SMEs in Oman Lending Requirements and Poor Management

Question: Discuss about theSMEs in Oman: Lending Requirements and Poor Management. Answer: Introduction The Oman SMEs are important drivers of the economy. However, the Oman SMEs face challenges in acquiring adequate funds. Oman face such challenges as need for collateral, conditional lending requirements and poor management of cash follow and ability to make scheduled repayment. Nevertheless, Oman SMEs have a range of sources to acquire funds including government support through Sanad Programmme, funds created by the government through MoCI (SMEs Development Fund) and Sharakah Fund for Development of Oman youth projects. Oman SMEs have also benefited from Esthmar Venture Capital and long term loans through Oman Arab Bank via Tomouhi Programme and Intilaaqah Enterprise Fund (IEF). The Oman government has created Oman SMEs Development Fund to fund the SMEs in Oman. Evaluation of Various Sources of Finance Available For Oman SME's Government Assistance in General without Naming any Specific Fund The Sanad Programmme within the Ministry of Manpower (MoM) was established by the government in 2001 to offer financial support to the SMEs during their formative years. Sanad assists SMEs through soft loans, besides mentorship and helping with government services. The programme gives loans at favorable interest rate of 2% thanks to government subsidies thereby reducing the borrowing cost as well as risk for SMEs. The Sanads SMEs approved applicants get their funding via the Oman Development Bank. The government has created funds through MoCI in April 2012 by establishing SME Development Fund managed by National Company for Projects and Management (NCPM). Sharakah Fund for Development of Youth Projects has also worked in handy with MoCI and Sanad established in 1988 by royal decree thereby helping youths to undertake their business ideas. Via the collaboration between the Director General of the SMEs the United States Small Business Administration and the MEPI, the LGP provides eighty percent guarantees for SMES loans up to $650,000 with the rate of interest ranging from 3.4- to 4.3 percent. Venture Capital with Specific Oman Venture Capital Company (Ethmar) is being seed funded by Al Raffd Fund. The funding of a target capital of RO 10 million. The board of directors represented by shareholders have been mandated to manage the funds. Esthmar has invested in equity of high growth potential private sector start-ups SMEs. It has only cultivated a culture of innovation, promoted new ideas, provided a platform for expanding regionally as well as eventually stimulated the creation of jobs in Oman. It has targeted opportunities in the SMEs sector in Oman. The fund has preferred such sectors as oil and gas, agribusiness, retail, tourism and information technology. Ethmar has invested in early stage companies which exhibit a clear path to growth as well as profitability and with competitive advantage alongside those that can compete locally, regionally and even internationally with a minimum requirement for investment of RO 100,000 and a maximum of 10% of the paid up capital of Ethmar that is RO 1 million. Ethmars promoted had invested the application of various SMEs in 2015 and considered them for potential funding. Three promoters were selected for funding including Najah Salim al Abdulsalam (communicate-hearing assessment, diagnosis, and speech therapy services), Mansoor al Mahrouqi, Ahmed ali Salim al Mahrouqi (Victoria Lake-oil and gas services) as well as Munther al Battash (Ruken Al Pizza-food and beverage company). Long Term Loans The Oman Arab Bank that is owned 51% by the Oman International Development and Investment Company and 49% by Arab Bank has commenced a new programme for the SMEs financing. The programme is called Tomouhi or my ambition. This fund works in partnership with the MoCI and Oman Development Banks loan guarantee programme. Moreover, BankMuscat has financing design particularly for SMEs in Oman and have been additionally joined by many private funds. Intilaaqah Enterprise Fund (IEF) which is a $17 million fund has been designed to stimulate SMEs among Oman youths through the provision of funds, business development services as well as guidance. Oman-based Al Anwar Holding is offering a more traditional private-equity approach to Oman SMEs. It is publicly traded on the Muscat Securities Market. It is a for-profit institution investing in its specialty sectors. The Oman SMEs also get funds from long term loans particularly from the banks. Apart from equity and owners finance, almost eighteen percent of small and medium firms acquire capital from banks and other financial institutions. These institutions give finance to small and medium businesses under specific terms. Unlike equity, banks and other institutional borrowings have got immediate reflections on the cash flow. Credit acquired from banks and other financial institutions are subjected to interests which sometimes become a challenge to small businesses. Even though the interest rate is high most of small and medium size businesses still depend on bank loan for expansion and growth. Angel Investors Angel investors are also noticed to be very important source of capital and finance to small and medium size enterprises in Oman. Angel investors are rich individuals who are always willing to venture into various businesses.[1] They have provided financial support to various small and medium size enterprises in Oman. They enter into various organizations either as partners or as financiers. Angel investors invest largely into the economy by starting various small businesses and financing others as well.[2] Problems and Challenges Asymmetric Information The Small and Medium Enterprises also face a challenge of asymmetric information which complicates the process by which they select among the range of sources available for funding. With the limited information available for the SMEs, there is an increasing difficulty facing SMEs to arrive at the ideal method to choose the best financing alternatives.[3] The information asymmetry thus make the Oman SMEs to embrace the old pecking theory thereby preferring internal financing like cash flows from their business instead of external financing like loan from banks hence limiting their ability to benefit from the economies of scale. Conditional Lending Requirements Oman SMEs financing face challenges related to a range of government entities based on conditional lending. This condition lending requires the beneficiaries of the loans to purchase a given equipment from a particular agent or purchase needed supplies from a pre-determined agents.[4] The practice remains contradictory to the principle of entrepreneurship and more significantly, it prohibits beneficiaries of the loan to run the business in a cost-effective as well as flexible manner as a result of these complications. The SMEs thus do not have the freedom to choose vendors and suppliers locally or abroad. Requirement of Collateral Banks require SMEs to provide collateral as security before being approved for loans. SMEs hence have less access to bank credit compared to large enterprises. Banks in Oman still practice the traditional way of lending SMEs against collateral which makes the SMEs to be underfinanced. The current procedure in the banking sector allows banks to categorize any business loan as either a non-paid loan in case the SMEs fails to service the loan for ninety days. The banks get it easy to take non-payment cases to the court for recovery of the lent amount making thereby inflicting fears on SMEs to seek out for bank loans. This is because these kinds of loans remain backed by valuable collaterals like lands, retirement wages as well as business itself. The ninety day- non-payment periods is harsh to the SMEs and should be extended to the one-eighty days. Banks Hesitant to Lend The IMF and World Bank studies have shown that Oman banking sectors face various challenges from both demand and supply side which confine the extension of its lending to the SMEs. On the supply side, the restricted competition among the banks and a high margin needed from lending to consumers that provide little incentives for banks to give lending to SMEs given the high inherent risk linked to SMEs.[5] Banks in Oman have invested little resources needed in the examination of SMEs credit risk as well as credit evaluation tools. On the demand side, the studies have shown that SMEs present banks with restricted pool of viable projects. There also seems to be a lack of transparency as well as management expertise alongside prevailing poor financial infrastructure which together offer little incentives for banks to extend lending to SMEs in Oman. Poor Management of Cash Flows and Inability to Make Scheduled Loan Repayment Small and Medium Enterprise face challenges in their management of cash flows as well as ability to make scheduled repayment of loans to the banks. These challenges stems from delayed payments SMEs face in dealing with the agencies of government as well as large firms to which deliver services via contractual agreements. The challenge besides other problems linked to the SMEs sector adversely affect the operations of the Oman SMEs. The failure of SMEs to meet the scheduled repayment to the banks results from the fact the even SMEs that have succeeded face various challenges in regards to cash flow. The SMEs sometimes provide services to the government entities as well as large firms that do not honor their timely payment particularly in government payments. Accordingly, the problem translates into cash flow problems for SMEs in Oman and by subsequently adversely affect their scheduled loans repayment to the banks. High Cost of Undertaking Professional Feasibility Studies Oman SMEs also face high cost of conducting professional feasibility studies as well as lack of collateral required to obtain a line of credit. These two challenges have left the Oman Development Bank (ODP) as the primary lender in the Oman SMEs sector. The ODB business model is anchored on low cost of funding (government equity) in collaboration with vast interest rate subsidies employed to the long-term loans it extends.[6] The IMF and World Bank have pointed out that the prevalence low rates of interest from ODB has crowd out the long-run lending to SMEs from the commercial banks. Suggestion for SMES and Financial Institution to Smoothen Financial Flow SMEs play a key role in the development of the Oman economies and there is a need to appreciate the attempts that SMEs make to boost the economy across all sectors. Some of the suggestion include: The government needs to put more emphasis to explore the opportunities presented by the SMEs and grow the economy by a double digit. Accordingly, some of the key suggestion through which the government can intervene is by promoting and helping the SMEs to create efficient business plans which will convince the banks and other financial institutions to fund the SMEs. Maintenance of detailed accounting finance records should also be encouraged so as to avail the required information by the financial institution to show the repayment records of SMEs to help the banks have trust of repayment within the schedule. The government should also ensure that both banks and other financial institutions reduce the currently hiked cost of transactions as well as bureaucratic procedures that discourage the SMEs from considering debt financing.[7] There is also a need to use the government sources for soft loans including the Sharaqah, Sanad and Intalaqah instead of commercial banks. This will stimulate the acquisition of these soft loans by the SMEs that cannot give collateral required by the commercial banks. In so doing, the SMEs will boost their capital base and benefit from the economies of scale hence fastening the Oman economic growth. What the Government has done The government of Oman has already created Oman SMEs Development Fund that directly go to SMEs. This exemplary step has been undertaken to strengthen the SMES industry to boost the SMEs growth from the current beginning growth curve of Oman SMEs sector. The government has also engaged in exclusive SMEs development symposium that took place in Seeh Al Shamikhat, Balm, much has changed in Oman SMEs sector. The government is using these symposium to create an enabling environment for the SMEs as a mechanism to provide employment opportunities for the youth. Conclusion The SMEs in Oman in taking the center stage and they are growing at an escalated rate. The government has taken various steps including the creation of SMEs Development Fund an organized various symposium to create enabling environment for the SMEs growth. SMEs will greatly contribute to the economic growth of the Oman economy and banks and other financial need to avail funds to these enterprises without need for collateral to facilitate this growth.[8] This will in turn lead an increased in the GDP of the Oma which will also benefit the Oman banks and other lending intuitions. References Ashrafi, Rafi, and Muhammad Murtaza. "ICT adoption in SME in an Arab GCC Country Oman." E-strategies for Resource Management Systems: Planning and Implementation (2010): 371-376. Ashrafi, Rafi, and Muhammed Murtaza. "Use and Impact of ICT on SMEs in Oman." Electronic Journal Information Systems Evaluation 11, no. 3 (2008): 125-138. Magd, Hesham AE, and Mark P. McCoy. "Entrepreneurship in Oman: Paving the Way for a Sustainable Future." Procedia Economics and Finance 15 (2014): 1632-1640. Ongori, Henry, and Stephen O. Migiro. "Information and communication technologies adoption in SMEs: literature review." 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