity fails to service the loan for 90 days. It is therefore easy for banks to take non-payment cases to the court and recover the amount lent, in particular that these types of loans are backed by valuable collaterals such as lands, the business itself and retirement wages. Given the challenges faced by small businesses, the official suggests that the non-payment classification should be extended to 180 days.
Failure to meet regular payment to the banks is in some cases due to the fact that even successful SMEs face challenges with respect to cash flow. These small firms may be providing services to government entities or large companies which some time do not honor their payment on time, and more often in the case of government payments. This challenge usually translates into cash flow problem for SMEs and by default affecting the scheduled loans payments to banks. In order to mitigate this challenge, one way is for the Government to set up fast track payments systems for SMEs while encouraging large business to do the same.
As an incentive for large businesses to expedite payments to SMEs, the Public Authority for Development of SMEs or the Government Tenders Board could include in their annual reports public listed companies with average period of payment to SMEs. The performance pertaining to progress made in shortening the time period of payments could then be used as an indicator of support to the SME sector. While the Government Tenders Board is setting up an initiative to support SMEs, the ability to foster and expedite payments to SMEs should be a priority.
Other Challenges faced by SMEs in Oman include high costs of conducting professional feasibility studies, lack of collaterals needed to receive a line of credit. These challenges left Oman Development Bank (ODB) as the main lender in this sector. The business model of ODB is based on low cost of funding (government equity) together with large interest rate subsidies applied to the long-term loans that it extends3. The issue here, as correctly pointed by the IMF and the WB, is that the prevalence of low interest rates from ODB crowd out long-term lending to SMEs from commercial banks. At basic level the SMEs sector in Oman confronts challenges in the forms of marketing, administrative, technical, organizational and regulatory limitations (Al Belushi et al, 2012). The details pertaining to the basic challenges faced by the SME sector in Oman as discussed by Al Belushi et al are captured in Box 3.2.2 below.
3 The interest rate subsidies consist of 3 percent interest rates on loans together with a 6 percent subsidy.
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3.3 Growth opportunity for the SME sector in Oman The relatively underdeveloped SME sector in Oman provides significant potential, in particular given the country’s economic growth witnessed over many years. More importantly, the outlays of discretionary spending in the form of capital expenditure for major infrastructure projects provide significant opportunities for the SME sector through various modes of supplies. Equally important are the opportunities that could be generated in making SMEs as parts and parcels of the overall industrial policy and Foreign Direct Investment (FDI) policies in the Sultanate with the aim of promoting linkages and knowledge transfers from large and Transnational Companies (TNCs) to smaller firms. As part of an overall development strategy, policies makers in the Sultanate have identified the logistic and transport sector as one of the sectors that would propel the country’s growth in the future, in particular given the country’s geographical location and trade history in the Indian Ocean. In a recent event titled Oman Business Road Show to the United States with the aim of promoting trade and investment opportunities between the two countries, four sectors were listed as significant business opportunities. Among the sectors identified were transport and logistics, manufacturing, healthcare, and tourism. Given the magnitude and variety of investments that are expected to take place to further develop these sectors, a strategy and a road map to identify synergies between these projects with the SME sector in Oman, both startups and existing firms are required. The strategy and road map should include pre and post implementation opportunities that can be seized by the SME sector. Selected large logistics and transport projects are discussed in Box 3.3.1.
Box 3.3.1: Selected Transport and Logistic Projects
Ports and Logistics The Sultan Qaboos Port based in Muscat is going to be dedicated for cruise ships with containers activities to be moved to Sohar Port where a logistic hub is also being developed. Another logistic and port hub is Duqum where storages for juice, oil and grain are being built to serve both Africa and Asia. It takes two weeks for containers to arrive at Duqum Port from the East coast of the United States and it takes three weeks from the East coast. These containers are then moved to feeder boats to serve Africa which is growing and opening fast as well as the Indian subcontinent. Duqum Port also accounts for lower shipping insurance cost given that vessels do not have to travel all the way to the Gulf. Salalah Port is becoming one of the top transshipment venues in the world servicing a number of major cities globally.
Railway and Airports There is the upcoming railway project that would extend over the Gulf region from Kuwait to Salalah. The plan is to have the railway project complementing the ports with respect to moving goods from inland in the gulf region that are destined for export. Similarly, goods that are being imported into the gulf region through ports would use the railway to move them to the inland regions of the Gulf. The railway project is to be double track catering for both freight and passengers. Oman is also witnessing the expansion of both the Muscat and Salalah airports with the former expected to have its capacity increasing to 7 million passengers a year and the latter to 1 million passengers.
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Box 3.2.2: Selected Challenges faced by SMEs in Oman Marketing limitations Scarce funding for SMEs has translated into marketing weaknesses and inefficiency, resulting in scant information on local and foreign markets as well as on consumer tastes. The SME sector also lacks marketing outlets for promotion to local and foreign consumers. Another challenges faced by the Sector is the lack of sufficient incentives for local products when it comes to compete with imported products and brand names. Increased costs of transportation, delayed payments by consumers, and lack of national support for local products compound the marketing constraints faced by SMEs in Oman. Product marketing outside local regions faces similar challenges in addition to the underlying myth that local and national products are “inferior” to imported products.
Administrative limitations Lack of modern managerial and administrative skills amounts to a serious challenge faced by SMEs owners in Oman, in particular when it comes to the use of modern technology. In terms of management, SMEs owners in Oman often act as a “one man show”, juggling the role of manager, head of finance, head of marketing etc. The result is administrative shortcomings due to lack of area focus and job specialization. SMEs in Oman also faces lack of functional organizational plans for projects or enterprises at hand, often leading to inefficiency and high transaction cost given that decisions tend to be made on ad-hoc basis. There is also limited knowledge by SMEs owners on how to deal with official parties as well as on regulations and required bureaucracy, resulting in preventable delays. The absence of key and relevant information and statistics for SMEs on competing firms, product information, work regulations, social insurance hinder the ability of firms to effective decisions.
Technical limitations Given that SMEs depend in most part on the abilities and the experiences of their owners, lacking or limited knowledge on the product itself or in the ability to manage a project as is often the case among some Omani owners, have led to failures. The raw materials and inputs used for production are not subjected to technical standards, therefore depending on the knowledge, experiences and judgment of the owner, which in some cases are limited or lacking. Organizational and regulatory limitations Multiple and sometime overlapping agencies have created redundancies and as such consuming time, effort, and money from SMEs owners. The SME sector in Oman also faces bias in favor of larger organizations in terms of tax breaks, incentives and rollover subsidies. Larger and established organizations are often given concessions from the government such as no corporate taxes over five years that can be extended, leading to unfair competitions for startup SMEs.
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3.3 Growth opportunity for the SME sector in Oman The relatively underdeveloped SME sector in Oman provides significant potential, in particular given the country’s economic growth witnessed over many years. More importantly, the outlays of discretionary spending in the form of capital expenditure for major infrastructure projects provide significant opportunities for the SME sector through various modes of supplies. Equally important are the opportunities that could be generated in making SMEs as parts and parcels of the overall industrial policy and Foreign Direct Investment (FDI) policies in the Sultanate with the aim of promoting linkages and knowledge transfers from large and Transnational Companies (TNCs) to smaller firms. As part of an overall development strategy, policies makers in the Sultanate have identified the logistic and transport sector as one of the sectors that would propel the country’s growth in the future, in particular given the country’s geographical location and trade history in the Indian Ocean. In a recent event titled Oman Business Road Show to the United States with the aim of promoting trade and investment opportunities between the two countries, four sectors were listed as significant business opportunities. Among the sectors identified were transport and logistics, manufacturing, healthcare, and tourism. Given the magnitude and variety of investments that are expected to take place to further develop these sectors, a strategy and a road map to identify synergies between these projects with the SME sector in Oman, both startups and existing firms are required. The strategy and road map should include pre and post implementation opportunities that can be seized by the SME sector. Selected large logistics and transport projects are discussed in Box 3.3.1.
Box 3.3.1: Selected Transport and Logistic Projects
Ports and Logistics The Sultan Qaboos Port based in Muscat is going to be dedicated for cruise ships with containers activities to be moved to Sohar Port where a logistic hub is also being developed. Another logistic and port hub is Duqum where storages for juice, oil and grain are being built to serve both Africa and Asia. It takes two weeks for containers to arrive at Duqum Port from the East coast of the United States and it takes three weeks from the East coast. These containers are then moved to feeder boats to serve Africa which is growing and opening fast as well as the Indian subcontinent. Duqum Port also accounts for lower shipping insurance cost given that vessels do not have to travel all the way to the Gulf. Salalah Port is becoming one of the top transshipment venues in the world servicing a number of major cities globally.
Railway and Airports There is the upcoming railway project that would extend over the Gulf region from Kuwait to Salalah. The plan is to have the railway project complementing the ports with respect to moving goods from inland in the gulf region that are destined for export. Similarly, goods that are being imported into the gulf region through ports would use the railway to move them to the inland regions of the Gulf. The railway project is to be double track catering for both freight and passengers. Oman is also witnessing the expansion of both the Muscat and Salalah airports with the former expected to have its capacity increasing to 7 million passengers a year and the latter to 1 million passengers.
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Box 3.2.2: Selected Challenges faced by SMEs in Oman Marketing limitations Scarce funding for SMEs has translated into marketing weaknesses and inefficiency, resulting in scant information on local and foreign markets as well as on consumer tastes. The SME sector also lacks marketing outlets for promotion to local and foreign consumers. Another challenges faced by the Sector is the lack of sufficient incentives for local products when it comes to compete with imported products and brand names. Increased costs of transportation, delayed payments by consumers, and lack of national support for local products compound the marketing constraints faced by SMEs in Oman. Product marketing outside local regions faces similar challenges in addition to the underlying myth that local and national products are “inferior” to imported products.
Administrative limitations Lack of modern managerial and administrative skills amounts to a serious challenge faced by SMEs owners in Oman, in particular when it comes to the use of modern technology. In terms of management, SMEs owners in Oman often act as a “one man show”, juggling the role of manager, head of finance, head of marketing etc. The result is administrative shortcomings due to lack of area focus and job specialization. SMEs in Oman also faces lack of functional organizational plans for projects or enterprises at hand, often leading to inefficiency and high transaction cost given that decisions tend to be made on ad-hoc basis. There is also limited knowledge by SMEs owners on how to deal with official parties as well as on regulations and required bureaucracy, resulting in preventable delays. The absence of key and relevant information and statistics for SMEs on competing firms, product information, work regulations, social insurance hinder the ability of firms to effective decisions.
Technical limitations Given that SMEs depend in most part on the abilities and the experiences of their owners, lacking or limited knowledge on the product itself or in the ability to manage a project as is often the case among some Omani owners, have led to failures. The raw materials and inputs used for production are not subjected to technical standards, therefore depending on the knowledge, experiences and judgment of the owner, which in some cases are limited or lacking. Organizational and regulatory limitations Multiple and sometime overlapping agencies have created redundancies and as such consuming time, effort, and money from SMEs owners. The SME sector in Oman also faces bias in favor of larger organizations in terms of tax breaks, incentives and rollover subsidies. Larger and established organizations are often given concessions from the government such as no corporate taxes over five years that can be extended, leading to unfair competitions for startup SMEs.
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The opportunity for SMEs growth can also be generated through clusters or business incubators in Oman in order to promote entrepreneurship, knowledge and costs sharing, as well as benefits realized through the economies of scale which tends to be an advantage enjoyed by large companies. However, it is important that the resources that are allocated to develop SME clusters have clear objectives that in turn should be linked to the goal of sustainable growth of the sector, keeping in mind the structure of the Omani economy and its inherent comparative and competitive advantages. Developing clusters by simply duplicating or emulating other countries models may simply fail in promoting the SME sector in the Sultanate.
Another prospect for SME sector growth in the Sultanate is the involvement of large companies through supply chains and linkages. A potent example in Oman is that of Petroleum Development Oman (PDO) through its programs that support local firms in their field of operation or development. This program provides contracts as well as technical consultation and financial advice to local firms.
Given access to information, infrastructure, opportunities, financing, and a legal framework aimed at leveling the playing field, the SME sector in Oman has potential to grow and add value to the economy, in addition to increasing income and addressing the challenge of unemployment among the youth. It is, however, important to emphasize that time alone cannot address the challenges of the SME sector in Oman, what is of essence is the implementation of required building blocks to support the sector.
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4. Data Collection and Methodology
The study collects primary data through three different surveys4. The first survey targeted 120 SMEs in Oman and through an exhaustive 30 questions and sub-questions, data on various aspects of the sector such as challenges, opportunities, classifications, demographics, and others have been collected. The objective of this survey is to gauge the various aspects of relationships that exist between these entities and their SME contractors. The second survey which consists of 12 main questions targeted 7 commercial banks in Oman with the aim of assessing various financing aspects of the SME sector in Oman. The third survey targeted 2 large hydrocarbon companies in Oman and consists of 9 main questions and number of sub-questions. Distributions of the first and second surveys were sent to large corporations and commercial banks accordingly, while the first survey was distributed through three channels. The first channel consisted of a hand to hand distribution to a number of SMEs in Oman through exhibitions. The second channel was through business locations, and the third channel was through large corporations given an array of contractual agreements between these corporations and their respective SME contractors. In order to avoid skewed responses from SME owners based on regions, efforts were made to distribute the questionnaires to businesses located in different regions of Oman.
It is important to point a priori that not all SME firms surveyed responded to all 30 questions or subsequent sub-questions included in the survey. Accordingly the description and analysis of the findings were based on questions that were answered. The surveys targeting the banking sector and hydrocarbon companies in Oman were aimed at garnering other perspectives within the realm of their respective activities as related to the SME sector. For instance, the focus of the survey targeting financial institutions is primarily on financing SMEs while the survey on large corporations gauged the extent of their linkages to the sector. As regards, the methodology being used, the survey sample that targeted SMEs in Oman were first recorded on singular basis then classified in aggregate manner. The classifications of Micro, Small, and Medium enterprises in Oman were based on the three definitions by the Omani Ministry of Commerce and Industry for each of these three categories.
4 Appendix 1 includes all three surveys conducted for this study.
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high school diploma, 19 percent held two-year diploma while those who held undergraduate University degrees or higher accounted for 23 percent (Charts 5.1.2). Those with no academic qualifications accounted for just over 3 percent. Together, those who held two-year diploma or a higher university degrees account for 42.5 percent, suggesting a segment that is susceptible to advanced and relevant training and potential success insofar as managing SMEs is concerned. The study also identifies prior work experience as an important asset for entrepreneurs who want to build businesses as wells as current SMEs owners. The survey shows that over 34 percent had prior work experience of more than ten years, about 9 percent with work experience of less than one year while those without any prior work experience account for about 14 percent (Charts 5.1.3). It is important to point out that while work experience may be an important asset, there have been cases of successful businesses built by entrepreneurs without significant work experience. Similar to any business, SME firms are in need of training that target owners as well as employees in those firms. The survey posed the question to SME owners on training received related to firms they own, the findings indicate that over 70 percent did not receive any training related to SMEs (Chart 5.1.4). The results under this specific question further point to the importance and urgency of professional training programs targeting SME owners in various disciplines related to the sector as well as employees in this sector.
29.7
70.3
5.1.4: Percentage Ownership Based on Training Received
YesNo
14.2 9.2
18.3
24.2
34.2
Chart 5.1.3: Percentage Breakdown of SME Ownweship Based on working Experience
No experience
Less than 1 year
From 1 year to 3 years
From 4 years to 10years
More than 10 years
3.3
18.3
33.3 19.2
23.3
2.5
Chart 5.1.2: Percentage SME Ownership Based on Academic Qualification
No academicqualifications
Academic qualificationlower than high schooldiplomaHigh school Diploma
2 year diploma
Undergraduate degreeor above
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5. Findings and Data Analysis
Data analysis and findings are based on three surveys conducted for the study and are discussed in subsequent three sections with sub-sections as required. Inference has been used in a number of findings as part of qualitative analysis.
5.1 Surveys on Small and Medium-Sized Enterprises in Oman The study uses a sample of 120 SME firms responding to a thirty-question survey5. It is important to note at the outset that not all 120 firms respond to all 30 questions and sub-questions. Despite these shortcomings, the various regions that have been covered and the different characteristics of the firms that have responded to the survey provides the study with enough information to assess the challenges faced by the SME firms in Oman as well as the various qualitative aspects of the sector. Selected questions and their subsequent responses are analyzed below while aggregate data on the responses to the questions can be viewed on Appendix 1 of the study.
5.1.1 Selected SME descriptive statistics
The age distribution of ownership of SMEs in Oman based on 120 firms that had been surveyed showed that over 39 percent of these firms were of the age of over 40-year old while just over 4 percent were below 20-year old (Charts 5.1.1). The finding also indicates that around 38 percent were between the age of 30 years and 39 years and about 18 percent were between 20 years and 29 years of age. The data were collected at the given point of time without taking into account the life span of the firms. The finding at this point of time suggests that a significant majority of SME owners in Oman or 77.5 percent of those surveyed were over 30 years of age. The findings on age ownership are validated by a Grant Thornton’s study on National Business Center in Oman conducted in 2013, indicating that a majority of those self-employed ranged from 35 and 54 years of age.
On the question of academic qualifications and ownership of SMEs, the results of the survey indicated that about 33 percent held
5 Appendix 1 lists all the questions in the survey and responses from targeted firms.
Less than 20 years old,
4.2 20 - 29 years
old, 18.3
30 - 39 years old, 38.3
40 years old and above ,
39.2
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
0 1 2 3 4 5
Chart 5.1.1: Percenetage Breakdwon on Age Ownership of SME s
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high school diploma, 19 percent held two-year diploma while those who held undergraduate University degrees or higher accounted for 23 percent (Charts 5.1.2). Those with no academic qualifications accounted for just over 3 percent. Together, those who held two-year diploma or a higher university degrees account for 42.5 percent, suggesting a segment that is susceptible to advanced and relevant training and potential success insofar as managing SMEs is concerned. The study also identifies prior work experience as an important asset for entrepreneurs who want to build businesses as wells as current SMEs owners. The survey shows that over 34 percent had prior work experience of more than ten years, about 9 percent with work experience of less than one year while those without any prior work experience account for about 14 percent (Charts 5.1.3). It is important to point out that while work experience may be an important asset, there have been cases of successful businesses built by entrepreneurs without significant work experience. Similar to any business, SME firms are in need of training that target owners as well as employees in those firms. The survey posed the question to SME owners on training received related to firms they own, the findings indicate that over 70 percent did not receive any training related to SMEs (Chart 5.1.4). The results under this specific question further point to the importance and urgency of professional training programs targeting SME owners in various disciplines related to the sector as well as employees in this sector.
29.7
70.3
5.1.4: Percentage Ownership Based on Training Received
YesNo
14.2 9.2
18.3
24.2
34.2
Chart 5.1.3: Percentage Breakdown of SME Ownweship Based on working Experience
No experience
Less than 1 year
From 1 year to 3 years
From 4 years to 10years
More than 10 years
3.3
18.3
33.3 19.2
23.3
2.5
Chart 5.1.2: Percentage SME Ownership Based on Academic Qualification
No academicqualifications
Academic qualificationlower than high schooldiplomaHigh school Diploma
2 year diploma
Undergraduate degreeor above
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The question on whether the firm is the only source of income revealed that 52.5 percent of SME owners identified their firms as the only source of income. When the question is expanded to identify other sources of income, 59 percent of those who were willing to identify other sources of income beyond their firms identified their full time jobs as an additional source of income while those who derived their additional income from other businesses and pension funds were 18 percent each (Chart 5.1.7). The key observation from this finding is that almost 60 percent of SME owners in Oman who were willing to respond to this specific question have full time jobs somewhere else, raising a number of questions as to the dedication and actual ownership of the businesses. More importantly is the question of real ownership given the prevalent practice in the country where the management of small businesses is often abdicated to expatriates while nationals receive a fee or an agreed amount as a reward of simply being an agent. Access to professional consultancy is part and parcel of doing business. Consultancy services can be ad-hoc or continuous in nature depending of the requirement and financial resources of a firm. SME firms are not exempted from these services if they have to grow and prosper. The survey under this study aimed to find out whether SME owners use professional advices or not and the results showed that about 52 percent said they did while the remaining 48 percent said they did not (Chart 5.1.8). On the question of sources of advice, 64 percent pointed to family, friends and relatives as their sources of business advices, 15.6 percent identified the government, and 14.1 percent have used professional advices while 4.7 percent identified Oman Development Bank (ODB) as a source of advices. The fact that almost half of the respondents do not receive professional advice and more than 60 percent resort to informal sources of advice such as families and friends, suggests that either existing professional consultants are expensive or not reliable. Another likely explanation is that SME owners or entrepreneurs do not deem existing professional consultancy, private or public, relevant or necessary to run or start a business.
48.3 51.7
Chart 5.1.8: Percentage of SME Owners Obtaining Proffesional Advice
YesNo
18%
59%
0%
18% 5%
Chart 5.1.7 : Percentage Breakdown of SME owners Sources of Income
Pension/retirementannuity
Full time job
Revenue frominvestments
Revenue from otherbusinesses
Other (please specify)
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Another important criterion used in the survey pertains to the lifespan of the firms for which 33 percent had been in the market for over ten years, 17 percent between three and five years and about 13 percent less than one year (Chart 5.1.5). It is important to point out that the study does not look at the correlation factors linked to firms’ lifespan, but given that 50 percent of these firms have been in the market for over three years is indicative of potentials that could be further explored. A follow-up analysis as to the factors that have contributed to the sustainability of these firms could benefit policy makers in devising relevant policies. The survey listed 10 business activities in addition to those classified as others in order to gauge sectorial distribution of the SME firms in Oman. Given the sample surveyed, the finding indicates that 20 percent engage in retail and trading activities, about 8 percent in manufacturing, 16 percent engaged in craft and other artisan activities and 3.5 percent or 5 firms were in agriculture and fishing businesses (Charts 5.1.6)6. The findings suggest that the SME sector in Oman is yet to engage in the types of activities that add tangible value to the economy. In the case of agriculture and fisheries sector for instance, activities are primarily centered on fishing and cultivation and subsequent marketing of the raw products rather than on manufacturing in the related products for the sector.
6 Given that some firms are engaged in more than one sector, the number of responses on this particular survey question was 144.
12.7 18.6
16.9 18.6
33.1
Chart 5.1.5: Percentage Breakdown SMEs Lifespan
Less than 1 year
From 1 year to 3 years
From 3 years to 5years
From 5 years to 10years
More than 10 years
20.1
8.3
16.0 11.8
11.1 3.5
0.0 2.1
2.1 7.6 17.4
5.1.6. Percentage Breakdown Sectoral Distribution of SME Business Activities Retail trade
Manufacturing
Craft/ Artisan
Information and communicationtechnologyConstruction
Agriculture and fishing
Mining, electricity, gas andwater supplyTransportation and storage
Accommodation and tourism
Food services
Others
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The question on whether the firm is the only source of income revealed that 52.5 percent of SME owners identified their firms as the only source of income. When the question is expanded to identify other sources of income, 59 percent of those who were willing to identify other sources of income beyond their firms identified their full time jobs as an additional source of income while those who derived their additional income from other businesses and pension funds were 18 percent each (Chart 5.1.7). The key observation from this finding is that almost 60 percent of SME owners in Oman who were willing to respond to this specific question have full time jobs somewhere else, raising a number of questions as to the dedication and actual ownership of the businesses. More importantly is the question of real ownership given the prevalent practice in the country where the management of small businesses is often abdicated to expatriates while nationals receive a fee or an agreed amount as a reward of simply being an agent. Access to professional consultancy is part and parcel of doing business. Consultancy services can be ad-hoc or continuous in nature depending of the requirement and financial resources of a firm. SME firms are not exempted from these services if they have to grow and prosper. The survey under this study aimed to find out whether SME owners use professional advices or not and the results showed that about 52 percent said they did while the remaining 48 percent said they did not (Chart 5.1.8). On the question of sources of advice, 64 percent pointed to family, friends and relatives as their sources of business advices, 15.6 percent identified the government, and 14.1 percent have used professional advices while 4.7 percent identified Oman Development Bank (ODB) as a source of advices. The fact that almost half of the respondents do not receive professional advice and more than 60 percent resort to informal sources of advice such as families and friends, suggests that either existing professional consultants are expensive or not reliable. Another likely explanation is that SME owners or entrepreneurs do not deem existing professional consultancy, private or public, relevant or necessary to run or start a business.
48.3 51.7
Chart 5.1.8: Percentage of SME Owners Obtaining Proffesional Advice
YesNo
18%
59%
0%
18% 5%
Chart 5.1.7 : Percentage Breakdown of SME owners Sources of Income
Pension/retirementannuity
Full time job
Revenue frominvestments
Revenue from otherbusinesses
Other (please specify)
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advancement for its workers. Only a vibrant and growing SME sector has the potential to attract Omani entrepreneurs and employees. 5.1.2 Overall challenges faced by SMEs in Oman The survey also posed the question to SME owners regarding the challenges they faced in starting or running businesses. Given the selection of the challenges listed in this specific question of the survey, two areas, namely competition and access to finance were ranked as leading challenges with 17 percent of respondents identifying each of these challenges as the leading challenge, albeit competition ranked slightly higher. These two challenges were followed by cost of production that includes labor and rent at 13 percent while challenges from regulation as well as administrative burdens came next at 12 percent (Charts 5.1.11). On the question of competition, the lack of level playing field was viewed in the context of large businesses in Oman often extending to all supply chains in all key sectors, leaving limited opportunities for the SME sector. Other challenges that ranked prominently included cost of production such as labor and rent, regulation and administrative burdens as well as high cost of financing. On the challenge of data availability, a scale of 1 to 5 was devised whereby each number was assigned a description as to the extent of the significance associated with availability of relevant data related to the SME sector in Oman was devised for the study. The results indicated that 53 percent viewed the lack of required data as not pressing while 13 percent believed that it was a pressing issue (Chart 5.1.12). The interpretation of this finding, in particular given the response of more than 50 percent of the respondents who were surveyed viewed the lack of data as a major challenge reflects, to some extent, a lack of business knowledge or appreciation of relevant data in business decision making. This observation is more prescient in the case of Oman where there is scarcity of data related to the SME sector.
6% 11%
17%
17% 11%
13%
11% 12%
2%
Chart 5.1.11 : Percentage Breakdown on Sources of Challenges
Lacking the requiredknowledgeFinding customers
Competition
Access to finance
relatively high costs offinance or loansCosts of production orlabor or rentAvailability of skilled staffor experienced managersRegulations andadministrative burdensOthers
53%
13%
8%
13% 13%
Chart 5.1.12: Percentage Breakdown on the Lack of Required Data
1 - Not pressing at all 23 45 - Extremely pressing
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On the employment front, the finding from the survey showed that 51 percent of SMEs in Oman employ 1 to 4 workers while 12.5 percent employed more than 20 staff. The finding also showed that about 17 percent of SMEs employ between 10 and 20 workers while those that employ between 5 and 9 workers accounted for about 20 percent of the sample (Chart 5.1.9). Given the definition of SME in Oman and in particular as it pertains to the criterion of number of workers being employed, it is clear by this survey that a significant majority of SMEs in the country consists of micro enterprises. The key challenge in this case is to promote the sustainability and growth of these firms to larger firms given that small and medium enterprises facing similar challenges. More importantly, while micro firms may provide a mode of subsistence or modest income to the owners, they do not constitute a source of employment with livable wages let alone avenues for career growth. Using the definition of micro by the Ministry of Commerce and Industry of 1 to 4 employees, the results of the survey in this study suggest that the majority of SME firms in Oman are micro with similar findings when using data from PASI albeit for the latter the majority is more pronounced. Another important and pertinent question on the survey related to the employment was on the number of nationals working in the SME sector. The finding revealed that 58 percent of SMEs in the country employed between 1 and 4 Omanis against 2 percent that employed over 20 Omanis (Chart 5.1.10). The results also indicated that 12 percent of the firms hired 5 to 9 Omani employees and 2 percent employed 10 to 20 Omanis. Gauging the sector as a whole rather than analyzing the data based on whether a firm is micro, small, or medium, the finding suggests that a significant majority of SME firms employs more expatriates than nationals albeit the ratios micro, small and medium firms are not determined by this study. Employment in the SME sector in Oman is beset by a number of challenges as alluded to in the previous section of the study ranging from wages, benefits, working hours, and opportunity for
From 1 employee to 4
employees 51% From 5
employees to 9 employees
20%
From 10 employees to 20 employees
17%
More than 20 employees
13%
Chart 5.1.9: Percentage Break on Number of Employees
21%
58%
12%
2%
6%
Chart 5.1.10: Percentage Break of Number of Omani Employees in SMES
None
From 1 employee to 4employees
From 5 employees to 9employees
From 10 employees to20 employees
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advancement for its workers. Only a vibrant and growing SME sector has the potential to attract Omani entrepreneurs and employees. 5.1.2 Overall challenges faced by SMEs in Oman The survey also posed the question to SME owners regarding the challenges they faced in starting or running businesses. Given the selection of the challenges listed in this specific question of the survey, two areas, namely competition and access to finance were ranked as leading challenges with 17 percent of respondents identifying each of these challenges as the leading challenge, albeit competition ranked slightly higher. These two challenges were followed by cost of production that includes labor and rent at 13 percent while challenges from regulation as well as administrative burdens came next at 12 percent (Charts 5.1.11). On the question of competition, the lack of level playing field was viewed in the context of large businesses in Oman often extending to all supply chains in all key sectors, leaving limited opportunities for the SME sector. Other challenges that ranked prominently included cost of production such as labor and rent, regulation and administrative burdens as well as high cost of financing. On the challenge of data availability, a scale of 1 to 5 was devised whereby each number was assigned a description as to the extent of the significance associated with availability of relevant data related to the SME sector in Oman was devised for the study. The results indicated that 53 percent viewed the lack of required data as not pressing while 13 percent believed that it was a pressing issue (Chart 5.1.12). The interpretation of this finding, in particular given the response of more than 50 percent of the respondents who were surveyed viewed the lack of data as a major challenge reflects, to some extent, a lack of business knowledge or appreciation of relevant data in business decision making. This observation is more prescient in the case of Oman where there is scarcity of data related to the SME sector.
6% 11%
17%
17% 11%
13%
11% 12%
2%
Chart 5.1.11 : Percentage Breakdown on Sources of Challenges
Lacking the requiredknowledgeFinding customers
Competition
Access to finance
relatively high costs offinance or loansCosts of production orlabor or rentAvailability of skilled staffor experienced managersRegulations andadministrative burdensOthers
53%
13%
8%
13% 13%
Chart 5.1.12: Percentage Breakdown on the Lack of Required Data
1 - Not pressing at all 23 45 - Extremely pressing
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Table 5.1.1: Assessment of SME Income Generation
Number Percentage
a) Turnover 111 100 Increased 36 32.43 Remained unchanged 44 39.64 Decreased 27 24.32 Not applicable 4 3.60 b) Labor cost (including social security contributions) 111 100 Increased 67 60.36 Remained unchanged 21 18.92 Decreased 7 6.31 Not applicable 16 14.41 c) Other cost (materials, energy, other) 108 100 Increased 72 66.67 Remained unchanged 20 18.52 Decreased 9 8.33 Not applicable 7 6.48 d) Net interest expenses [= interest expenses minus interest income =
what you pay in interest for your debt minus what you receive in interest for your assets]
104 100
Increased 32 30.77 Remained unchanged 21 20.19 Decreased 11 10.58 Not applicable 40 38.46 e) Profit [= net income] 108 100 Increased 24 22.22 Remained unchanged 40 37.04 Decreased 42 38.89 Not applicable 2 1.85 f) Profit margin [= the difference between the selling price and the cost
price for each unit] 102 100
Increased 16 15.69 Remained unchanged 43 42.16 Decreased 35 34.31 Not applicable 8 7.84
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The survey listed a number of challenging factors deemed relevant to the income generated by SMEs in Oman. Questions based on qualitative assessments are listed under selected factors namely turnover, labor costs, other costs, net interest expenses as well as profit margin7 (Table 5.1.1). It is worth noting that profit, besides profit margin, remained unchanged or decreased for a significant majority of the respondents (76 percent) in one year before the survey was conducted. The time frame specified in the questions is one year and subsequent results reflected performances within the specified time frame. On the question of turnover, 40 percent of respondents indicated that this factor remained the same within the specified time, 32 percent said that it increased while 24 percent said that it decreased.
7 The results on Table 5.1.1 are parts of the complete survey in Appendix 1.
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Table 5.1.1: Assessment of SME Income Generation
Number Percentage
a) Turnover 111 100 Increased 36 32.43 Remained unchanged 44 39.64 Decreased 27 24.32 Not applicable 4 3.60 b) Labor cost (including social security contributions) 111 100 Increased 67 60.36 Remained unchanged 21 18.92 Decreased 7 6.31 Not applicable 16 14.41 c) Other cost (materials, energy, other) 108 100 Increased 72 66.67 Remained unchanged 20 18.52 Decreased 9 8.33 Not applicable 7 6.48 d) Net interest expenses [= interest expenses minus interest income =
what you pay in interest for your debt minus what you receive in interest for your assets]
104 100
Increased 32 30.77 Remained unchanged 21 20.19 Decreased 11 10.58 Not applicable 40 38.46 e) Profit [= net income] 108 100 Increased 24 22.22 Remained unchanged 40 37.04 Decreased 42 38.89 Not applicable 2 1.85 f) Profit margin [= the difference between the selling price and the cost
price for each unit] 102 100
Increased 16 15.69 Remained unchanged 43 42.16 Decreased 35 34.31 Not applicable 8 7.84
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The question arising is as to why a number of SME owners in Oman are not managing their businesses using professional tools and methods required to minimize costs, maximize profits, and to keep financial records, all of which are critical in sustaining and growing a business. The answer, as indicated by the findings, lies primarily in skills and knowledge gaps. More importantly, the answer reflects the lack of awareness by some emerging entrepreneurs and SME owners as to the importance of professionalism required to run successful businesses. The survey also aimed to identify the main sources of businesses for the SME sector in Oman. Accordingly, four criteria were listed as questions in the survey. The results from the respondents indicate that 40 percent of SME firms depend on contract or legal agreements with customers, 25 percent on more than one-year contracts with large and reputable companies, 22 percent on established regular customers and 13 percent not aware where businesses would be generated from (Charts 5.1.15).
5.1.3 SME financing in Oman
Access to financing is one of the key challenges facing SMEs in Oman. Accordingly, the survey posed this question to SME owners. The finding pointed to modest activities insofar as funding for SMEs through financial institutions in Oman was concerned. It is important to note that in some cases, funding came from more than one source. According to the survey, 56 percent of firms were self-funded - individually or jointly by family, 20 percent borrowed from friends, 18 percent borrowed from banks and financial institutions, 10 percent from ODB and 4 percent from SANAD (Chart 5.1.16). The funding mirrors the modest lending by commercial banks to the SME sector wherein about 2.5 percent of aggregate lending by these banks has been channeled to SME according in 2013. The challenges with regards
25%
40%
22%
13%
Chart 5.1.15: Percentage Breakdown Sources of Business for SMEs
Contracts (>1 year) withlarge reputablecompanies
Contracts/legalagreements withcustomers
Established regularcustomers
Never know wherecustomers will comefrom
56% 20%
7%
3% 13%
1%
Chart 5.1.16: Percentage Breakdown on Sources of Finance
Personal money from meand my family
Borrowed fromfamily/friends
Borrowed from OmanDevelopment Bank
Funded by SANAD
Borrowed frombanks/financialinstitutions
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Regarding the effect of labor cost on income, 60 percent of respondents pointed to an increase in one year, and 19 percent said it remained unchanged and 6 percent indicated a decrease. On the question pertaining to other costs among which include materials and energy, 67 percent said there had been an increase in one year, 19 percent indicated no increase while 8 percent of the respondents pointed to a decrease in one year. As regards net interest expenses, 38 percent of respondents indicated an increase, 20 percent indicated that it remained unchanged and 11 percent said it decreased. The survival of any private business depends primarily on the profit that it generates and according to the survey, 42 percent responded that profit margin had remained unchanged in the course of one year up to the time survey was conducted, 34 percent said that it had decreased and 16 percent said that it had increased. Payment method is one of the key indicators used to assess the efficiency as well as the modernization of a firm. For the purpose of this study, four classifications were used in the survey in addition to other. With 56 percent of respondents citing cash payment as their method of payment to their suppliers, this method of payment appears to be the dominant one among SMEs owners in Oman, followed by check payment with 29 percent of respondents, direct transfer from banks with 12 percent and those using debit and credit cards accounted for 2 percent (Charts 5.1.13). Failure to resort to modern technologies and existing facilities within financial institutions in Oman as avenues to conduct financial transactions with suppliers amounts to additional transaction and administrative costs that could be avoided by SMEs. Preparing relevant financial statements is an integral part of running a business including SME businesses. The survey undertaken for this study indicated that 58 percent of SMEs in Oman prepared relevant financial statements while the remaining 42 percent did not (Chart 5.1.14). The findings on payment methods by the SME sector in Oman as well as on preparing financial statements are indicative of a sector that is required to become more professional as well as being able to adapt to modern technologies in order to minimize transaction costs.
56% 29%
12%
2% 1%
Chart 5.1.13: Percentage Breakdown on Payment Methods to Suppliers
Cash
Cheque
Direct transfers from abank
Payment/Debit/Creditcards
Other (Please mention)
58%
42%
Chart 5.1.14: Preparation of Financial Statements
Yes
No
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The question arising is as to why a number of SME owners in Oman are not managing their businesses using professional tools and methods required to minimize costs, maximize profits, and to keep financial records, all of which are critical in sustaining and growing a business. The answer, as indicated by the findings, lies primarily in skills and knowledge gaps. More importantly, the answer reflects the lack of awareness by some emerging entrepreneurs and SME owners as to the importance of professionalism required to run successful businesses. The survey also aimed to identify the main sources of businesses for the SME sector in Oman. Accordingly, four criteria were listed as questions in the survey. The results from the respondents indicate that 40 percent of SME firms depend on contract or legal agreements with customers, 25 percent on more than one-year contracts with large and reputable companies, 22 percent on established regular customers and 13 percent not aware where businesses would be generated from (Charts 5.1.15).
5.1.3 SME financing in Oman
Access to financing is one of the key challenges facing SMEs in Oman. Accordingly, the survey posed this question to SME owners. The finding pointed to modest activities insofar as funding for SMEs through financial institutions in Oman was concerned. It is important to note that in some cases, funding came from more than one source. According to the survey, 56 percent of firms were self-funded - individually or jointly by family, 20 percent borrowed from friends, 18 percent borrowed from banks and financial institutions, 10 percent from ODB and 4 percent from SANAD (Chart 5.1.16). The funding mirrors the modest lending by commercial banks to the SME sector wherein about 2.5 percent of aggregate lending by these banks has been channeled to SME according in 2013. The challenges with regards
25%
40%
22%
13%
Chart 5.1.15: Percentage Breakdown Sources of Business for SMEs
Contracts (>1 year) withlarge reputablecompanies
Contracts/legalagreements withcustomers
Established regularcustomers
Never know wherecustomers will comefrom
56% 20%
7%
3% 13%
1%
Chart 5.1.16: Percentage Breakdown on Sources of Finance
Personal money from meand my family
Borrowed fromfamily/friends
Borrowed from OmanDevelopment Bank
Funded by SANAD
Borrowed frombanks/financialinstitutions
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Regarding the effect of labor cost on income, 60 percent of respondents pointed to an increase in one year, and 19 percent said it remained unchanged and 6 percent indicated a decrease. On the question pertaining to other costs among which include materials and energy, 67 percent said there had been an increase in one year, 19 percent indicated no increase while 8 percent of the respondents pointed to a decrease in one year. As regards net interest expenses, 38 percent of respondents indicated an increase, 20 percent indicated that it remained unchanged and 11 percent said it decreased. The survival of any private business depends primarily on the profit that it generates and according to the survey, 42 percent responded that profit margin had remained unchanged in the course of one year up to the time survey was conducted, 34 percent said that it had decreased and 16 percent said that it had increased. Payment method is one of the key indicators used to assess the efficiency as well as the modernization of a firm. For the purpose of this study, four classifications were used in the survey in addition to other. With 56 percent of respondents citing cash payment as their method of payment to their suppliers, this method of payment appears to be the dominant one among SMEs owners in Oman, followed by check payment with 29 percent of respondents, direct transfer from banks with 12 percent and those using debit and credit cards accounted for 2 percent (Charts 5.1.13). Failure to resort to modern technologies and existing facilities within financial institutions in Oman as avenues to conduct financial transactions with suppliers amounts to additional transaction and administrative costs that could be avoided by SMEs. Preparing relevant financial statements is an integral part of running a business including SME businesses. The survey undertaken for this study indicated that 58 percent of SMEs in Oman prepared relevant financial statements while the remaining 42 percent did not (Chart 5.1.14). The findings on payment methods by the SME sector in Oman as well as on preparing financial statements are indicative of a sector that is required to become more professional as well as being able to adapt to modern technologies in order to minimize transaction costs.
56% 29%
12%
2% 1%
Chart 5.1.13: Percentage Breakdown on Payment Methods to Suppliers
Cash
Cheque
Direct transfers from abank
Payment/Debit/Creditcards
Other (Please mention)
58%
42%
Chart 5.1.14: Preparation of Financial Statements
Yes
No
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5.2 Survey on financial institutions and SME lending
The survey conducted on the financial institutions in Oman consisted of 12 questions pertaining to activities directly or indirectly linked to the financing of the SME sector in the country8. A total of seven domestic banks responded to the survey questionnaire whose aggregate findings are shown and analyzed in this section9.
The findings from the question on lending preference by the banks that was based on ownership structures of SMEs, ranked individual businesses as the most preferred entity given the replies from 6 banks out of 7 or around 86 percent, followed by non-family partnership businesses and family businesses (Chart 5.2.1)10. The simplicity of dealing with an individual SME owner rather than other types of ownership structure appeared to be the driving incentive for the majority of banks surveyed in prioritizing their lending. Individual businesses were followed by non-family partnership businesses and then family businesses.
Analyzing the findings on the question of stages of SMEs and lending preference, the result from the survey indicated that financial institutions ranked firms that were already established as their preferred lending recipients given the responses from 86 percent of the surveyed banks (Chart 5.2.2). Both firms that were in a stage of signing contracts with larger firms or the government and established firms that were already in contract with larger firms or the government came second with 57 percent providing the same ranking. It is assumed here that firms that are about to sign contract with larger firms or the government are either established or start-ups. As for start-up firms with no contract at hand, they ranked last in terms of lending preference by the banks, using stage as a criterion. The results are indicative of a lending preference by the banks that is based on track record or lifespan of SMEs or their ability to service prospective loans. 8 Appendix 2 listed the aggregate findings on the 12 survey questions that targeted the financial sector in Oman. 9 The seven banks include Bank Dhofar, Standard Charted Bank, Bank of Baroda, Oman Arab Bank, Bank Muscat, State Bank of India, and National Bank of Oman 10 The Surveyed banks did not provide answers or specification on part 4 of question 1.
57.14%
85.71%
71.43%
42.86%
4
6 5
3
0
1
2
3
4
5
6
7
0%10%20%30%40%50%60%70%80%90%
Family businesses Individual Businesses Non-familypartnershipbusinesses
Others and pleasespecify below
% Number
Chart 5.2.1: Ownership Structure and Lending Preference
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to SME financing in Oman can be found from lending institutions as well as SME owners and new entrepreneurs as elaborated in relevant sections of this study. Continuing with the financing theme from the perspective of business owners, the survey on business loans approval for SMEs in Oman pointed to a lack of expediency. According to the finding, a significant majority, or 84 percent of respondents indicated that it took about six months to have a business loan approved by a financial institution while 2 percent of the respondents indicated a time frame of more than two years (Chart 5.1.17). In view of the finding on this question, it appears that loan approval by the financial institutions to SME projects required some degree of time-sensitivity. Another critical financing challenge for SMEs in Oman is the collateral often required by financial institutions as a means to mitigate non-payment risks. The survey indicated that 88 percent used property or other types of collateral to secure required financing while over 11 percent used equipment as collaterals. The average rate of interest rate repayment is another criterion used by the survey to assess the financing challenges faced by SME owners or entrepreneurs in Oman. Those paying an average rate between 0 percent and 3 percent accounted for 37 percent of the respondents, 19 percent pay in the range of 3 percent to 5 percent, 14 percent between 5 percent and 7 percent, 23 percent between 7 percent and 10 percent and 7 percent of the respondents pay more than 10 percent in interest rate on business loans (Chart 5.1.18). The survey also looked at the repayment period with regard to SME financing in Oman where 10 percent of the respondents indicated 1 to 2 years, 36 percent between 2 and 5 years, 27 percent between 5 and 8 years and another 27 percent 8 years and above.
37%
19% 14%
23% 7%
Chart 5.1.18: Percentage Breakdown Average Interest Rate Payment
0-3% 3%-5%5%-7% 7%-10%More than 10%
84%
9%
5% 2%
Chart 5.1.17: Duration of Loan Approval
Less than 6 months
From 6 months to 12months
From 1 year to 2 years
More than 2 years
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5.2 Survey on financial institutions and SME lending
The survey conducted on the financial institutions in Oman consisted of 12 questions pertaining to activities directly or indirectly linked to the financing of the SME sector in the country8. A total of seven domestic banks responded to the survey questionnaire whose aggregate findings are shown and analyzed in this section9.
The findings from the question on lending preference by the banks that was based on ownership structures of SMEs, ranked individual businesses as the most preferred entity given the replies from 6 banks out of 7 or around 86 percent, followed by non-family partnership businesses and family businesses (Chart 5.2.1)10. The simplicity of dealing with an individual SME owner rather than other types of ownership structure appeared to be the driving incentive for the majority of banks surveyed in prioritizing their lending. Individual businesses were followed by non-family partnership businesses and then family businesses.
Analyzing the findings on the question of stages of SMEs and lending preference, the result from the survey indicated that financial institutions ranked firms that were already established as their preferred lending recipients given the responses from 86 percent of the surveyed banks (Chart 5.2.2). Both firms that were in a stage of signing contracts with larger firms or the government and established firms that were already in contract with larger firms or the government came second with 57 percent providing the same ranking. It is assumed here that firms that are about to sign contract with larger firms or the government are either established or start-ups. As for start-up firms with no contract at hand, they ranked last in terms of lending preference by the banks, using stage as a criterion. The results are indicative of a lending preference by the banks that is based on track record or lifespan of SMEs or their ability to service prospective loans. 8 Appendix 2 listed the aggregate findings on the 12 survey questions that targeted the financial sector in Oman. 9 The seven banks include Bank Dhofar, Standard Charted Bank, Bank of Baroda, Oman Arab Bank, Bank Muscat, State Bank of India, and National Bank of Oman 10 The Surveyed banks did not provide answers or specification on part 4 of question 1.
57.14%
85.71%
71.43%
42.86%
4
6 5
3
0
1
2
3
4
5
6
7
0%10%20%30%40%50%60%70%80%90%
Family businesses Individual Businesses Non-familypartnershipbusinesses
Others and pleasespecify below
% Number
Chart 5.2.1: Ownership Structure and Lending Preference
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to SME financing in Oman can be found from lending institutions as well as SME owners and new entrepreneurs as elaborated in relevant sections of this study. Continuing with the financing theme from the perspective of business owners, the survey on business loans approval for SMEs in Oman pointed to a lack of expediency. According to the finding, a significant majority, or 84 percent of respondents indicated that it took about six months to have a business loan approved by a financial institution while 2 percent of the respondents indicated a time frame of more than two years (Chart 5.1.17). In view of the finding on this question, it appears that loan approval by the financial institutions to SME projects required some degree of time-sensitivity. Another critical financing challenge for SMEs in Oman is the collateral often required by financial institutions as a means to mitigate non-payment risks. The survey indicated that 88 percent used property or other types of collateral to secure required financing while over 11 percent used equipment as collaterals. The average rate of interest rate repayment is another criterion used by the survey to assess the financing challenges faced by SME owners or entrepreneurs in Oman. Those paying an average rate between 0 percent and 3 percent accounted for 37 percent of the respondents, 19 percent pay in the range of 3 percent to 5 percent, 14 percent between 5 percent and 7 percent, 23 percent between 7 percent and 10 percent and 7 percent of the respondents pay more than 10 percent in interest rate on business loans (Chart 5.1.18). The survey also looked at the repayment period with regard to SME financing in Oman where 10 percent of the respondents indicated 1 to 2 years, 36 percent between 2 and 5 years, 27 percent between 5 and 8 years and another 27 percent 8 years and above.
37%
19% 14%
23% 7%
Chart 5.1.18: Percentage Breakdown Average Interest Rate Payment
0-3% 3%-5%5%-7% 7%-10%More than 10%
84%
9%
5% 2%
Chart 5.1.17: Duration of Loan Approval
Less than 6 months
From 6 months to 12months
From 1 year to 2 years
More than 2 years
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The survey also gauged the maximum amount the banks would be willing to lend to SMEs in Oman. The findings point to non-skewed results with just over 28 percent of banks preferring to lend between RO 10,000 and RO 50,000. Another similar percentage ranked the amount of between RO 250,000 and RO 1,000,000 (Chart 5.2.4).
The surveyed banks have also been asked as to what needs to be done in order to enhance SME financing in Oman. Out of the five criteria listed under this question, improving infrastructure for SMEs in Oman ranked the highest with about 86 percent responding similarly, followed by the criterion that suggests a presence of a legal framework that level the playing field in terms of competing with large firms (Chart 5.2.5). The third ranked criterion was on the need for financial institutions to invest required resources in analyzing and assessing opportunities in the SME sector with over 57 percent, followed by other criteria that were not specified by the lending institutions with 43 percent and last, a binding regulatory requirement by CBO mandating a share of lending portfolio to SMEs with 23 percent.
28.57%
14.29%
28.57% 28.57%
2
1
2 2
0
0.5
1
1.5
2
2.5
0%
5%
10%
15%
20%
25%
30%
RO 10,000 - RO 50,000 RO 50,000 – RO 250,000
RO 250,000 – RO 1,000,000
Others and pleasespecify the amount
below% Number
Chart 5.2.4: Maximum Amount of Lending
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On the question of limited lending to SMEs in Oman, the highest ranking rationale, as indicated by the survey targeting the banks was the lack of financial history or position through financial statements given the replies from 86 percent of the respondents, followed by limited or lack of required skills by owners with just over 71 percent of the respondents (Chart 5.2.3). The lowest ranked rationale with just over 28 percent pertained to high risk often associated with SMEs. While this response might appear counter-intuitive, it can be explained by a system of high collateral value or salaries being used as securities by the banks in a number of lending cases. It is also important to note that unenthusiastic SME owners provide little confidence to bankers when it comes to financing, indicating another reason of the wide bridge that exists between SMEs and Banks.
57.14%
28.57%
57.14%
71.43%
42.86%
57.14%
85.71%
4
2
4 5
3 4
6
0
1
2
3
4
5
6
7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Lack ofcollateral
High risk High failure rate Limited or lackof required skills
by owners
Small or limitedmarket for
growth
Lack or poorfeasibility
studies
Lack of financialhistory orpositionthroughfinancial
statements
%Number
Chart 5.2.3: Reasons for Limited Lending
42.86%
85.71%
57.14% 57.14%
3
6 4 4
0
1
2
3
4
5
6
7
0%10%20%30%40%50%60%70%80%90%
Start-up firms Established firms Firms that are about tosign contracts with larger
firms/gov
Firms that are already incontract with larger
firms/gov
% Number
Chart 5.2.2: Preferred Stages of Lending
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The survey also gauged the maximum amount the banks would be willing to lend to SMEs in Oman. The findings point to non-skewed results with just over 28 percent of banks preferring to lend between RO 10,000 and RO 50,000. Another similar percentage ranked the amount of between RO 250,000 and RO 1,000,000 (Chart 5.2.4).
The surveyed banks have also been asked as to what needs to be done in order to enhance SME financing in Oman. Out of the five criteria listed under this question, improving infrastructure for SMEs in Oman ranked the highest with about 86 percent responding similarly, followed by the criterion that suggests a presence of a legal framework that level the playing field in terms of competing with large firms (Chart 5.2.5). The third ranked criterion was on the need for financial institutions to invest required resources in analyzing and assessing opportunities in the SME sector with over 57 percent, followed by other criteria that were not specified by the lending institutions with 43 percent and last, a binding regulatory requirement by CBO mandating a share of lending portfolio to SMEs with 23 percent.
28.57%
14.29%
28.57% 28.57%
2
1
2 2
0
0.5
1
1.5
2
2.5
0%
5%
10%
15%
20%
25%
30%
RO 10,000 - RO 50,000 RO 50,000 – RO 250,000
RO 250,000 – RO 1,000,000
Others and pleasespecify the amount
below% Number
Chart 5.2.4: Maximum Amount of Lending
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On the question of limited lending to SMEs in Oman, the highest ranking rationale, as indicated by the survey targeting the banks was the lack of financial history or position through financial statements given the replies from 86 percent of the respondents, followed by limited or lack of required skills by owners with just over 71 percent of the respondents (Chart 5.2.3). The lowest ranked rationale with just over 28 percent pertained to high risk often associated with SMEs. While this response might appear counter-intuitive, it can be explained by a system of high collateral value or salaries being used as securities by the banks in a number of lending cases. It is also important to note that unenthusiastic SME owners provide little confidence to bankers when it comes to financing, indicating another reason of the wide bridge that exists between SMEs and Banks.
57.14%
28.57%
57.14%
71.43%
42.86%
57.14%
85.71%
4
2
4 5
3 4
6
0
1
2
3
4
5
6
7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Lack ofcollateral
High risk High failure rate Limited or lackof required skills
by owners
Small or limitedmarket for
growth
Lack or poorfeasibility
studies
Lack of financialhistory orpositionthroughfinancial
statements
%Number
Chart 5.2.3: Reasons for Limited Lending
42.86%
85.71%
57.14% 57.14%
3
6 4 4
0
1
2
3
4
5
6
7
0%10%20%30%40%50%60%70%80%90%
Start-up firms Established firms Firms that are about tosign contracts with larger
firms/gov
Firms that are already incontract with larger
firms/gov
% Number
Chart 5.2.2: Preferred Stages of Lending
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SME financing could be the reasons. While the projections appear optimistic, latest data in 2014 suggests that even the 50 percent target would be difficult to achieve. The survey also ranked SME financing by the commercial banks with respect to sector. All 7 banks ranked retail trade as the largest recipient of SME financing in Oman, followed by construction as well as transportation and storage (Chart 5.2.7). The third place was food services sector while the fourth place was by manufacturing, agriculture and fishing as well as real estate. The findings under this question are commensurate to some extent with sectoral investments being initiated by the government in areas of logistics and transportation and by default construction as elaborated in Box 3.3.1 in section 3 of this study. The challenge is to devise a strategy that would optimize the synergy and linkages between these projects and the SME sector pre and post implementation.
14.29%
28.57%
57.14%
1 2
4
00.511.522.533.544.5
0%
10%
20%
30%
40%
50%
60%
1% -3% 3%-5% 5%-8% 8%-10% Others andplease
specify therate below
Chart 5.2.6: Projected Annual Lending Growth to SMEs
% Number
7
4
2 2
6
4
3
6
3
5
4
1
100%
57%
29%
29%
86%
57%
43%
86%
43%
71%
57%
14%
0%
20%
40%
60%
80%
100%
120%
0
1
2
3
4
5
6
7
8
Reta
il tr
ade
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Oth
er se
rvic
e ac
tiviti
es(p
leas
e sp
ecify
)
5.2.7: Sectorwise Lending to SMEs
Number %
PUBLIC 32
The response to the survey also indicated that just over 28 percent wanted CBO to impose an administrative binding rule on the percentage of lending portfolio to be allocated to SMEs. The response to this question testifies to the discussion in the previous section of this study as to the importance of developing effective infrastructure to support the SME sector as well as the need to devise a legal framework to protect the sector from unhealthy competition. The response also indicates the lack of enthusiasm by the commercial banks to have CBO introducing binding rules pertaining to SME lending. In other words, an effective infrastructure that supports the SME sector in Oman as well as a legal framework that promotes fair competition would go a long way in providing incentives to the banks to lend to SMEs albeit that 57 percent of banks surveyed also acknowledged the importance of developing their own resources insofar that SME financing is concerned.
Another critical question on the survey was on whether the banks allocated or dedicated a certain amount of lending portfolio for SME in Oman. The criteria range from RO 5 million to RO 20 million and others. On this particular question 14 percent of the banks sampled indicated a portfolio of RO 5 million while 43 percent indicated others without specifying the amount. The conclusion drawn from the responses under this question is indicative of the marginal interest or incentives for the commercial banks in Oman to finance SMEs under the prevailing environment. The follow-up question to the financial sector with regard to lending is on expected annual growth of the loan portfolio targeting SMEs in Oman. The response in this case pointed to some signs of optimism given that 57 percent of banks surveyed expected some growth without specifying the rate, 14 percent expected 5 percent to 8 percent growth while 29 percent pointed to 8 percent and 10 percent growth (Chart 5.2.6). One could not point out the exact rationale behind the positive findings on this question, but an educated guess would suggest the recent initiatives by the government to promote the sector as well the CBO’s recent circular to encourage and incentivize
28.57%
85.71%
71.43%
57.14%
42.86%
2
6 5
4 3
0
1
2
3
4
5
6
7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
A binding administrative
requirement from CBO – a given
Percentage of the total lending
portfolio
Improveinfrastructure
support for MSMEs
Level the plane fieldwhen it comes tocompletion with
Large firms througha legal framework
Financialinstitutions to
invest resources inanalyzing and
Assessingopportunities in
MSME sector
Others and pleasespecify below
%Number
Chart 5.2.5: Recommendations on Enhancing SMEs Lending
Occasional Paper
PUBLIC 33
SME financing could be the reasons. While the projections appear optimistic, latest data in 2014 suggests that even the 50 percent target would be difficult to achieve. The survey also ranked SME financing by the commercial banks with respect to sector. All 7 banks ranked retail trade as the largest recipient of SME financing in Oman, followed by construction as well as transportation and storage (Chart 5.2.7). The third place was food services sector while the fourth place was by manufacturing, agriculture and fishing as well as real estate. The findings under this question are commensurate to some extent with sectoral investments being initiated by the government in areas of logistics and transportation and by default construction as elaborated in Box 3.3.1 in section 3 of this study. The challenge is to devise a strategy that would optimize the synergy and linkages between these projects and the SME sector pre and post implementation.
14.29%
28.57%
57.14%
1 2
4
00.511.522.533.544.5
0%
10%
20%
30%
40%
50%
60%
1% -3% 3%-5% 5%-8% 8%-10% Others andplease
specify therate below
Chart 5.2.6: Projected Annual Lending Growth to SMEs
% Number
7
4
2 2
6
4
3
6
3
5
4
1
100%
57%
29%
29%
86%
57%
43%
86%
43%
71%
57%
14%
0%
20%
40%
60%
80%
100%
120%
0
1
2
3
4
5
6
7
8
Reta
il tr
ade
Man
ufac
turin
g
Craf
t/ A
rtisa
n
Info
rmat
ion
and
com
mun
icat
ion
tech
nolo
gy
Cons
truc
tion
Agric
ultu
re a
nd fi
shin
g
Min
ing,
ele
ctric
ity, g
as a
ndw
ater
supp
ly
Tran
spor
tatio
n an
d st
orag
e
Acco
mm
odat
ion
and
tour
ism
Food
serv
ices
Real
est
ate
Oth
er se
rvic
e ac
tiviti
es(p
leas
e sp
ecify
)
5.2.7: Sectorwise Lending to SMEs
Number %
PUBLIC 32
The response to the survey also indicated that just over 28 percent wanted CBO to impose an administrative binding rule on the percentage of lending portfolio to be allocated to SMEs. The response to this question testifies to the discussion in the previous section of this study as to the importance of developing effective infrastructure to support the SME sector as well as the need to devise a legal framework to protect the sector from unhealthy competition. The response also indicates the lack of enthusiasm by the commercial banks to have CBO introducing binding rules pertaining to SME lending. In other words, an effective infrastructure that supports the SME sector in Oman as well as a legal framework that promotes fair competition would go a long way in providing incentives to the banks to lend to SMEs albeit that 57 percent of banks surveyed also acknowledged the importance of developing their own resources insofar that SME financing is concerned.
Another critical question on the survey was on whether the banks allocated or dedicated a certain amount of lending portfolio for SME in Oman. The criteria range from RO 5 million to RO 20 million and others. On this particular question 14 percent of the banks sampled indicated a portfolio of RO 5 million while 43 percent indicated others without specifying the amount. The conclusion drawn from the responses under this question is indicative of the marginal interest or incentives for the commercial banks in Oman to finance SMEs under the prevailing environment. The follow-up question to the financial sector with regard to lending is on expected annual growth of the loan portfolio targeting SMEs in Oman. The response in this case pointed to some signs of optimism given that 57 percent of banks surveyed expected some growth without specifying the rate, 14 percent expected 5 percent to 8 percent growth while 29 percent pointed to 8 percent and 10 percent growth (Chart 5.2.6). One could not point out the exact rationale behind the positive findings on this question, but an educated guess would suggest the recent initiatives by the government to promote the sector as well the CBO’s recent circular to encourage and incentivize
28.57%
85.71%
71.43%
57.14%
42.86%
2
6 5
4 3
0
1
2
3
4
5
6
7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
A binding administrative
requirement from CBO – a given
Percentage of the total lending
portfolio
Improveinfrastructure
support for MSMEs
Level the plane fieldwhen it comes tocompletion with
Large firms througha legal framework
Financialinstitutions to
invest resources inanalyzing and
Assessingopportunities in
MSME sector
Others and pleasespecify below
%Number
Chart 5.2.5: Recommendations on Enhancing SMEs Lending
Occasional Paper
PUBLIC 35
Table 5.1.2: Success Lending Rate for the SME Sector Based on 5-Year Repayment
Rate of lending success for all SMES
Range Number of Banks Response Rate
10% -20% 2 28.57%
20% - 30% 0 0.00%
30% -50% 0 0.00%
50% -70% 1 14.29%
Others 4 57.14%
Rate of lending success for medium enterprises
Range Number of Banks Response Rate
10% -20% 2 28.57%
20% - 30% 0 0.00%
30% -50% 0 0.00%
50% -70% 0 0.00%
Others 4 57.14%
Rate of lending success for small enterprises
Range Number of Banks Response Rate
10% -20% 3 42.86%
20% - 30% 0 0.00%
30% -50% 0 0.00%
50% -70% 0 0.00%
Others 3 42.86%
Rate of lending success for micro enterprises
Range Number of Banks Response Rate
10% -20% 2 28.57%
20% - 30% 0 0.00%
30% -50% 0 0.00%
50% -70% 0 0.00%
Others 3 42.86%
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The study, through its survey on financial institutions, found it useful to pose the question on the rate of success of SME financing as a whole in the last five years by these institutions as well as disaggregate the same question with respect to medium, small and micro enterprises. As regards the success rate for the SME sector as a whole, the results indicate that 29 percent pointed to a success financing rate of between 10 percent and 20 percent and 14 percent pointed to a success rate of 50 percent to 70 percent (Table 5.1.2). The findings in this case could be viewed as a proxy for the rate of success of SMEs in Oman within a life span of five years, which based on the results appear to be low. The rate of financing success for medium enterprises in the last five years points to some similarity with the overall success rate for the SME sector. From the banks that responded to this question, 2 indicated that the rate of financing success for medium enterprises in Oman ranged between 10 percent and 20 percent while 4 banks pointed to other rates of success without providing specification11. The findings for small enterprises with respect to the rate of financing success pointed to a rate of between 10 percent and 20 percent from 43 percent of the banks surveyed while another 43 percent pointed to other rates of success without providing specifications12. On micro enterprises, 29 percent of banks indicated a success rate of between 10 percent and 20 percent while 43 banks indicated other rates of success13. Given the results of the survey targeting the banking sector on the lending success from banks to SMEs, it is clear that SMEs in Oman have not been generally very successful in their ability to service their loans and pay the interest to commercial banks. The findings complement other findings in the study where on one side a number of potential entrepreneurs and SMEs Owners are not well equipped to run businesses professionally and on the other side the limited investments by the commercial banks in building capacity that would carter to SMEs. The way forward is to bridge the wide gap that currently exists between potentials in the SME sector and capacities in the banking sector to identify these potentials.
11 A reminder that a medium sized enterprise in Oman is defined as a firm consisting of 10 to 99 employees with an annual sales ranging between RO 250,000 to RO 1,500,000. 12 A small enterprise in Oman consists of firm that employs between 5 and 9 employees with an annual sale that ranges RO 25,000 and RO 250,000. 13 A micro enterprise in Oman consists of firm with less than 5 employees and an annual sale of less than RO 25,000.
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Table 5.1.2: Success Lending Rate for the SME Sector Based on 5-Year Repayment
Rate of lending success for all SMES
Range Number of Banks Response Rate
10% -20% 2 28.57%
20% - 30% 0 0.00%
30% -50% 0 0.00%
50% -70% 1 14.29%
Others 4 57.14%
Rate of lending success for medium enterprises
Range Number of Banks Response Rate
10% -20% 2 28.57%
20% - 30% 0 0.00%
30% -50% 0 0.00%
50% -70% 0 0.00%
Others 4 57.14%
Rate of lending success for small enterprises
Range Number of Banks Response Rate
10% -20% 3 42.86%
20% - 30% 0 0.00%
30% -50% 0 0.00%
50% -70% 0 0.00%
Others 3 42.86%
Rate of lending success for micro enterprises
Range Number of Banks Response Rate
10% -20% 2 28.57%
20% - 30% 0 0.00%
30% -50% 0 0.00%
50% -70% 0 0.00%
Others 3 42.86%
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The study, through its survey on financial institutions, found it useful to pose the question on the rate of success of SME financing as a whole in the last five years by these institutions as well as disaggregate the same question with respect to medium, small and micro enterprises. As regards the success rate for the SME sector as a whole, the results indicate that 29 percent pointed to a success financing rate of between 10 percent and 20 percent and 14 percent pointed to a success rate of 50 percent to 70 percent (Table 5.1.2). The findings in this case could be viewed as a proxy for the rate of success of SMEs in Oman within a life span of five years, which based on the results appear to be low. The rate of financing success for medium enterprises in the last five years points to some similarity with the overall success rate for the SME sector. From the banks that responded to this question, 2 indicated that the rate of financing success for medium enterprises in Oman ranged between 10 percent and 20 percent while 4 banks pointed to other rates of success without providing specification11. The findings for small enterprises with respect to the rate of financing success pointed to a rate of between 10 percent and 20 percent from 43 percent of the banks surveyed while another 43 percent pointed to other rates of success without providing specifications12. On micro enterprises, 29 percent of banks indicated a success rate of between 10 percent and 20 percent while 43 banks indicated other rates of success13. Given the results of the survey targeting the banking sector on the lending success from banks to SMEs, it is clear that SMEs in Oman have not been generally very successful in their ability to service their loans and pay the interest to commercial banks. The findings complement other findings in the study where on one side a number of potential entrepreneurs and SMEs Owners are not well equipped to run businesses professionally and on the other side the limited investments by the commercial banks in building capacity that would carter to SMEs. The way forward is to bridge the wide gap that currently exists between potentials in the SME sector and capacities in the banking sector to identify these potentials.
11 A reminder that a medium sized enterprise in Oman is defined as a firm consisting of 10 to 99 employees with an annual sales ranging between RO 250,000 to RO 1,500,000. 12 A small enterprise in Oman consists of firm that employs between 5 and 9 employees with an annual sale that ranges RO 25,000 and RO 250,000. 13 A micro enterprise in Oman consists of firm with less than 5 employees and an annual sale of less than RO 25,000.
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Chart 6.1: A Strategy for the SME Sector in Oman
Promote a Growing, Competitive and Dynamic SME Sector in Oman
Legal Framework Policy and
Institutional Supports
Access to Financing and Opportunities
Support Network
Regular Policy Evaluation
Direct and Indirect CBO Initiatives
Effective and Efficient Incubators
Goal
Infrastructure Support
Promote Fair Competition
Institutional Centralization or
Coordination
Entrepreneurship in Education
Capacity Enhancement by
Commercial Banks
Viable Projects from Entrepreneurs
Integrated Clusters in Competitive Sectors
Professionally Resourced Statistical
Body
Public Private Partnership
Growth-Driven Regulations
Dynamic and Flexible Policies
Effective Agency Regulations
Research-Based Regulations
Access to Government
Contracts
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6. A Strategy for a Growing, Competitive, and Dynamic SME Sector in Oman
The strategy devised under this study comes on the back of an exhaustive analysis of all the responses of the survey questions from various stake holders. The strategy also incorporated selected best practices garnered from experiences of other countries and aligned them within the context and specifics to the Omani economy and institutions. According to the strategy, the goal of government policy makers in Oman insofar as the SME sector is concerned, would be to ensure its growth, competitiveness, and dynamism that in turn would contribute to the overall economic growth, economic diversification, upward mobility and higher income among the participants in the sector. However, realizing the goal set by policy makers requires a mechanism of support through a network of institutional interactions. Four major modules have been identified, forming the basis of the support network required to reach the goal that has been set (Chart 6.1). Included in the support network modules for the SME sector in Oman are policy and institutional supports, a legal framework that would govern the sector, access to financing and opportunities, and infrastructure support. Each of these four modules is to be supported by actions deemed critical to their successes and ultimately in realizing the goal of promoting a growing and dynamic SME sector in the country. Section 7 of the study listed a number of policy recommendations that support the modules in the proposed strategy as well as provide detailed explanations in addition to implications of each of these policy recommendations.
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Chart 6.1: A Strategy for the SME Sector in Oman
Promote a Growing, Competitive and Dynamic SME Sector in Oman
Legal Framework Policy and
Institutional Supports
Access to Financing and Opportunities
Support Network
Regular Policy Evaluation
Direct and Indirect CBO Initiatives
Effective and Efficient Incubators
Goal
Infrastructure Support
Promote Fair Competition
Institutional Centralization or
Coordination
Entrepreneurship in Education
Capacity Enhancement by
Commercial Banks
Viable Projects from Entrepreneurs
Integrated Clusters in Competitive Sectors
Professionally Resourced Statistical
Body
Public Private Partnership
Growth-Driven Regulations
Dynamic and Flexible Policies
Effective Agency Regulations
Research-Based Regulations
Access to Government
Contracts
Occasional Paper
PUBLIC 39
6.2 Legal framework
A number of countries have developed regulations aimed at governing and promoting the SME sector within the context of their respective commercial laws. The proposed strategy under this study also recommends a formulation of a comprehensive set of rules and regulations also aimed at governing and promoting the SME sector in Oman. The legal framework module under the proposed strategy has four sub-modules that include growth-driven regulations, promotion of fair competition in the market place where SMEs can strive, effective agency regulation, and research-based regulations.
Growth-driven regulations
Growth-driven regulations need to be based on incentive structures that promote competition within the sector. Introducing regulations that eliminate real and potential unfair practices from larger firms is also required. Equally important is to have a legal framework that does not promote a path dependency where government policies protect the sector at the expense of competitiveness and growth.
Promote fair competition
The government needs to make sure that policies and rules promote level playing fields through fair competition among SME firms as well as protection from larger firms. The legal framework governing the SME sector in Oman should also set legal parameters that extend certain types of business opportunities within an agreed margin to SMEs.
Effective agency regulations
The government of Oman should eliminate all loopholes in current agency laws to allow for a proven ownership of SME firms by nationals. The agency laws must be effectively implemented and enforced even through hefty fines.
Research-based regulations
Rules and regulations need to be based on proper studies that identify and analyze potential direct and indirect implications in addition to gauge short or long term ramifications. Research-based regulations would avoid paradoxical or contradictory policies targeting the SME sector.
6.3 Access to financing and opportunities Similar to any other sector, SME sector in Oman require access to financing as well as business opportunities in order to grow or in the event entrepreneurs want to start new businesses. The survey conducted under this study validates the challenges faced by the sector in these two critical
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6.1 Policy and institutional support
The growth of the SME sector in Oman as would be the case in any other country requires effective policy and institutional support. This module consists of four sub-modules, namely regular policy evaluation, dynamic and flexible policies, institutional centralization or coordination, and entrepreneurship in education.
Regular policy evaluation
Regular policy evaluation is required to mitigate changes in economic dynamic or structure as well as identify and address policy failures. Policy evaluation necessitates a pre-set of objective metrics based on professional studies and realistic assessments and which could be used as instruments for regular policy evaluation and its subsequent performance. The objective metrics could include, among others, contribution of the SME sector to the GDP, number of new SMEs joining and leaving the market, progression from Micro to Small and Medium and vice versa, trend in the number of nationals working in the sector or owning the firms, sectorial dynamics, and others.
Dynamic and flexible policies
Dynamic and flexible policies are necessary to adapt to changes in the economy. As a follow-up to policy evaluation, changes in policies should be driven by necessity and based on reliable data and professional analysis and not in response to social pressure without accounting for financial and economic implications. Dynamic and flexible policies require coordination among relevant government entities to the SME sector to ensure consistency in the vision and goal.
Institutional centralization and coordination
Effective coordination among government institutions that have been set up to promote the SME sector directly or indirectly must take place through a centralized government body. In other words, all government entities should come under one umbrella either through restructuring or through effective and high level participation in policy making body. The objective is to minimize redundancies and unhealthy competitions among concerned agencies.
Entrepreneurship in education
Entrepreneurial culture should be fostered through the education system at both high school and university levels in addition to avenues that promote this culture in the society as a whole. Equally important is to promote an education that advances the idea and benefits of one being a job creator and not just a job seeker. Encouraging innovation, stimulating critical thinking, and introducing soft skills are few of the ideas to be included in entrepreneurial curriculum.
Occasional Paper
PUBLIC 39
6.2 Legal framework
A number of countries have developed regulations aimed at governing and promoting the SME sector within the context of their respective commercial laws. The proposed strategy under this study also recommends a formulation of a comprehensive set of rules and regulations also aimed at governing and promoting the SME sector in Oman. The legal framework module under the proposed strategy has four sub-modules that include growth-driven regulations, promotion of fair competition in the market place where SMEs can strive, effective agency regulation, and research-based regulations.
Growth-driven regulations
Growth-driven regulations need to be based on incentive structures that promote competition within the sector. Introducing regulations that eliminate real and potential unfair practices from larger firms is also required. Equally important is to have a legal framework that does not promote a path dependency where government policies protect the sector at the expense of competitiveness and growth.
Promote fair competition
The government needs to make sure that policies and rules promote level playing fields through fair competition among SME firms as well as protection from larger firms. The legal framework governing the SME sector in Oman should also set legal parameters that extend certain types of business opportunities within an agreed margin to SMEs.
Effective agency regulations
The government of Oman should eliminate all loopholes in current agency laws to allow for a proven ownership of SME firms by nationals. The agency laws must be effectively implemented and enforced even through hefty fines.
Research-based regulations
Rules and regulations need to be based on proper studies that identify and analyze potential direct and indirect implications in addition to gauge short or long term ramifications. Research-based regulations would avoid paradoxical or contradictory policies targeting the SME sector.
6.3 Access to financing and opportunities Similar to any other sector, SME sector in Oman require access to financing as well as business opportunities in order to grow or in the event entrepreneurs want to start new businesses. The survey conducted under this study validates the challenges faced by the sector in these two critical
PUBLIC 38
6.1 Policy and institutional support
The growth of the SME sector in Oman as would be the case in any other country requires effective policy and institutional support. This module consists of four sub-modules, namely regular policy evaluation, dynamic and flexible policies, institutional centralization or coordination, and entrepreneurship in education.
Regular policy evaluation
Regular policy evaluation is required to mitigate changes in economic dynamic or structure as well as identify and address policy failures. Policy evaluation necessitates a pre-set of objective metrics based on professional studies and realistic assessments and which could be used as instruments for regular policy evaluation and its subsequent performance. The objective metrics could include, among others, contribution of the SME sector to the GDP, number of new SMEs joining and leaving the market, progression from Micro to Small and Medium and vice versa, trend in the number of nationals working in the sector or owning the firms, sectorial dynamics, and others.
Dynamic and flexible policies
Dynamic and flexible policies are necessary to adapt to changes in the economy. As a follow-up to policy evaluation, changes in policies should be driven by necessity and based on reliable data and professional analysis and not in response to social pressure without accounting for financial and economic implications. Dynamic and flexible policies require coordination among relevant government entities to the SME sector to ensure consistency in the vision and goal.
Institutional centralization and coordination
Effective coordination among government institutions that have been set up to promote the SME sector directly or indirectly must take place through a centralized government body. In other words, all government entities should come under one umbrella either through restructuring or through effective and high level participation in policy making body. The objective is to minimize redundancies and unhealthy competitions among concerned agencies.
Entrepreneurship in education
Entrepreneurial culture should be fostered through the education system at both high school and university levels in addition to avenues that promote this culture in the society as a whole. Equally important is to promote an education that advances the idea and benefits of one being a job creator and not just a job seeker. Encouraging innovation, stimulating critical thinking, and introducing soft skills are few of the ideas to be included in entrepreneurial curriculum.
Occasional Paper
PUBLIC 41
Effective and efficient incubators
Make sure business incubators work effectively and efficiently with metrics such as the number of successful graduates as well as the level of standard and relevant services. It is important to make sure that business incubators focus on core functions and not bureaucratic exercise and red tape. An important undertaking would be to certify that services being provided by business incubators are aligned with market requirements and more importantly driven by the spirit of innovation and enhancement of competitive advantage.
Integrated clusters in competitive sectors
SME business clusters should be built around sectors with proven comparative advantage and potential competitive advantage. It is also necessary to ensure that business clusters looks beyond domestic markets into export markets regional as well as international. In addition to looking for synergy and coordinating between successful graduates from business incubators with space allocation in business clusters when and if required, ensuring proximity of business incubators to relevant services infrastructure such as ports, highways and railway stations would enhance the efficiency of clusters.
Professionally resourced statistical body
There is a need to establish a professionally resourced statistical body under the Secretariat General of SME dedicated to SMEs so as to provide relevant, timely and complete data. In addition to numerical indicators, the database should include information on existing and future government and major private projects that require supply or other types of services from SMEs. More importantly there needs to be coordination and interaction between the statistical body and policy makers, entrepreneurs, investors, lending institutions, consulting firms, and current SME owners to conduct relevant analyses and studies as well as making informed decisions.
Public and private sector partnership
Public and private sectors partnership is of critical essence to promote and sustain the SME sector in Oman. The partnership should promote knowledge exchange, identifications of opportunities in supply chain as well as in backward and forward linkages among others. The partnership should also organize Seminars, workshops, and lectures and other avenues that could bring SME stake holders together.
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components of the business. In order to address these challenges, four sub-modules have been identified including direct and indirect initiatives by CBO, capacity enhancement by the commercial banks, viable projects from entrepreneurs or SME owners, and access to government contracts.
Direct and indirect CBO initiatives
A recent direct CBO’s initiative that is of note in terms of SME financing was to compel commercial banks to allocate 5 percent of their total credit to SMEs. CBO could also take initiatives that are non-regulatory in nature given the constraints of regulations. Some of the initiatives may consist of organizing seminars, workshops and awareness programs on the financing of SMEs or bring venture capitalists and entrepreneurs together through regular forum. CBO is also in the position to use moral suasion and incentives to influence commercial banks to lend to SMEs.
Capacity enhancement by commercial banks
Commercial banks and other lending institutions should give due diligence to this sector through capacity enhancement and investment in required resources, human as well as technical. Risk management and assessment of feasibility studies related to the SME sector are two areas that require capacity enhancement among commercial banks.
Viable projects from entrepreneurs
Entrepreneurs who require financing for new projects or current SME owners who want to expand their operations should present a professional feasibility study to the lending institutions. Benefits of professional feasibility study presented to the lenders minimize uncertainties and potential risks and provide opportunities to lend to businesses with higher probability of success.
Access to government contracts
Institutionalize and facilitate access to government contracts for SMEs through a transparent and competitive approach. The government should dedicate a realistic share of government contracts to SMEs. Secured government contracts would work as collateral surrogate and facilitate financing to SMEs.
6.4 Infrastructure support
An effective strategy to support the growth of the SME sector must be accompanied by infrastructure support. For the purpose of this study, four sub-components have been identified including, effective and efficient incubators, integrated clusters in competitive sectors, professionally resourced statistical body, and public private partnership.
Occasional Paper
PUBLIC 41
Effective and efficient incubators
Make sure business incubators work effectively and efficiently with metrics such as the number of successful graduates as well as the level of standard and relevant services. It is important to make sure that business incubators focus on core functions and not bureaucratic exercise and red tape. An important undertaking would be to certify that services being provided by business incubators are aligned with market requirements and more importantly driven by the spirit of innovation and enhancement of competitive advantage.
Integrated clusters in competitive sectors
SME business clusters should be built around sectors with proven comparative advantage and potential competitive advantage. It is also necessary to ensure that business clusters looks beyond domestic markets into export markets regional as well as international. In addition to looking for synergy and coordinating between successful graduates from business incubators with space allocation in business clusters when and if required, ensuring proximity of business incubators to relevant services infrastructure such as ports, highways and railway stations would enhance the efficiency of clusters.
Professionally resourced statistical body
There is a need to establish a professionally resourced statistical body under the Secretariat General of SME dedicated to SMEs so as to provide relevant, timely and complete data. In addition to numerical indicators, the database should include information on existing and future government and major private projects that require supply or other types of services from SMEs. More importantly there needs to be coordination and interaction between the statistical body and policy makers, entrepreneurs, investors, lending institutions, consulting firms, and current SME owners to conduct relevant analyses and studies as well as making informed decisions.
Public and private sector partnership
Public and private sectors partnership is of critical essence to promote and sustain the SME sector in Oman. The partnership should promote knowledge exchange, identifications of opportunities in supply chain as well as in backward and forward linkages among others. The partnership should also organize Seminars, workshops, and lectures and other avenues that could bring SME stake holders together.
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components of the business. In order to address these challenges, four sub-modules have been identified including direct and indirect initiatives by CBO, capacity enhancement by the commercial banks, viable projects from entrepreneurs or SME owners, and access to government contracts.
Direct and indirect CBO initiatives
A recent direct CBO’s initiative that is of note in terms of SME financing was to compel commercial banks to allocate 5 percent of their total credit to SMEs. CBO could also take initiatives that are non-regulatory in nature given the constraints of regulations. Some of the initiatives may consist of organizing seminars, workshops and awareness programs on the financing of SMEs or bring venture capitalists and entrepreneurs together through regular forum. CBO is also in the position to use moral suasion and incentives to influence commercial banks to lend to SMEs.
Capacity enhancement by commercial banks
Commercial banks and other lending institutions should give due diligence to this sector through capacity enhancement and investment in required resources, human as well as technical. Risk management and assessment of feasibility studies related to the SME sector are two areas that require capacity enhancement among commercial banks.
Viable projects from entrepreneurs
Entrepreneurs who require financing for new projects or current SME owners who want to expand their operations should present a professional feasibility study to the lending institutions. Benefits of professional feasibility study presented to the lenders minimize uncertainties and potential risks and provide opportunities to lend to businesses with higher probability of success.
Access to government contracts
Institutionalize and facilitate access to government contracts for SMEs through a transparent and competitive approach. The government should dedicate a realistic share of government contracts to SMEs. Secured government contracts would work as collateral surrogate and facilitate financing to SMEs.
6.4 Infrastructure support
An effective strategy to support the growth of the SME sector must be accompanied by infrastructure support. For the purpose of this study, four sub-components have been identified including, effective and efficient incubators, integrated clusters in competitive sectors, professionally resourced statistical body, and public private partnership.
Occasional Paper
PUBLIC 43
compete and grow is further hindered given the existing biases towards established larger businesses in terms of tax breaks and rollover subsidies that come in many forms as well as exemptions from corporate taxation over five years that can be extended upon request. Introducing a policy that exempts SMEs from taxation and selected fees while levying some taxation on large firms and corporations that have proven to be successful over the years would assist in promoting a level playing field.
A policy initiative compelling large businesses to progressively divest from activities that could easily be carried out by small or medium firms and let these large firms focus on more complex activities that require large capitals and multiple resources. The objective is to promote supply chain structures wherein the divested SMEs could enter into contractual agreements with the large businesses. These arrangements have a number of benefits, including minimizing the costs of large businesses associated primarily with staffing as well as expanding growth opportunities to the SME sector.
All policies initiated by the government related to the SME sector need to be dynamic so as to adapt to changing economic conditions including economic structure. Any change in policies need to be based on effective evaluation and when possible be pro-active. Failure to properly and regularly evaluate prior policy outcomes and take appropriate actions could lead to economic and financial costs as well as damage the credibility of policy makers.
The recently established Public Authority for the Development of SMEs should set up an institutional framework that plays a strong and effective coordinating role among all entities, public or private that deal with SME matters. The objective in this case is to avoid redundancies, provide regular guidance towards the common goal, and eliminate unhealthy competitions among these entities. More importantly, this institutional framework should be at the forefront in evaluating and devising policies that promote the SME sector in addition to be the repository of a database of all existing and potential business opportunities that could benefit the SME sector.
The education system, both at secondary and university levels should introduce as part of its curricula, strong entrepreneurial courses depending on the level. Critical thinking, innovation, basic business skills could provide the foundation of these curricula.
7.2 Legal basis
The SME sector in Oman requires a legal basis or framework from which it can be governed. However, in the process of developing a legal framework and relevant regulations, it is vital to keep in mind that the role of the government should be that of a facilitator and enabler that mitigates market failures. More importantly, the role of the government should be guided by the goal of promoting a growing, competitive, and a dynamic SME sector.
One major challenge facing the SME sector in Oman is the issue of ownership or management of firms. The survey indicates that over half of owners identify their businesses as their only sources of income while the rest cited their full time jobs and other
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7. Policy Recommendations for Oman
Some of the key objectives of the policy makers in the Sultanate include the promotion of a diversified economic base, job creation that keeps up with the requirement of the market development, expanding the private sector in the economy, increasing participation of the national working force in all sectors of the economy and more specifically in the private sector. It is evident that all these objectives are critically linked to the development of the SME sector, particularly given the unrealized potential of this sector in Oman and its proven contributions to many other economies worldwide in terms of value addition, job creation, flexibility and innovation. Drawing from the challenges and opportunities of the SME sector in Oman, results garnered from the two surveys as well experiences from other countries, the study provides a set of policy recommendations that take into account the specifics of the Omani economy and other prevailing conditions that are deemed relevant and critical in promoting and developing the sector in the country. The policy recommendations are aimed at supporting and strengthen the strategy discussed in section 6 of the study and are an extension of its four components and subsequent sub-components. More importantly, these recommendations are designed to address the challenges faced by the SME sector in Oman from the demand as well as the supply sides. The recommendations are grouped in five categories, namely policy and institutions, legal basis, access to financing, opportunities, and infrastructure.
7.1 Policy and institutions The growth and development of the SME sector in Oman require a number of supports among which are policy support and institutional support. In fact, effective policies and institutions provide a basis from which the sector can be evaluated regularly and necessary changes made accordingly. Below are a set of policy recommendations as well as recommendations pertaining to the functioning of institutions responsible for overseeing the SME sector in Oman within the context of prevailing dynamic in the country.
One major characteristic of the SME sector in Oman is in the large dominance of its foreign workforce. The policy challenges for micro enterprises as well as small and medium enterprises with regard to employing nationals can be traced in wages gap between the sector and larger firms or public sector, misalignment of benefits as well working hours and overall the prospect for growth and advancement for these employees. Policy incentives that the government could initiate in order to attract national employees would be in subsidizing training for SMEs and when possible and effective align some of the benefits with the public sector. The overall policy strategy would be to promote a healthy growth of the sector that would translate, together with other policy initiatives, into job creation with livable wages.
One way to incentivize the SME sector is to address some of the cost advantages that large
businesses have enjoyed for many years. The prospect for startups or existing SMEs to
Occasional Paper
PUBLIC 43
compete and grow is further hindered given the existing biases towards established larger businesses in terms of tax breaks and rollover subsidies that come in many forms as well as exemptions from corporate taxation over five years that can be extended upon request. Introducing a policy that exempts SMEs from taxation and selected fees while levying some taxation on large firms and corporations that have proven to be successful over the years would assist in promoting a level playing field.
A policy initiative compelling large businesses to progressively divest from activities that could easily be carried out by small or medium firms and let these large firms focus on more complex activities that require large capitals and multiple resources. The objective is to promote supply chain structures wherein the divested SMEs could enter into contractual agreements with the large businesses. These arrangements have a number of benefits, including minimizing the costs of large businesses associated primarily with staffing as well as expanding growth opportunities to the SME sector.
All policies initiated by the government related to the SME sector need to be dynamic so as to adapt to changing economic conditions including economic structure. Any change in policies need to be based on effective evaluation and when possible be pro-active. Failure to properly and regularly evaluate prior policy outcomes and take appropriate actions could lead to economic and financial costs as well as damage the credibility of policy makers.
The recently established Public Authority for the Development of SMEs should set up an institutional framework that plays a strong and effective coordinating role among all entities, public or private that deal with SME matters. The objective in this case is to avoid redundancies, provide regular guidance towards the common goal, and eliminate unhealthy competitions among these entities. More importantly, this institutional framework should be at the forefront in evaluating and devising policies that promote the SME sector in addition to be the repository of a database of all existing and potential business opportunities that could benefit the SME sector.
The education system, both at secondary and university levels should introduce as part of its curricula, strong entrepreneurial courses depending on the level. Critical thinking, innovation, basic business skills could provide the foundation of these curricula.
7.2 Legal basis
The SME sector in Oman requires a legal basis or framework from which it can be governed. However, in the process of developing a legal framework and relevant regulations, it is vital to keep in mind that the role of the government should be that of a facilitator and enabler that mitigates market failures. More importantly, the role of the government should be guided by the goal of promoting a growing, competitive, and a dynamic SME sector.
One major challenge facing the SME sector in Oman is the issue of ownership or management of firms. The survey indicates that over half of owners identify their businesses as their only sources of income while the rest cited their full time jobs and other
PUBLIC 42
7. Policy Recommendations for Oman
Some of the key objectives of the policy makers in the Sultanate include the promotion of a diversified economic base, job creation that keeps up with the requirement of the market development, expanding the private sector in the economy, increasing participation of the national working force in all sectors of the economy and more specifically in the private sector. It is evident that all these objectives are critically linked to the development of the SME sector, particularly given the unrealized potential of this sector in Oman and its proven contributions to many other economies worldwide in terms of value addition, job creation, flexibility and innovation. Drawing from the challenges and opportunities of the SME sector in Oman, results garnered from the two surveys as well experiences from other countries, the study provides a set of policy recommendations that take into account the specifics of the Omani economy and other prevailing conditions that are deemed relevant and critical in promoting and developing the sector in the country. The policy recommendations are aimed at supporting and strengthen the strategy discussed in section 6 of the study and are an extension of its four components and subsequent sub-components. More importantly, these recommendations are designed to address the challenges faced by the SME sector in Oman from the demand as well as the supply sides. The recommendations are grouped in five categories, namely policy and institutions, legal basis, access to financing, opportunities, and infrastructure.
7.1 Policy and institutions The growth and development of the SME sector in Oman require a number of supports among which are policy support and institutional support. In fact, effective policies and institutions provide a basis from which the sector can be evaluated regularly and necessary changes made accordingly. Below are a set of policy recommendations as well as recommendations pertaining to the functioning of institutions responsible for overseeing the SME sector in Oman within the context of prevailing dynamic in the country.
One major characteristic of the SME sector in Oman is in the large dominance of its foreign workforce. The policy challenges for micro enterprises as well as small and medium enterprises with regard to employing nationals can be traced in wages gap between the sector and larger firms or public sector, misalignment of benefits as well working hours and overall the prospect for growth and advancement for these employees. Policy incentives that the government could initiate in order to attract national employees would be in subsidizing training for SMEs and when possible and effective align some of the benefits with the public sector. The overall policy strategy would be to promote a healthy growth of the sector that would translate, together with other policy initiatives, into job creation with livable wages.
One way to incentivize the SME sector is to address some of the cost advantages that large
businesses have enjoyed for many years. The prospect for startups or existing SMEs to
Occasional Paper
PUBLIC 45
The fact that commercial banks in Oman have little incentive to lend to SMEs, especially to those enterprises that are in the establishment phase due to their inherent high risk and the fact that personal loans tend to be more lucrative and less risky, enhancing the capacity of the current Banking Credit Statistical Bureau (BCSB) under CBO is important. Specifically, the enhanced capacity would target potential borrowers for SME projects by making information available in the form of their credit worthiness to commercial banks. This initiative would go a long way in bridging information asymmetry and potentially limiting the use of collateral or other types of guarantee against the risk of default.
Expand and enhance the current Banking Credit Statistical Bureau (BCSB) at CBO to include an SME database component given the prevailing scare financial statistics in this sector. In view of its role as a compiler of financial statistics, CBO can obtain the necessary data and publish relevant indicators to assist the banks in accessing required information and data for lending purpose in this sector.
CBO, together with relevant government entities could be at the forefront to promote
policy initiatives that would mitigate market failures and as such focusing on those measures that complete the market with regard to financing SMEs rather than those measures that simply work as substitutes which often have high probability of failure. A case in point would be of a collateral surrogate that is completed by other requirements such as the viability of a project demonstrated through a professional feasibility study or a creditworthiness of a borrower.
Equally important is the importance of distinguishing by CBO and lending institutions
between what could be viewed as “willful default” and other defaults so that genuine business failures are not associated with stigma of non-payment while the treatments of defaults are also exercised accordingly.
CBO, together with relevant government entities should be at the forefront of promoting
policies aimed at reducing the current heavy reliance on collateral by banks in lending to SMEs. The first would be to assess the possibility of expanding existing collateral surrogates by the Government. It is important to note that collateral surrogates cannot be complete substitutes for collateral itself, in particular when it is not coupled with some sort of borrowers’ commitments. However, collateral substitutes are critical in reducing the fixed costs of financing and one effective way is to expand government credit guarantee.
Another approach in collateral substitute could be in the linking of credit scoring of
prospective borrowers in the SME sector. In other words, credit history and high credit score by an entrepreneur should reduce the extent of collateral required for SME loans or allow the borrower to benefit from government guarantee scheme.
Islamic Banking, by the nature of its business philosophy, should be in a position to
broaden the asset-based and activity-based financing from which SMEs could benefit.
PUBLIC 44
sources such as pension funds as additional sources of income. In a country where many SMEs are not managed and in certain cases not even owned by the registered owners, it is difficult to suggest that this sector is a viable source of income to the Omani owners or for that matter a source of job creation for nationals or a basis for upward mobility. Strict working visas rules as well as clear laws need to be devised by the concerned authorities as to the ownership of SMEs where owners are expected to be invested rather than representing mere fronts for others. More importantly, these laws must be effectively enforced.
Regulations must strike a balance between a competitive SME sector and an ineffective SME sector. Equally important are regulations that introduce a level playing field between SMEs and large companies with the purpose of expanding opportunities to SMEs and curtailing the influence of large companies in driving out competitive and successful SMEs through unfair practices such as “price wars”.
Among key rules and regulations would be the introduction of clear property rights,
minimize the costs associated with resolving business disputes, effective contractual laws that protect all parties involved in transactions, and eliminate loopholes that could result in abuses. These rules and regulations should be guided by the principles of efficiency, accessibility and simplicity in their interpretation14.
7.3 Access to financing
Facilitating financing to SMEs should be a critical component of the government policy program with the Central Bank of Oman (CBO) being one of the major players. Given its role as a monetary policy agency, regulator and supervisor of commercial banks, CBO’s policy and initiatives aimed at promoting the SME sector in the Sultanate could translate into positive outcomes. Before listing the proposed policies on financing, it is worth noting and as already alluded in the strategy section of the study, that the recent CBO initiative asking the commercial banks to allocate 5 percent of their total credit, amounting to about RO 1 billion in the phased period of implementation to SMEs in addition to providing incentives though prudential regulation that lowered the capital requirement as well as risk weighing for the sector, amounted to an important and potentially beneficial decision for the sustainability of the sector. Equally important would be the various roles played by other government entities and lending institutions in facilitating the financing of SMEs both directly and indirectly. The following policy recommendations are drawn from the analysis conducted in relevant sections of this study, experiences from other countries and mainly from South East Asian countries through a comprehensive study of the region by Boldbataar et al (2005). It is however important to note that though other countries’ experiences have been taken into account in recommending the following policies, they have been molded to fit the specifics and particularities of Oman.
14 These concepts were drawn from the World Bank and IFC report titled Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises.
Occasional Paper
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The fact that commercial banks in Oman have little incentive to lend to SMEs, especially to those enterprises that are in the establishment phase due to their inherent high risk and the fact that personal loans tend to be more lucrative and less risky, enhancing the capacity of the current Banking Credit Statistical Bureau (BCSB) under CBO is important. Specifically, the enhanced capacity would target potential borrowers for SME projects by making information available in the form of their credit worthiness to commercial banks. This initiative would go a long way in bridging information asymmetry and potentially limiting the use of collateral or other types of guarantee against the risk of default.
Expand and enhance the current Banking Credit Statistical Bureau (BCSB) at CBO to include an SME database component given the prevailing scare financial statistics in this sector. In view of its role as a compiler of financial statistics, CBO can obtain the necessary data and publish relevant indicators to assist the banks in accessing required information and data for lending purpose in this sector.
CBO, together with relevant government entities could be at the forefront to promote
policy initiatives that would mitigate market failures and as such focusing on those measures that complete the market with regard to financing SMEs rather than those measures that simply work as substitutes which often have high probability of failure. A case in point would be of a collateral surrogate that is completed by other requirements such as the viability of a project demonstrated through a professional feasibility study or a creditworthiness of a borrower.
Equally important is the importance of distinguishing by CBO and lending institutions
between what could be viewed as “willful default” and other defaults so that genuine business failures are not associated with stigma of non-payment while the treatments of defaults are also exercised accordingly.
CBO, together with relevant government entities should be at the forefront of promoting
policies aimed at reducing the current heavy reliance on collateral by banks in lending to SMEs. The first would be to assess the possibility of expanding existing collateral surrogates by the Government. It is important to note that collateral surrogates cannot be complete substitutes for collateral itself, in particular when it is not coupled with some sort of borrowers’ commitments. However, collateral substitutes are critical in reducing the fixed costs of financing and one effective way is to expand government credit guarantee.
Another approach in collateral substitute could be in the linking of credit scoring of
prospective borrowers in the SME sector. In other words, credit history and high credit score by an entrepreneur should reduce the extent of collateral required for SME loans or allow the borrower to benefit from government guarantee scheme.
Islamic Banking, by the nature of its business philosophy, should be in a position to
broaden the asset-based and activity-based financing from which SMEs could benefit.
PUBLIC 44
sources such as pension funds as additional sources of income. In a country where many SMEs are not managed and in certain cases not even owned by the registered owners, it is difficult to suggest that this sector is a viable source of income to the Omani owners or for that matter a source of job creation for nationals or a basis for upward mobility. Strict working visas rules as well as clear laws need to be devised by the concerned authorities as to the ownership of SMEs where owners are expected to be invested rather than representing mere fronts for others. More importantly, these laws must be effectively enforced.
Regulations must strike a balance between a competitive SME sector and an ineffective SME sector. Equally important are regulations that introduce a level playing field between SMEs and large companies with the purpose of expanding opportunities to SMEs and curtailing the influence of large companies in driving out competitive and successful SMEs through unfair practices such as “price wars”.
Among key rules and regulations would be the introduction of clear property rights,
minimize the costs associated with resolving business disputes, effective contractual laws that protect all parties involved in transactions, and eliminate loopholes that could result in abuses. These rules and regulations should be guided by the principles of efficiency, accessibility and simplicity in their interpretation14.
7.3 Access to financing
Facilitating financing to SMEs should be a critical component of the government policy program with the Central Bank of Oman (CBO) being one of the major players. Given its role as a monetary policy agency, regulator and supervisor of commercial banks, CBO’s policy and initiatives aimed at promoting the SME sector in the Sultanate could translate into positive outcomes. Before listing the proposed policies on financing, it is worth noting and as already alluded in the strategy section of the study, that the recent CBO initiative asking the commercial banks to allocate 5 percent of their total credit, amounting to about RO 1 billion in the phased period of implementation to SMEs in addition to providing incentives though prudential regulation that lowered the capital requirement as well as risk weighing for the sector, amounted to an important and potentially beneficial decision for the sustainability of the sector. Equally important would be the various roles played by other government entities and lending institutions in facilitating the financing of SMEs both directly and indirectly. The following policy recommendations are drawn from the analysis conducted in relevant sections of this study, experiences from other countries and mainly from South East Asian countries through a comprehensive study of the region by Boldbataar et al (2005). It is however important to note that though other countries’ experiences have been taken into account in recommending the following policies, they have been molded to fit the specifics and particularities of Oman.
14 These concepts were drawn from the World Bank and IFC report titled Doing Business 2014: Understanding Regulations for Small and Medium-Size Enterprises.
Occasional Paper
PUBLIC 47
Effective risk management and by implication risk pricing also require that commercial
banks invest in training and resources in order to provide better information and support to SME borrowers in understanding the various financial products in offer.
Equally important is training in sectoral financing which would allow commercial bank
staff to identify competitive sectors within SMEs and channel financings accordingly. For instance, staff should be familiar with the economics of agriculture, fisheries, or tourism sectors as part of the overall risk management training.
The investment in SME financing resources and services by the commercial banks
should extend to other population concentration areas in Oman and not simply limited to a few major cities. Entrepreneurs in these areas should be able to address their needs locally and as such avoid all sorts of transaction costs. While e-financing is the most effective way to address transaction costs, it still requires a sophisticated and integrated infrastructure which is still lacking in Oman.
Underpinning all measures pertaining to facilitate financing in the SME sector is the
promotion of bankable SMEs which must be coupled with policies that minimize market failures instead of policies that rely on ineffective subsidies and similar support mechanisms. In fact, the cost of financing SMEs could escalate for existing subsidized loans in the event market failures in the forms of information asymmetry and limited competition among financing institutions persist. For commercial banks, information asymmetry puts pressure on administrative costs on SME loans while limited competition incentivizes commercial banks in Oman to channel most of their financing to personal loans and large corporations where profit is higher and risk is lower16.
Established and successful SMEs could also be allowed to be listed in the capital market
using it as a source of financing as well as credit risk barometer for the listed enterprises. The recent announcement of a plan by the Capital Market Authority (CMA) to list SMEs in Muscat Securities Market (MSM) is a step in the right direction17.
Another potential source of financing for SMEs is through asset-based financing or also
known as leasing financing18. This type of financing allows entrepreneurs to lease assets from a lessor who in return through contractual agreements will receive periodical payments. Here all risks and rewards of the ownership of the assets are transferred to the entrepreneur or lessee while the lender or lessor remains the owner of the assets. This is another form of collateral based lending that is secured.
Eliminate conditional lending from government entities that assist SMEs with financing.
Conditional lending refers to the practice where the beneficiaries of the loans in certain
16 Administrative costs come mostly in the forms of processing and monitoring as discussed in a study by Bolbaatar on the Asian SMEs. 17 The announcement was sourced from the Oman Observer, January 21, 2014. 18 The idea was garnered from a working paper by Kramer –Eis and Lang in which they discuss the importance of asset-based financing (2012).
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Relevant government entities along with CBO could be at the forefront and in partnership with the private sector in promoting equity financing for potentially profitable SMEs. Studies have indicated that in most part, there is a positive relationship between profitability and equity financing and negative relationship between profitability and debt financing. The advantage of equity financing is the capacity to identify SMEs with growth prospects15.
Within the framework of public private partnership, CBO could lead the way and take a
pro-active role in organizing workshops, seminars, and other forms of gatherings involving banks, prospective equity financiers and entrepreneurs as well as relevant government entities. Meetings between prospective entrepreneurs in various population concentration areas and prospective financiers, including banks should also feature in CBO's initiatives agenda.
Commercial banks that lead the way in SME financing could be incentivized by the
government in the form of compensation for cheaper and conditional funds channeled to SMEs as is the case in some South East Asian member states. In the case of Oman, this initiative could only be successful in an environment of competitive banking sector where there is a balance between demand and supply for liquidity in which case the following could be initiated by the government and CBO:
o Funds could be allocated through banks that have clearly committed to expand SME financing and have track records in this regards. A simple metric would be the proportion of SME lending of the total lending by a bank. CBO could play a role in the implementation of this policy and in overseeing the lending by commercial banks.
o The sources of funding could be from fiscal budget. It is important in this case to make sure that this initiative does not collide with other existing initiatives. The objective is to make each initiative unique and effective in its financing requirements. The key characteristic of this initiative is that commercial banks will have to agree and comply with pre-specified conditions such as the rate of interest rate, the amount to be lent, and the type of industry that the government has deemed critical to the economy following careful studies.
The government, through its contractual obligations to SMEs, could introduce an expedient payment mechanism that does not extend beyond 30 days once SMEs have rendered the agreed services, or CBO could extend non-payment SME loan classification beyond the existing practice of 90 days, in particular in cases of proven account receivable from government entities.
Commercial banks should invest in risk managements that are geared towards more
effective assessments of prospective SME borrowers among which is an effective risk pricing. An effective risk pricing is also critical in the sustainability of SMEs financing given the prospect of reduction in the cost of borrowing.
15 The relationships were identified by Tze-Wei Fu et al in 2002 study. A number of other studies have pointed to similar relationship
Occasional Paper
PUBLIC 47
Effective risk management and by implication risk pricing also require that commercial
banks invest in training and resources in order to provide better information and support to SME borrowers in understanding the various financial products in offer.
Equally important is training in sectoral financing which would allow commercial bank
staff to identify competitive sectors within SMEs and channel financings accordingly. For instance, staff should be familiar with the economics of agriculture, fisheries, or tourism sectors as part of the overall risk management training.
The investment in SME financing resources and services by the commercial banks
should extend to other population concentration areas in Oman and not simply limited to a few major cities. Entrepreneurs in these areas should be able to address their needs locally and as such avoid all sorts of transaction costs. While e-financing is the most effective way to address transaction costs, it still requires a sophisticated and integrated infrastructure which is still lacking in Oman.
Underpinning all measures pertaining to facilitate financing in the SME sector is the
promotion of bankable SMEs which must be coupled with policies that minimize market failures instead of policies that rely on ineffective subsidies and similar support mechanisms. In fact, the cost of financing SMEs could escalate for existing subsidized loans in the event market failures in the forms of information asymmetry and limited competition among financing institutions persist. For commercial banks, information asymmetry puts pressure on administrative costs on SME loans while limited competition incentivizes commercial banks in Oman to channel most of their financing to personal loans and large corporations where profit is higher and risk is lower16.
Established and successful SMEs could also be allowed to be listed in the capital market
using it as a source of financing as well as credit risk barometer for the listed enterprises. The recent announcement of a plan by the Capital Market Authority (CMA) to list SMEs in Muscat Securities Market (MSM) is a step in the right direction17.
Another potential source of financing for SMEs is through asset-based financing or also
known as leasing financing18. This type of financing allows entrepreneurs to lease assets from a lessor who in return through contractual agreements will receive periodical payments. Here all risks and rewards of the ownership of the assets are transferred to the entrepreneur or lessee while the lender or lessor remains the owner of the assets. This is another form of collateral based lending that is secured.
Eliminate conditional lending from government entities that assist SMEs with financing.
Conditional lending refers to the practice where the beneficiaries of the loans in certain
16 Administrative costs come mostly in the forms of processing and monitoring as discussed in a study by Bolbaatar on the Asian SMEs. 17 The announcement was sourced from the Oman Observer, January 21, 2014. 18 The idea was garnered from a working paper by Kramer –Eis and Lang in which they discuss the importance of asset-based financing (2012).
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Relevant government entities along with CBO could be at the forefront and in partnership with the private sector in promoting equity financing for potentially profitable SMEs. Studies have indicated that in most part, there is a positive relationship between profitability and equity financing and negative relationship between profitability and debt financing. The advantage of equity financing is the capacity to identify SMEs with growth prospects15.
Within the framework of public private partnership, CBO could lead the way and take a
pro-active role in organizing workshops, seminars, and other forms of gatherings involving banks, prospective equity financiers and entrepreneurs as well as relevant government entities. Meetings between prospective entrepreneurs in various population concentration areas and prospective financiers, including banks should also feature in CBO's initiatives agenda.
Commercial banks that lead the way in SME financing could be incentivized by the
government in the form of compensation for cheaper and conditional funds channeled to SMEs as is the case in some South East Asian member states. In the case of Oman, this initiative could only be successful in an environment of competitive banking sector where there is a balance between demand and supply for liquidity in which case the following could be initiated by the government and CBO:
o Funds could be allocated through banks that have clearly committed to expand SME financing and have track records in this regards. A simple metric would be the proportion of SME lending of the total lending by a bank. CBO could play a role in the implementation of this policy and in overseeing the lending by commercial banks.
o The sources of funding could be from fiscal budget. It is important in this case to make sure that this initiative does not collide with other existing initiatives. The objective is to make each initiative unique and effective in its financing requirements. The key characteristic of this initiative is that commercial banks will have to agree and comply with pre-specified conditions such as the rate of interest rate, the amount to be lent, and the type of industry that the government has deemed critical to the economy following careful studies.
The government, through its contractual obligations to SMEs, could introduce an expedient payment mechanism that does not extend beyond 30 days once SMEs have rendered the agreed services, or CBO could extend non-payment SME loan classification beyond the existing practice of 90 days, in particular in cases of proven account receivable from government entities.
Commercial banks should invest in risk managements that are geared towards more
effective assessments of prospective SME borrowers among which is an effective risk pricing. An effective risk pricing is also critical in the sustainability of SMEs financing given the prospect of reduction in the cost of borrowing.
15 The relationships were identified by Tze-Wei Fu et al in 2002 study. A number of other studies have pointed to similar relationship
Occasional Paper
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process given that validation can easily be made through government to government portal. What must be avoided is the creation of more bureaucracy and paper work19.
Large firms could divest from businesses that could be easily be handled by SMEs either
through supply agreements or forward or backward linkages whenever possible. Creating ownership of SMEs through members of families who own large family businesses for the purpose of serving the mother companies defies the objective of developing the sector at so many levels, but more importantly the objective of upward mobility by those who take risk to build SMEs and fostering and promoting entrepreneurship. Allowing SMEs to partner with large firms would benefit large firms in terms of cost efficiency with regard to staffing, administration, and a number of hidden transaction costs as the large firms focus on their core and complex businesses.
The In-County Value program currently in vogue in the hydrocarbon sector where oil and
gas companies in Oman opt to optimize the share of foreign contracts with domestic suppliers, should include an SME component even through sub-contracting policies so as to allow the spread of benefits of these contracts beyond few large and established firms.
The Foreign Direct Investment policy of the Sultanate should introduce set of policies that would also benefit SMEs through linkages or supply. Equally important is for foreign investing firms to transfer knowledge and skills whenever possible.
7.5 Infrastructure
A key and critical component aimed at developing the SME sector is the establishment and development of relevant and modern physical infrastructure as well as human capital. The following selected measures are deemed important towards developing a sustainable and competitive SME sector in Oman.
Expanding existing business incubators beyond the capital area and develop SME clusters with the purpose of promoting entrepreneurship, knowledge, costs sharing, and capitalize on additional benefits realized through the economy of scale under these entities. it is however important that the resources that are allocated to develop SME clusters and business incubators have clear objectives that in turn should be linked to the goal of sustainable growth of the sector.
The establishment of business incubators and clusters should take into account the structure of the Omani economy and its inherent comparative and prospective competitive advantages. Equally important is to make sure that the endeavor is devoid of institutional overlaps that these entities work effectively and efficiently with public-private and education partnership. Business incubators and clusters should also reflect targeted industries within the context of the overall industrial policy in Oman. One potential SME cluster for Oman besides IT and ICT is in the fishing sector given a coastal line of over 1000 kilometers.
19 Detailed measures and policies to improve SME financing in Oman are discussed in the subsequent section of the paper.
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instances have suppliers and vendors imposed on them as a part of loan approval. This practice contradicts the spirit of entrepreneurship and beyond taking away operational flexibility from the borrowers; it is not cost effective for the business or the government. SMEs should only be required to operate within approved criteria of safety, health and other required operational and work standards.
7.4 Opportunities A pro-growth policy for SME sector needs, first and foremost, a process that continuously identify potential opportunities for the sector and devise a strategy with a mechanism that would promote access to these opportunities by the sector, in particular when government contracts are awarded. Large firms in Oman should also have strategies through business models that work with SMEs. The following are selected initiatives that could be introduced by the Government and its various institutions as well as large firms with the purpose of promoting the SME sector in Oman.
Promote SME growth through access to government contracts by emulating the In-Country Value model currently in vogue among some major downstream hydrocarbon companies in Oman. The model could be modified to target the SME sector. The Government could start with a realistic target as to the amount share of total contracts that need to benefit the domestic SME sector. This policy needs to be accompanied by a transparent and competitive mechanism with respect to the awards of contracts and a certifiable validation mechanism as to the Omani ownership and involvement of the company.
Access to government contracts by SMEs should require a set of standards and criteria from these firms such as proven records in the project at offer and human capacity and skills. Through rigorous assessments and depending on the requirement of a project SMEs with no proven records in similar projects but possess the required capacity and skills should be considered.
Government agencies and ministries should devise strategies that promote the supply of their operational resources through SMEs whenever possible. A share of supply of these resources should be sourced or supplied through SME firms.
Initiate a specific strategy that would allow SMEs to benefit through contracts or supply links from the multitude of public investments that are expected to take place to further develop these sectors. The objective is to generate opportunities for new SMEs to join the market and for the existing ones to grow. In order to have an effective strategy however, coordination is of essence between the newly established Public Authority for Development of SMEs and all the stakeholders, including business incubators and clusters.
Large corporations should not either directly or indirectly be the beneficiaries of SME-
specific government - awarded contracts through agency loopholes or any other forms of indirect accesses. It is important to optimize the use of modern technology to facilitate the
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process given that validation can easily be made through government to government portal. What must be avoided is the creation of more bureaucracy and paper work19.
Large firms could divest from businesses that could be easily be handled by SMEs either
through supply agreements or forward or backward linkages whenever possible. Creating ownership of SMEs through members of families who own large family businesses for the purpose of serving the mother companies defies the objective of developing the sector at so many levels, but more importantly the objective of upward mobility by those who take risk to build SMEs and fostering and promoting entrepreneurship. Allowing SMEs to partner with large firms would benefit large firms in terms of cost efficiency with regard to staffing, administration, and a number of hidden transaction costs as the large firms focus on their core and complex businesses.
The In-County Value program currently in vogue in the hydrocarbon sector where oil and
gas companies in Oman opt to optimize the share of foreign contracts with domestic suppliers, should include an SME component even through sub-contracting policies so as to allow the spread of benefits of these contracts beyond few large and established firms.
The Foreign Direct Investment policy of the Sultanate should introduce set of policies that would also benefit SMEs through linkages or supply. Equally important is for foreign investing firms to transfer knowledge and skills whenever possible.
7.5 Infrastructure
A key and critical component aimed at developing the SME sector is the establishment and development of relevant and modern physical infrastructure as well as human capital. The following selected measures are deemed important towards developing a sustainable and competitive SME sector in Oman.
Expanding existing business incubators beyond the capital area and develop SME clusters with the purpose of promoting entrepreneurship, knowledge, costs sharing, and capitalize on additional benefits realized through the economy of scale under these entities. it is however important that the resources that are allocated to develop SME clusters and business incubators have clear objectives that in turn should be linked to the goal of sustainable growth of the sector.
The establishment of business incubators and clusters should take into account the structure of the Omani economy and its inherent comparative and prospective competitive advantages. Equally important is to make sure that the endeavor is devoid of institutional overlaps that these entities work effectively and efficiently with public-private and education partnership. Business incubators and clusters should also reflect targeted industries within the context of the overall industrial policy in Oman. One potential SME cluster for Oman besides IT and ICT is in the fishing sector given a coastal line of over 1000 kilometers.
19 Detailed measures and policies to improve SME financing in Oman are discussed in the subsequent section of the paper.
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instances have suppliers and vendors imposed on them as a part of loan approval. This practice contradicts the spirit of entrepreneurship and beyond taking away operational flexibility from the borrowers; it is not cost effective for the business or the government. SMEs should only be required to operate within approved criteria of safety, health and other required operational and work standards.
7.4 Opportunities A pro-growth policy for SME sector needs, first and foremost, a process that continuously identify potential opportunities for the sector and devise a strategy with a mechanism that would promote access to these opportunities by the sector, in particular when government contracts are awarded. Large firms in Oman should also have strategies through business models that work with SMEs. The following are selected initiatives that could be introduced by the Government and its various institutions as well as large firms with the purpose of promoting the SME sector in Oman.
Promote SME growth through access to government contracts by emulating the In-Country Value model currently in vogue among some major downstream hydrocarbon companies in Oman. The model could be modified to target the SME sector. The Government could start with a realistic target as to the amount share of total contracts that need to benefit the domestic SME sector. This policy needs to be accompanied by a transparent and competitive mechanism with respect to the awards of contracts and a certifiable validation mechanism as to the Omani ownership and involvement of the company.
Access to government contracts by SMEs should require a set of standards and criteria from these firms such as proven records in the project at offer and human capacity and skills. Through rigorous assessments and depending on the requirement of a project SMEs with no proven records in similar projects but possess the required capacity and skills should be considered.
Government agencies and ministries should devise strategies that promote the supply of their operational resources through SMEs whenever possible. A share of supply of these resources should be sourced or supplied through SME firms.
Initiate a specific strategy that would allow SMEs to benefit through contracts or supply links from the multitude of public investments that are expected to take place to further develop these sectors. The objective is to generate opportunities for new SMEs to join the market and for the existing ones to grow. In order to have an effective strategy however, coordination is of essence between the newly established Public Authority for Development of SMEs and all the stakeholders, including business incubators and clusters.
Large corporations should not either directly or indirectly be the beneficiaries of SME-
specific government - awarded contracts through agency loopholes or any other forms of indirect accesses. It is important to optimize the use of modern technology to facilitate the
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enterprises, nurturing entrepreneurship, marketing, and others. A more comprehensive support under the Public Authority for the Development of SMEs equipped with appropriate cadre of professionals and resources is required to promote the SME sector from all angles. More importantly, this unit needs to be supported across the various regions of Oman with branches. The unit, along with its branches, should also represent a one-stop shop where all bureaucratic requirements are addressed and queries answered. Equipping the unit with Business to Business and Business to Public portals is essential for expediency and minimizing transaction costs.
An effective telecommunication infrastructure and friendly telecommunication policies by
the Telecommunication Regulatory Authority towards businesses in general and the SME sector in particular, with the aim of minimizing operational costs are important avenues to assist SMEs to expedite communication and by default efficiency.
Assistance in providing professional feasibilities studies and consultancy fees at minimum fees as well as conducting awareness on the importance of producing regular financial statements for SME firms and the use of modern technologies in payment and supply methods to minimize transaction costs.
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Experiences by other countries indicate that successful clusters incorporate synergies among their activities. The benefits, among others, include cost and knowledge sharing.
Business incubators and clusters should also promote capacity building among aspiring and existing entrepreneurs as well as for staff employed by these enterprises as part of human infrastructure development. Knowledge and skills transfer, innovation, optimization of existing technology through adoption, absorption and adaptation, all of which should feature prominently in these establishments and could be promoted through interactions between these entities, the education system and Research and Development entities20. The interconnection of companies and relevant institutions through business incubators and clustering has potential to generate business opportunities by opening the market and reducing cost of doing business via resources pools and as such allows the SME sector to become competitive and grow. These initiatives are important in addressing some of the challenges in the demand side of the sector in Oman.
Effective governance of business incubators is required through clear mandate of its operating framework and articulated by its management. As recommended by the European Commission in 2002, incubators need to clearly define their target markets, admission and exit rules, as well as quality standards for client assistance and other aspects of the incubators’ operations. All employees need to be aware of the targets and rules so as to ensure effective operation. Incubators must also keep tab of success stories as well as cases of failure and use them as sources of learning.
Allocation of needed resources with required capacity to the National Center for Statistics and Information dedicated to gather critical and relevant data pertaining to the SME sector in Oman such as market structure, specialization, capital, ownership, number of employees, value addition to the GDP, rates of successes and failures etc. Emphasis should be put on the quality, reliability as well as timeliness of the data. One way to deal with market failures is to devise effective policies which in turn require relevant and quality data issued in a timely manner.
The building of dynamic databases by large corporations, government entities, and large
service providers such as ports and airports with listed opportunities in services, logistics, and products that can be provided by startup businesses and established SMEs is critical in mitigating information asymmetry, transaction costs, and more importantly assisting entrepreneurs to start new firms and established SMEs to expand through the identification of business opportunities. Mitigating information asymmetry also addresses some aspect of policy biases given that access is not a privilege to few.
A government supported entity, preferably in partnership with the private sector to assist startup SMEs to produce professional feasibility studies, assess the viability of projects and business initiatives, costs projection, fixed and mobile training on effective management of SMEs, e-banking, review of financial and administrative aspects of startup and expanding
20 A 2011 paper by UNCTAD titled: A Framework for Science, Technology and Innovation Policy Reviews discusses the importance of adoption, absorption and adaptation of existing technological knowledge generated abroad for the purpose of helping developing economies to leverage knowledge and innovation for development.
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enterprises, nurturing entrepreneurship, marketing, and others. A more comprehensive support under the Public Authority for the Development of SMEs equipped with appropriate cadre of professionals and resources is required to promote the SME sector from all angles. More importantly, this unit needs to be supported across the various regions of Oman with branches. The unit, along with its branches, should also represent a one-stop shop where all bureaucratic requirements are addressed and queries answered. Equipping the unit with Business to Business and Business to Public portals is essential for expediency and minimizing transaction costs.
An effective telecommunication infrastructure and friendly telecommunication policies by
the Telecommunication Regulatory Authority towards businesses in general and the SME sector in particular, with the aim of minimizing operational costs are important avenues to assist SMEs to expedite communication and by default efficiency.
Assistance in providing professional feasibilities studies and consultancy fees at minimum fees as well as conducting awareness on the importance of producing regular financial statements for SME firms and the use of modern technologies in payment and supply methods to minimize transaction costs.
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Experiences by other countries indicate that successful clusters incorporate synergies among their activities. The benefits, among others, include cost and knowledge sharing.
Business incubators and clusters should also promote capacity building among aspiring and existing entrepreneurs as well as for staff employed by these enterprises as part of human infrastructure development. Knowledge and skills transfer, innovation, optimization of existing technology through adoption, absorption and adaptation, all of which should feature prominently in these establishments and could be promoted through interactions between these entities, the education system and Research and Development entities20. The interconnection of companies and relevant institutions through business incubators and clustering has potential to generate business opportunities by opening the market and reducing cost of doing business via resources pools and as such allows the SME sector to become competitive and grow. These initiatives are important in addressing some of the challenges in the demand side of the sector in Oman.
Effective governance of business incubators is required through clear mandate of its operating framework and articulated by its management. As recommended by the European Commission in 2002, incubators need to clearly define their target markets, admission and exit rules, as well as quality standards for client assistance and other aspects of the incubators’ operations. All employees need to be aware of the targets and rules so as to ensure effective operation. Incubators must also keep tab of success stories as well as cases of failure and use them as sources of learning.
Allocation of needed resources with required capacity to the National Center for Statistics and Information dedicated to gather critical and relevant data pertaining to the SME sector in Oman such as market structure, specialization, capital, ownership, number of employees, value addition to the GDP, rates of successes and failures etc. Emphasis should be put on the quality, reliability as well as timeliness of the data. One way to deal with market failures is to devise effective policies which in turn require relevant and quality data issued in a timely manner.
The building of dynamic databases by large corporations, government entities, and large
service providers such as ports and airports with listed opportunities in services, logistics, and products that can be provided by startup businesses and established SMEs is critical in mitigating information asymmetry, transaction costs, and more importantly assisting entrepreneurs to start new firms and established SMEs to expand through the identification of business opportunities. Mitigating information asymmetry also addresses some aspect of policy biases given that access is not a privilege to few.
A government supported entity, preferably in partnership with the private sector to assist startup SMEs to produce professional feasibility studies, assess the viability of projects and business initiatives, costs projection, fixed and mobile training on effective management of SMEs, e-banking, review of financial and administrative aspects of startup and expanding
20 A 2011 paper by UNCTAD titled: A Framework for Science, Technology and Innovation Policy Reviews discusses the importance of adoption, absorption and adaptation of existing technological knowledge generated abroad for the purpose of helping developing economies to leverage knowledge and innovation for development.
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Appendix 1: Aggregate Findings on SMEs Survey
Q1. Name of the company/establishment:
Q2. The governorate the business is located in:
Number Percentage Q3. The age of the owner(s)/founder(s): (If more than one owner exists, please
indicate so at the end of the question) 120 100
Less than 20 years old 5 4.2 20 - 29 years old 22 18.3 30 - 39 years old 46 38.3 40 years old and above 47 39.2
Q4. The highest formal qualification attained by the business owner(s): (If more than one owner exists, please indicate so at the end of the question)
120 100
No academic qualifications 4 3.3 Academic qualification lower than high school diploma 22 18.3 High school Diploma 40 33.3 2 year diploma 23 19.2 Undergraduate degree or above 28 23.3 Other 3 2.5
Q5. Before starting up your current business, what was your accumulated business and working experience? (If more than one owner exists, please indicate so at the end of the question)
120 100
No experience 17 14.2 Less than 1 year 11 9.2 From 1 year to 3 years 22 18.3 From 4 years to 10 years 29 24.2 More than 10 years 41 34.2
Q6. Have you had any financial and/or business administration training prior or during establishment?
118 100
Yes 35 29.7 No 83 70.3
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8. Concluding Remarks
The SME sector in Oman requires significant reforms in order to grow, be competitive, dynamic and add value to the economy and society at large. Drawing from the findings of the two surveys, targeting Omani entrepreneurs and SME owners on one hand and domestic lending institutions on the other, this paper has outlined a strategy to develop the SME sector in Oman and listed a number of policy recommendations that are in line with the proposed strategy.
Realizing the goal of a growing, competitive and dynamic SME sector in Oman should be premised on a support network consisting of four major components as encapsulated in the strategy. The four components, namely policy and institutional support, a legal framework, access to financing and opportunities, and infrastructure support, are to be realized through a set of respective sub-components listed in the strategy and discussed in subsequent sections of the study. While having a strategy and set of policies to guide the development of the SME sector in Oman are critical components, what is even more important is an implementation that is conducted effectively, efficiently, and professionally.
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Appendix 1: Aggregate Findings on SMEs Survey
Q1. Name of the company/establishment:
Q2. The governorate the business is located in:
Number Percentage Q3. The age of the owner(s)/founder(s): (If more than one owner exists, please
indicate so at the end of the question) 120 100
Less than 20 years old 5 4.2 20 - 29 years old 22 18.3 30 - 39 years old 46 38.3 40 years old and above 47 39.2
Q4. The highest formal qualification attained by the business owner(s): (If more than one owner exists, please indicate so at the end of the question)
120 100
No academic qualifications 4 3.3 Academic qualification lower than high school diploma 22 18.3 High school Diploma 40 33.3 2 year diploma 23 19.2 Undergraduate degree or above 28 23.3 Other 3 2.5
Q5. Before starting up your current business, what was your accumulated business and working experience? (If more than one owner exists, please indicate so at the end of the question)
120 100
No experience 17 14.2 Less than 1 year 11 9.2 From 1 year to 3 years 22 18.3 From 4 years to 10 years 29 24.2 More than 10 years 41 34.2
Q6. Have you had any financial and/or business administration training prior or during establishment?
118 100
Yes 35 29.7 No 83 70.3
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8. Concluding Remarks
The SME sector in Oman requires significant reforms in order to grow, be competitive, dynamic and add value to the economy and society at large. Drawing from the findings of the two surveys, targeting Omani entrepreneurs and SME owners on one hand and domestic lending institutions on the other, this paper has outlined a strategy to develop the SME sector in Oman and listed a number of policy recommendations that are in line with the proposed strategy.
Realizing the goal of a growing, competitive and dynamic SME sector in Oman should be premised on a support network consisting of four major components as encapsulated in the strategy. The four components, namely policy and institutional support, a legal framework, access to financing and opportunities, and infrastructure support, are to be realized through a set of respective sub-components listed in the strategy and discussed in subsequent sections of the study. While having a strategy and set of policies to guide the development of the SME sector in Oman are critical components, what is even more important is an implementation that is conducted effectively, efficiently, and professionally.
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Q13. If yes, from whom? 64 100
Family, Friends, Relatives 41 64.1 Government institutions (Ministry of Commerce and Industry,
Ministry of Manpower, etc.) 10 15.6
Oman Development Bank 3 4.7 Professionals advisors 9 14.1 Other (Please specify)
1 1.6
Q14. How many people does your company currently employ either full or part time (including the founder(s)/owner(s))? Please do not include unpaid family workers and freelancers working regularly for your company.
120 100
From 1 employee to 4 employees 61 50.8 From 5 employees to 9 employees 24 20.0 From 10 employees to 20 employees 20 16.7 More than 20 employees 15 12.5
Q15. How many Omanis does your company currently employ either full or part time (including the founder(s)/owner(s))? Please don’t include unpaid family workers and freelancers working regularly for your company.
118 100
None 25 21.2 From 1 employee to 4 employees 69 58.5 From 5 employees to 9 employees 14 11.9 From 10 employees to 20 employees 3 2.5 More than 20 employees 7 5.9
Q16. What is the total capital of the business? 159 100
Less than R.O 10 thousand 87 54.7 From R.O. 10-49 thousand 40 25.2 From R.O. 50 thousand to R.O. 99 thousand 16 10.1 From R.O. 100 thousands to R.O. 249 thousand 10 6.3 From R.O. 250 thousand to R.O. 999 thousand 6 3.8 From R.O. 1 Million to R.O. 5 Million 0 0.0 More than R.O. 5 Million 0 0.0
Q17. What sources of finance did you use to start/establish this business? (Several answers possible)
137 100
Personal money from me and my family 76 55.5 Borrowed from family/friends 28 20.4 Borrowed from Oman Development Bank 10 7.3 Funded by SANAD 4 2.9 Borrowed from banks/financial institutions 18 13.1 Other (Specify) 1 0.7
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Q7. When was this business established and how long have you been running it? 118 100
Less than 1 year 15 12.7 From 1 year to 3 years 22 18.6 From 3 years to 5 years 20 16.9 From 5 years to 10 years 22 18.6 More than 10 years 39 33.1
Q8. What is the main activity of your company? 144 100
Retail trade 29 20.1 Manufacturing 12 8.3 Craft/ Artisan 23 16.0 Information and communication technology 17 11.8 Construction 16 11.1 Agriculture and fishing 5 3.5 Mining, electricity, gas and water supply 0 0.0 Transportation and storage 3 2.1 Accommodation and tourism 3 2.1 Food services 11 7.6 Others 25 17.4
Q9. Is this business your only source of income? 120 100
Yes 63 52.5 No 57 47.5 (If yes, please go on to question no. 11)
Q10. If not, what are your other sources of income? 56 100
Pension/retirement annuity 10 17.9 Full time job 33 58.9 Revenue from investments 0 0.0 Revenue from other businesses 10 17.9 Other (please specify) 3 5.4
Q11. What type of premises do you operate your business from? 119 100
Own house 17 14.3 House/room/factory owned by business 12 10.1 House/room/factory rented for business 88 73.9
Other (please specify) 2 1.7
Q12. Did you obtain any professional advice for your business? 120 100
Yes 58 48.3 No 62 51.7
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Q13. If yes, from whom? 64 100
Family, Friends, Relatives 41 64.1 Government institutions (Ministry of Commerce and Industry,
Ministry of Manpower, etc.) 10 15.6
Oman Development Bank 3 4.7 Professionals advisors 9 14.1 Other (Please specify)
1 1.6
Q14. How many people does your company currently employ either full or part time (including the founder(s)/owner(s))? Please do not include unpaid family workers and freelancers working regularly for your company.
120 100
From 1 employee to 4 employees 61 50.8 From 5 employees to 9 employees 24 20.0 From 10 employees to 20 employees 20 16.7 More than 20 employees 15 12.5
Q15. How many Omanis does your company currently employ either full or part time (including the founder(s)/owner(s))? Please don’t include unpaid family workers and freelancers working regularly for your company.
118 100
None 25 21.2 From 1 employee to 4 employees 69 58.5 From 5 employees to 9 employees 14 11.9 From 10 employees to 20 employees 3 2.5 More than 20 employees 7 5.9
Q16. What is the total capital of the business? 159 100
Less than R.O 10 thousand 87 54.7 From R.O. 10-49 thousand 40 25.2 From R.O. 50 thousand to R.O. 99 thousand 16 10.1 From R.O. 100 thousands to R.O. 249 thousand 10 6.3 From R.O. 250 thousand to R.O. 999 thousand 6 3.8 From R.O. 1 Million to R.O. 5 Million 0 0.0 More than R.O. 5 Million 0 0.0
Q17. What sources of finance did you use to start/establish this business? (Several answers possible)
137 100
Personal money from me and my family 76 55.5 Borrowed from family/friends 28 20.4 Borrowed from Oman Development Bank 10 7.3 Funded by SANAD 4 2.9 Borrowed from banks/financial institutions 18 13.1 Other (Specify) 1 0.7
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Relatively high costs of finance or loans 60 100 1 - Not pressing at all 10 16.7 2 11 18.3 3 5 8.3 4 12 20.0 5 - Extremely pressing 22 36.7 Costs of production or labor or rent 69 100 1 - Not pressing at all 10 14.5 2 4 5.8 3 12 17.4 4 14 20.3 5 - Extremely pressing 29 42.0 Availability of skilled staff or experienced managers 55 100 1 - Not pressing at all 21 38.2 2 2 3.6 3 9 16.4 4 10 18.2 5 - Extremely pressing 13 23.6 Regulations and administrative burden 55 100 1 - Not pressing at all 13 23.6 2 6 10.9 3 8 14.5 4 8 14.5 5 - Extremely pressing 20 36.4 Other (mention please) 7 100 1 - Not pressing at all 0 0.0 2 1 14.3 3 0 0.0 4 2 28.6 5 - Extremely pressing 4 57.1
Q20. The following indicators are relevant to the income generated by your firm. Please tell us whether the following indicators have decreased, remained unchanged or increased over the last year in your company:
a) Turnover 111 100 Increased 36 32.4 Remained unchanged 44 39.6 Decreased 27 24.3 Not applicable 4 3.6 b) Labor cost (including social security contributions) 111 100 Increased 67 60.4 Remained unchanged 21 18.9 Decreased 7 6.3 Not applicable 16 14.4
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Section 2: Challenges
Q18. What is currently the most pressing problem that your firm is facing? (Multiple answers can be selected)
360 100
Lacking the required knowledge 20 5.6 Finding customers 40 11.1 Competition 63 17.5 Access to finance 60 16.7 relatively high costs of finance or loans 38 10.6 Costs of production or labor or rent 47 13.1 Availability of skilled staff or experienced managers 39 10.8 Regulations and administrative burdens 45 12.5 Others 8 2.2
Q19. On a scale of 1-5, where5 means it is extremely pressing and 1 means it is not at all pressing, how pressing are each of the following problems that your firm is facing:
Lacking the required knowledge 53 100 1 - Not pressing at all 28 52.8 2 7 13.2 3 4 7.5 4 7 13.2 5 - Extremely pressing 7 13.2 Finding customers 65 100 1 - Not pressing at all 25 38.5 2 5 7.7 3 14 21.5 4 8 12.3 5 - Extremely pressing 13 20.0 Competition 72 100 1 - Not pressing at all 11 15.3 2 9 12.5 3 12 16.7 4 14 19.4 5 - Extremely pressing 26 36.1 Access to finance 67 100 1 - Not pressing at all 20 29.9 2 6 9.0 3 6 9.0 4 5 7.5 5 - Extremely pressing
30 44.8
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Relatively high costs of finance or loans 60 100 1 - Not pressing at all 10 16.7 2 11 18.3 3 5 8.3 4 12 20.0 5 - Extremely pressing 22 36.7 Costs of production or labor or rent 69 100 1 - Not pressing at all 10 14.5 2 4 5.8 3 12 17.4 4 14 20.3 5 - Extremely pressing 29 42.0 Availability of skilled staff or experienced managers 55 100 1 - Not pressing at all 21 38.2 2 2 3.6 3 9 16.4 4 10 18.2 5 - Extremely pressing 13 23.6 Regulations and administrative burden 55 100 1 - Not pressing at all 13 23.6 2 6 10.9 3 8 14.5 4 8 14.5 5 - Extremely pressing 20 36.4 Other (mention please) 7 100 1 - Not pressing at all 0 0.0 2 1 14.3 3 0 0.0 4 2 28.6 5 - Extremely pressing 4 57.1
Q20. The following indicators are relevant to the income generated by your firm. Please tell us whether the following indicators have decreased, remained unchanged or increased over the last year in your company:
a) Turnover 111 100 Increased 36 32.4 Remained unchanged 44 39.6 Decreased 27 24.3 Not applicable 4 3.6 b) Labor cost (including social security contributions) 111 100 Increased 67 60.4 Remained unchanged 21 18.9 Decreased 7 6.3 Not applicable 16 14.4
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Section 3: Financing of the firm
Q24. Do you prepare financial statements? 112 100 Yes 65 58.0
No 47 42.0
Q25. Did you record any profits from the previous year? 106 100 Yes 68 64.2 No 38 35.8
If you have a loan from a commercial bank or from any financing institution, please answer the following questions:
Q26. How long did it take to get an approval for the loan (from the date of you submitting the request for a loan)?
43 100
Less than 6 months 36 83.7 From 6 months to 12 months 4 9.3 From 1 year to 2 years 2 4.7
More than 2 years 1 2.3
Q27. What is your loan collateral? 43 100 Property 19 44.2 Equipment 5 11.6
Others (Specify please) 19 44.2
Q28. What is the average of the interest rate you are paying on your loan? 43 100
0-3% 16 37.2 3%-5% 8 18.6 5%-7% 6 14.0 7%-10% 10 23.3
More than 10% 3 7.0
Q29. What is the repayment period of your loan? 41 100
1-2 years 4 9.8 2-5 years 15 36.6 5-8 years 11 26.8
8 years and above 11 26.8
Q30. Do you pay any charges levied by your bank other than the interest on your loan account?
41 100
Yes 23 56.1
No 18 43.9
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c) Other cost (materials, energy, other) 108 100 Increased 72 66.7 Remained unchanged 20 18.5 Decreased 9 8.3 Not applicable 7 6.5 d) Net interest expenses [= interest expenses minus interest
income = what you pay in interest for your debt minus what you receive in interest for your assets]
104 100
Increased 32 30.8 Remained unchanged 21 20.2 Decreased 11 10.6 Not applicable 40 38.5 e) Profit [= net income] 108 100 Increased 24 22.2 Remained unchanged 40 37.0 Decreased 42 38.9 Not applicable 2 1.9 f) Profit margin [= the difference between the selling price and the
cost price for each unit] 102 100
Increased 16 15.7 Remained unchanged 43 42.2 Decreased 35 34.3 Not applicable 8 7.8
Q21. How many competitors do you have? 120 100
None 8 6.7 1 to 10 competitors 42 35.0 More than 10 competitors 45 37.5 Unknown 25 20.8
Q22. What method do you use to buy supplies for your business? 157 100 Cash 88 56.1 Cheque 45 28.7 Direct transfers from a bank 19 12.1 Payment/Debit/Credit cards 4 2.5 Other (Please mention) 1 0.6 Q23. Which of the following apply to your business in terms of generated
business? 143 100
Contracts (>1 year) with large reputable companies 35 24.5 Contracts/legal agreements with customers 57 39.9 Established regular customers 32 22.4
Never know where customers will come from 19 13.3
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Section 3: Financing of the firm
Q24. Do you prepare financial statements? 112 100 Yes 65 58.0
No 47 42.0
Q25. Did you record any profits from the previous year? 106 100 Yes 68 64.2 No 38 35.8
If you have a loan from a commercial bank or from any financing institution, please answer the following questions:
Q26. How long did it take to get an approval for the loan (from the date of you submitting the request for a loan)?
43 100
Less than 6 months 36 83.7 From 6 months to 12 months 4 9.3 From 1 year to 2 years 2 4.7
More than 2 years 1 2.3
Q27. What is your loan collateral? 43 100 Property 19 44.2 Equipment 5 11.6
Others (Specify please) 19 44.2
Q28. What is the average of the interest rate you are paying on your loan? 43 100
0-3% 16 37.2 3%-5% 8 18.6 5%-7% 6 14.0 7%-10% 10 23.3
More than 10% 3 7.0
Q29. What is the repayment period of your loan? 41 100
1-2 years 4 9.8 2-5 years 15 36.6 5-8 years 11 26.8
8 years and above 11 26.8
Q30. Do you pay any charges levied by your bank other than the interest on your loan account?
41 100
Yes 23 56.1
No 18 43.9
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Q6. Does your institution allocate any funds for MSMEs lending? If so
RO 5 million 1 14.29% RO 10 million 0 0.00% RO 15 million 0 0.00% RO 20 million 0 0.00% Others and please specify the amount below 3 42.86%
Q7. As a follow-up to question 6 above, by how much do you project this fund to grow on yearly basis?
1% -3% 0 0.00% 3%-5% 0 0.00% 5%-8% 1 14.29% 8%-10% 2 28.57% Others and please specify the rate below 3 42.86%
Q8. In what industries do financed MSMEs predominately operate in? Retail trade 6 85.71% Manufacturing 3 42.86% Craft/ Artisan 2 28.57% Information and communication technology 2 28.57% Construction 5 71.43% Agriculture and fishing 3 42.86% Mining, electricity, gas and water supply 3 42.86% Transportation and storage 5 71.43% Accommodation and tourism 3 42.86% Food services 4 57.14% Real estate 3 42.86% Other service activities (please specify) 1 14.29%
Q9. Provide overall rate of Success for MSME financing in your organization (aggregating all three classifications – Micro, Small and Medium) in the last 5 Years *
10% -20% 1 14.29% 20% - 30% 0 0.00% 30% -50% 0 0.00% 50% -70% 1 14.29% Others and please specify the rate below 4 57.14%
Q10. Provide rate of success for Medium Enterprises only in the last 5 Years 10% -20% 1 14.29% 20% - 30% 0 0.00% 30% -50% 0 0.00% 50% -70% 0 0.00% Others and please specify the rate below 4 57.14%
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Appendix 2: Aggregate Findings on Commercial Banks Survey
Responses Percentage
Q1. Preferred recipients of MSMEs lending: 7 %
Family businesses 4 57.14% Individual Businesses 5 71.43% Non-family partnership businesses 5 71.43% Others and please specify below 3 42.86%
Q2. Preferred stages of MSMEs lending:
Start-up firms 3 42.86% Established firms 5 71.43% Firms that are about to sign contracts with larger firms/gov 4 57.14% Firms that are already in contract with larger firms/gov 4 57.14%
Q3. Reasons for limited lending to MSMEs:
Lack of collateral 4 57.14% High risk 2 28.57% High failure rate 3 42.86% Limited or lack of required skills by owners 4 57.14% Small or limited market for growth 3 42.86% Lack or poor feasibility studies 3 42.86% Lack of financial history or position through financial statements 5 71.43%
Q4. Maximum amount willing to lend to an individual MSME:
RO 10,000 - RO 50,000 2 28.57% RO 50,000 – RO 250,000 0 0.00% RO 250,000 – RO 1,000,000 2 28.57% Others and please specify the amount below 2 28.57%
Q5. What needs to be done to enhance MSME financing?
A binding administrative requirement from CBO – a given Percentage of the total lending portfolio
2 28.57%
Improve infrastructure support for MSMEs 5 71.43% Level the plane field when it comes to completion with Large firms through a legal framework
5 71.43%
Financial institutions to invest resources in analyzing and Assessing opportunities in MSME sector
3 42.86%
Others and please specify below 3 42.86%
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Q6. Does your institution allocate any funds for MSMEs lending? If so
RO 5 million 1 14.29% RO 10 million 0 0.00% RO 15 million 0 0.00% RO 20 million 0 0.00% Others and please specify the amount below 3 42.86%
Q7. As a follow-up to question 6 above, by how much do you project this fund to grow on yearly basis?
1% -3% 0 0.00% 3%-5% 0 0.00% 5%-8% 1 14.29% 8%-10% 2 28.57% Others and please specify the rate below 3 42.86%
Q8. In what industries do financed MSMEs predominately operate in? Retail trade 6 85.71% Manufacturing 3 42.86% Craft/ Artisan 2 28.57% Information and communication technology 2 28.57% Construction 5 71.43% Agriculture and fishing 3 42.86% Mining, electricity, gas and water supply 3 42.86% Transportation and storage 5 71.43% Accommodation and tourism 3 42.86% Food services 4 57.14% Real estate 3 42.86% Other service activities (please specify) 1 14.29%
Q9. Provide overall rate of Success for MSME financing in your organization (aggregating all three classifications – Micro, Small and Medium) in the last 5 Years *
10% -20% 1 14.29% 20% - 30% 0 0.00% 30% -50% 0 0.00% 50% -70% 1 14.29% Others and please specify the rate below 4 57.14%
Q10. Provide rate of success for Medium Enterprises only in the last 5 Years 10% -20% 1 14.29% 20% - 30% 0 0.00% 30% -50% 0 0.00% 50% -70% 0 0.00% Others and please specify the rate below 4 57.14%
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Appendix 3: Selected Non-Banking SMEs Support Avenues in Oman
Supporting Institutions Support
The Public Authority for Small and Medium Enterprises**
Established through a Royal Decree No 36/2013 in 2013 which also terminated the Directorate General for SMEs in the Ministry of commerce and Industry. A subsidiary of the Ministry of Commerce and Industry that aims to achieve overall development and support of the growth of SMEs, strengthen the role of SMEs in Providing more employment opportunities, add value to the economy and contribute in economic diversification.
National Business Center** Established in 2012 and designed to work as a platform for the development and support of Omani entrepreneurs. Among others, it provides physical facilities and value added services, and capitalizes on linkages with industrial areas.
Rafd Fund** Established by the Royal Decree No 6/2013 in 2013 with a capital or RO 70 million and RO 7 million to be added to the capital annually with the objective of supporting the Omani young entrepreneurs in their endeavors to establish or develop SMEs.
Sharakah** Established by the Royal Decree No 76/98 in 1998. It functions as a closed joint stock company which encourages and supports the development of entrepreneurs and SMES in Oman. It provides customized financial solutions and has three schemes: Loans, equity financing, and bill discounting.
Intilaaqah** A program that was established in 1995 by shell Oil Company in Oman to provide training, counseling, and accountancy in addition to supporting women entrepreneurs.
Knowledge Oasis Muscat* Geared towards supporting technology-oriented businesses through connecting a variety of businesses, including HP, Oracle, Microsoft, NCR, Motorola and Huawei as well as dynamic startups.
The Knowledge Mine* Publicly funded business incubator program that offers companies with high growth potential business mentoring, office space, reduced overheads, marketing assistance, financial signposting and others.
Oman Investment Corporation* Provides private equity investments in many sectors including oil and gas, construction and aviation.
Al Omaniya Financial Services Company*
Provides financial and leasing services for individuals and businesses. It is engaged in the purchase and lease-financing of vehicles and other assets.
Muscat Finance Company* Engaged in installment financing as well as leasing on vehicles and other assets, debt factoring, working capital and receivable activities.
Sources: * Wamda at static.wamda.com
** Respective Institutions websites and written media
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Q11. Provide Rate of Success for Small Enterprises only in the last 5 Years
10% -20% 2 28.57% 20% - 30% 0 0.00% 30% -50% 0 0.00% 50% -70% 0 0.00% Others and please specify the rate below 3 42.86%
Q12. Provide Rate of Success for Micro Enterprises only in the last 5 Years. If possible, please briefly list the reasons for failure.\
10% -20% 1 14.29% 20% - 30% 0 0.00% 30% -50% 0 0.00% 50% -70% 0 0.00% Others and please specify the rate below 3 42.86%
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Appendix 3: Selected Non-Banking SMEs Support Avenues in Oman
Supporting Institutions Support
The Public Authority for Small and Medium Enterprises**
Established through a Royal Decree No 36/2013 in 2013 which also terminated the Directorate General for SMEs in the Ministry of commerce and Industry. A subsidiary of the Ministry of Commerce and Industry that aims to achieve overall development and support of the growth of SMEs, strengthen the role of SMEs in Providing more employment opportunities, add value to the economy and contribute in economic diversification.
National Business Center** Established in 2012 and designed to work as a platform for the development and support of Omani entrepreneurs. Among others, it provides physical facilities and value added services, and capitalizes on linkages with industrial areas.
Rafd Fund** Established by the Royal Decree No 6/2013 in 2013 with a capital or RO 70 million and RO 7 million to be added to the capital annually with the objective of supporting the Omani young entrepreneurs in their endeavors to establish or develop SMEs.
Sharakah** Established by the Royal Decree No 76/98 in 1998. It functions as a closed joint stock company which encourages and supports the development of entrepreneurs and SMES in Oman. It provides customized financial solutions and has three schemes: Loans, equity financing, and bill discounting.
Intilaaqah** A program that was established in 1995 by shell Oil Company in Oman to provide training, counseling, and accountancy in addition to supporting women entrepreneurs.
Knowledge Oasis Muscat* Geared towards supporting technology-oriented businesses through connecting a variety of businesses, including HP, Oracle, Microsoft, NCR, Motorola and Huawei as well as dynamic startups.
The Knowledge Mine* Publicly funded business incubator program that offers companies with high growth potential business mentoring, office space, reduced overheads, marketing assistance, financial signposting and others.
Oman Investment Corporation* Provides private equity investments in many sectors including oil and gas, construction and aviation.
Al Omaniya Financial Services Company*
Provides financial and leasing services for individuals and businesses. It is engaged in the purchase and lease-financing of vehicles and other assets.
Muscat Finance Company* Engaged in installment financing as well as leasing on vehicles and other assets, debt factoring, working capital and receivable activities.
Sources: * Wamda at static.wamda.com
** Respective Institutions websites and written media
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Eurofish Magazine 6 (2012), “Bergen Welcomes Global Fisheries Event”, 2012 European Commission Enterprise Directorate-General, “Benchmarking of Business Incubators”, Center for Strategy and Evaluation Services, February 2002 Fu,Tze-Wei, et al, “Capital Growth, Financing Source and Profitability of Small Businesses: Evidence from Taiwan Small Enterprise”, Small Business Economics, Vol. 18. 2002, P 257-67, 2002 Gibson, Tom and Van der Vaart, H.J. “Defining SMEs: A Less Imperfect Way of Defining Small and Medium Enterprises in Developing Countries”. Brookings Global Economy and Development, September 2008 Global Competition Review, “The Asia-Pacific Antitrust Review 2007”, The International Journal of Competition Policy and Regulation, 2007 Grant Thornton (April, 2013), “National Business Center: Market and Feasibility Study”, April 2013 Gulf Business (December 10th, 2012). “UAE Approves New SME Law” International Finance Corporation, World Bank Group and Global Partnership for Financial Inclusion (2011). “SME Finance Policy Guide”, 2011 International Monetary Fund and the World Bank (2010) “Financial Sector Assessment Program: Sultanate of Oman”, International Monetary Fund and the World Bank, 2010 Kaplan, Robert D, “Monsoon: The Indian Ocean and the Future of American Power”, Random House, New York, 2010 Kraemer-Eis H et al, “The Importance of Leasing for SME Finance”, working paper 2012/5, European Investment Fund Research and Market Analysis, August 2012 Kushir, Khrystyna. “A Universal Definition of Small Enterprises: A Procrustean Bed for SMEs”. http://blogs.worldbank.org/psd August 11th, 2010 Muscat Daily (March 12, 2013), “Information Technology Launches Initiative for ICT Business Incubators” Norwergian Centers of Expertise (2006), “World Class Clusters”, www.nce.no Oman Daily Observe (June 20th, 2012). “Fresh Criteria for SMEs” Oman Daily Observer (March 11, 2013), “Foreign Investment Law is Being Revised in Oman”
Oman Daily Observer (January 21, 2014), “CMA Plans to List SMEs in MSM”
Oman Tribune (March, 2013), “19 percent Growth Recorded in 2011”
OECD Policy Brief (November, 2006). “Financing SMEs and Entrepreneurs”. www.sourceOECD.org
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