Digging Into RAKBANK’s First UAE SME Confidence Index

Digging Into RAKBANK’s First UAE SME Confidence Index 

Thought Leadership

The report, released on April 1, demonstrates that UAE SMEs have not only rebounded after the pandemic years but are bullish about the future.

RAKBANK takes pride in describing itself as the UAE’s SME bank. With more than current 80,000 SME customers, 35% to 45% of which are startups, it has every right to. What’s more, “Not many [banks] lend to SME customers given the risk associated with this sector, but we have almost 10,000 SME customers that borrowed with us,” said Dhiraj Kunwar, Managing Director, SME & Commercial Business at RAKBANK, at the launch of its inaugural Confidence Index report, released early this week.  “We are duty-bound to go beyond banking and provide something which is meaningful and that gives them intelligent insights to shape their business practices,” he added.

Notably, Raheel Ahmed, Group CEO of RAKBANK, highlighted two important developments that the survey put clearly into focus. One is the shift in SMEs’ domestic business. “10 years back, they were more into trading, importing and exporting. But today, we see a lot more business between SMEs domestically, which is a very positive factor because the dependence on other markets, though still there, is diminishing,” he said. The other is SMEs’ increasing adoption of technology, which enables them to “think of new channels, explore product-enabled services, or look to expand into the wider markets,” Ahmed said.

The bank surveyed 500 SMEs, all of which had annual revenue up to AED250 million, ensuring the UAE landscape was represented accurately across six main business sectors: Construction & Manufacturing, Transport, Trading, Public Services, Professional Services, and Consumer & Retail Services. The survey considered a number of data points, including business objectives over the next 12 months, annual revenue in the past two years, changes in the cost of doing business in the past two years, business sentiment, and macroeconomics. The index varies between 0 and 100, with 50 signalling no change, readings above 50 signalling an increase, and readings below 50 showing a decrease.

Telling Findings

The top factors boosting business optimism include the overall GDP growth of 5.70% expected in 2024, the 73% hotel occupancy rate after the COVID-19 drop, and SMEs’ massive 45% average increase in revenue over the last two years, buoyed by an upward trend in customer demand and the growth of net credit to the business and industrial sector from AED776 billion to AED836 million between March 2022 and November 2023. “Capital and debt are the raw materials for SMEs’ growth,” said Kunwar. No wonder that SMEs of all sizes and all sectors scored over 50.

On the other hand, SMEs felt pressure from the 18% drop in oil prices from 2022 to 2023, the increasing costs of doing business, underpinned by the rising cost of labour and raw materials, and the introduction of the corporate tax. “While SMEs would be wary of any taxation, in the long run, any taxation brings discipline in the country and that, in turn, enhances the bankability of SMEs,” said Kunwar. That’s why, as the report says, “It will be important to continue supporting and responding to SMEs needs to facilitate further growth and continue tapping the optimism in the market.”

Sectoral Perspectives

Differences between sectors are notable. Construction & Manufacturing, Public Services, and Professional Services all scored 62, the highest level reported across industries, reporting major revenue increases over the past two years (52%, 48%, and 47% respectively), despite significantly higher costs of doing business (60%, 66%, and 64%). 66% of Construction & Manufacturing SMEs and 67% of Professional Services SMEs cite changes in market competition as a key factor underpinning revenue changes, while 66% of Public Services SMEs mention cost of labour as the reason. However, SMEs in both Construction & Manufacturing (40%) and Public Services (39%) view increasing competition as a top challenge.

Meanwhile, SMEs in Transport displayed reserved optimism regarding their future performance with a score of 60, after a mere 29% increase in revenue over the past two years, caused by changes in the pricing of products (60%) and a 49% increase in the cost of doing business.

As for SMEs in Trading and Consumer & Retail Services, they scored 59, due to lesser increases in annual revenue (29% and 40% respectively) linked to changes in the pricing of products for Trading SMEs (68%) and lesser consumer demand for Consumer & Retail Services SMEs (70%), alongside higher costs of doing business (52% and 60% respectively). Importantly, the introduction of the corporate tax is the second biggest challenge for SMEs in Consumer & Retail Services, with 50% expecting it to have at least a high impact on their business.

Yet, vast majorities of SMEs across all sectors view the future business environment as favourable: 80% in Public Services, 72% in Professional Services, 68% in Trading, 67% in Construction & Manufacturing and Transport, and 66% in Consumer & Retail Services. Similarly, most expect their annual revenue to increase over 2024: 82% in Public Services, 69% in Professional Services, 64% in Consumer & Retail Services and Construction & Manufacturing 62% in Trading, and 55% in Transport.

As Kunwar said, “The insights are very clear that, in the aftermath of COVID, SMEs’ broader sentiment remains very bullish. This [was] also manifested in their historical revenue performance and in the way they see their business prospects going forward. Holistically, the market looks in good shape and I think we have good times ahead.”

You can access the report here.

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