SMEs: Key Driver of Sustainable Growth in Saudi Arabia and the UAE

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Funding Souq Editorial Team
Tech Writer
Sep 28, 2022
Funding Souq’s editorial team comprises experienced finance and investment professionals that are on a mission to fuel SME growth, create jobs, and drive the economy forward. They aim to share their extensive experience and industry know-how to empower entrepreneurs and investors alike.
Sep 28, 2022
Small and medium enterprises (SMEs) are the backbone of the economy. They represent 90 % of businesses and more than 50 % of employment worldwide. SMEs are at the top of the political agenda in the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) ). These countries strive to diversify their economy and generate less oil-reliant and more sustainable economic growth. Economic diversification through the development of SMEs is critical in the long term as the demand for fossil fuels from developed countries is likely to diminish as they fulfill their pledge to move to cleaner energy sources. 
The SME sector contributes to around 30 % of the Gross Domestic Product (GDP) in the KSA and 40 % in the UAE and it is growing fast. For example, the contribution of SMEs to the Saudi GDP has increased by 45% to 29 % between 2016 and 2021. 
This article gives an overview of the SME sector in two of the largest economies in the GCC
– Saudi Arabia and the UAE. Why are SMEs so important for sustainable economic growth?
What are their main challenges? What support do they need to overcome these challenges?

What is an SME?

SMEs are businesses that have revenues, assets, or a number of employees below a certain
threshold. Each country has its own definition of what constitutes an SME. In the KSA and the UAE, SMEs are businesses that employ less than 250 people and have less than 200 million riyals in annual revenue. 
In both the KSA and the UAE, around 70 % of SMEs are in trade and construction, followed by around 10 % in manufacturing. Business activities range from single artisans with few or no paid employees to high-growth firms offering innovative goods and services. Business models can target local, national, or international markets.

SMEs are Essential for Sustainable Economic Growth
SMEs are a critical component of a healthy and sustainable economy. Compared to bigger
companies, their main strength is flexibility. They can innovate and respond quickly to changing market conditions.
There are more than 660,000 SMEs in the KSA and 350,000 in the UAE. They account for more than 90 % of businesses in both countries.
SMEs are key drivers of local labor markets: more than 50 % of private sector workers are
employed by SMEs in the KSA. In the UAE, SMEs provide jobs for 86 % of the private sector
These businesses play a critical role in fighting high levels of youth unemployment in the KSA (28 % unemployed) and the UAE (11 % unemployed). With youth comprising around one-third of the population in the Arab world, SMEs provide much-needed employment opportunities to absorb young labor market entrants. They create job opportunities across a wide range of geographic areas and sectors, foster innovation, and provide skills development opportunities for young workers. In 2021, SMEs created almost 80 % of jobs in the KSA.
SMEs are also a great opportunity to harness women’s entrepreneurial potential. The GCC has one of the world's lowest female labor force participation rates (around 30 % in the KSA in 2022 and 47 % in the UAE in 2021). SMEs support greater economic inclusiveness and women's economic empowerment in the region. The share of female-led SMEs doubled in the KSA since 2016, reaching 46 % in 2022. 50 % of SMEs are owned by women in the UAE.
Bridging the SME Finance Gap
Despite being the engines of local economies in the region, the majority of SMEs in the KSA and the UAE continue to face major barriers to their growth. Their main challenge is the lack of adequate financial services. The SMEs’ credit gap - i.e., the difference between the supply and the demand for funds - is estimated at $250 billion in the GCC in 2019. The average share of SME lending of total loans is only 2% in the GCC against 27 % in OECD countries. This low share of SME lending reflects the historical structure of oil-based economies, dominated by very large enterprises.
The KSA and the UAE have both established long-term plans to develop the SME sector and have set up specialized agencies to offer targeted support to SMEs. In the KSA, the Small and Medium Enterprises General Authority (Monsha'at) was created in 2016 to empower SMEs to drive the growth of Saudi Arabia’s economy. Its mission is to support SMEs via the government program Vision 2030. One of the core objectives of Vision 2030 is to
facilitate SMEs’ access to funding by encouraging financial institutions to increase the share of loans they allocate to SMEs from 5 % to 20 %. The ultimate goal is to raise SMEs' contribution to national GDP to 35 % by 2030.
While SMEs have traditionally depended on banks and finance companies for credit, fintech has quickly become another funding channel. Commercial banks are generally reluctant to lend to SMEs because they are perceived as high-risk. Also, there is an imbalance between cost and benefit from servicing these businesses compared to larger corporates that typically require the same time and effort to underwrite. This in turn presents an opportunity for fintech as they leverage the power of technology to streamline SME funding. These tech-enabled firms have unlocked new sources of capital for the SME sectors and in many cases have more flexible terms than the banks, which will expedite SME growth.

Deloitte(2019). Bridging the SME finance gap in the GCC

IMF(2019). Enhancing the Role of SMEs in the Arab World—Some Key Considerations 

Monsha'at Thematic Reports


Tripathi, A. (2019). SMEs in Saudi Arabia-an innovative tool for the country’s economic growth. Sci. Int.(Lahore), 31(2), 261-267.

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