Current Situation of SMEs in Saudi Arabia Essay Example for Free

Current Situation of SMEs in Saudi Arabia Essay Small and medium-sized enterprises (SMEs) are apparently the central player of most economies, mostly in terms of generating micro employment and largely due to their contributions and development impacts as quantified by increasing growth potentials towards sustainable development. The perception that the significant collaboration of SMEs within the supply chain or pipeline industry of larger companies has engaged the consensus for social responsibility that links with corporate governance. The performance of SMEs in Western and Asian countries could have revolutionized the flow of investments that lead to emergence of new industries. In this paper, the patterns of SMEs’ performance â€Å"to propel the engine of economy† will be discussed in relation with its current situation in the Kingdom of Saudi Arabia. Collective situational indicators This section of the paper aims to collectively situate the key economic development of Saudi Arabia as a brief indicator that can link to the current situation of SMEs. As recent information, we cite Saudi Arabia as one of the worlds top reformers and the â€Å"easiest† countries to conduct business that raised 15 places to rank 23rd out of 178 countries. The World Bank quoted, â€Å"Saudi Arabia to be belonging from the global top ten most competitive countries by 2010† (World Bank, 2008). In similar report from prominent online business magazine, it cited that Saudi Arabia is â€Å"even ahead† to other Middle Eastern countries and can be compared to European economies like France and Austria (AME info, 2008). Meanwhile, Switzerland’s World Economic Forum (WEF) observed that Saudi Arabia must realign its educational system to adequately develop the foreseen potentials of the private sector, contingent to boost the economic diversification process as a strategic procedure of â€Å"weaning† from the Kingdom’s mother-industry of petroleum products. To cite, adequate skilled-labor are needed to totally ensure continuing employment and to be self-reliant from being dependent with foreign-owned companies that represents about one-third of the industry (WEF, 2007). Critical consideration The SMEs in Saudi Arabia comprise about 93% of total enterprise units that absorbs an estimated employment of 24. 7% Saudis. The study conducted by the Council of Saudi Chambers of Commerce and Industry (CSCCI) and the United Nations Industrial Development Organization (UNIDO) has accounted the primary problem of small-medium entrepreneurs as â€Å"deficient in credit-finance-capital facilitation†. (SIDF, 2008) Realizing the SMEs’ role The Saudi Industrial Development Fund (SIDF) has established a â€Å"loan guarantee scheme† aim to facilitate the SMEs application for commercial bank loans. To avail commercial bank loans, the SMEs’ applicants must be under the category of â€Å"small company† that has â€Å"lesser asset† of SR. 50 million and required to employ 250 workers, and to generate annual revenues of SR. 10 million. (SIDF, 2008) As cited, the loan guarantee scheme has specifically outlined the guidelines, such as (1) initial infusion of SR. 200 million representing equities of 50% from 10 commercial banks and another 50% from the government; (2) guarantee fees for SIDF handling charges or facilitation of 175 basis points; (3) guarantee maximum amount of SR. 1. 5 million and 75% of the outstanding or current loan; (4) loan period from 7 years for fixed assets and 4 years for working capital; and (5) proposed imposition of bank loan rates at 400 â€Å"basis points† above the Saudi Interbank Offer Rate (CSCCI, 2008). The â€Å"divestment† of the financing scheme has been proposed to future investments by SIDF to access more funding support and produce substantial returns on investments. (CSCCI, 2008) On the other hand, the Saudi Arabian General Investment Authority (SAGIA) has proposed ruling on â€Å"collateral loans† to exclude fixed assets on owner-occupied-residential housing which is under the SIDF. Whereas, shall effect the collateral in pursuance with the Public Collections Act that implement accelerated collateral enforcement procedure with no restrictions of the Shariah (law of Koran) Islamic court. The lending bank shall collect 75% from lent amount upon failure to pay in 3 consecutive months. (SAGIA, 2008) A multilateral capital investment to SMEs in Saudi Arabia has been proposed by the Saudi Arabian General Investment Authority (SAGIA), the Venture Capital Bank of Bahrain and the Global Emerging Markets (GEM) investment-operations in New York, London and Paris. The multi-entity investment is a partnership aim to venture-out an â€Å"independent† $100 million dollar capital budget to develop opportunity-growth of SMEs. To cite, the opportunity-growth is envisioned to establish the SMEs’ market direction, micro-macro business-economic environment and strategic market-values. (CSCCI, 2008) SWOT Analysis and general perceptions The Strength, Weakness, Opportunity, Threat (SWOT) analysis depicting in this section of the paper is based upon the initially indicated findings on the current situation of SMEs in Saudi Arabia. Strength One of the indicated strength of the SMEs in Saudi Arabia is its capability to contribute employment of 24. 7%, as indicated by Saudi Industrial Development Fund (SIDF) and the Council of Saudi Chambers of Commerce and Industry (CSCCI). The composition of SMEs to represent 93% of enterprise units is an added strength of capable performance. In support to this perception, an earlier claim on the performance of SMEs has been cited that 90% of â€Å"diverse† business from the small entrepreneurs of public sector basically operates in trade and manufacturing of petroleum by-products that is expected to contribute 50% of local industrial production (Bundagji, 2005). Weakness Like most common issues confronted by SMEs worldwide, the â€Å"private volunteerism† to industry development has yet to convey â€Å"popular† performance prior to government’s intervention. The foreign entities recognition to industry-wide participation of the private sector rekindles the Saudi government to focus on human development. The domestic competition on labor skills as attributed by emerging foreign-based companies could weaken the SMEs’ performance relating to technology advancement, in which translated into production output. Opportunity According to SDIF and CSCCI, a clearer vision for SMEs’ growth-opportunities is underway since the guarantee loans schemes would comprehensively address the industry issues pertaining to accelerate the private sector’s initiative. The comprehensive program is consistent with the financing-support-scheme, subsidies, training and technology innovation, and flexible micro-macro business-policy environment. This â€Å"growth-opportunities† could be deduced as referring to â€Å"tangible† opportunity for local and international partnership, wherein the abovementioned multilateral capital investments to SMEs can be deduced as â€Å"availing† such an opportunity. In which case, the SMEs creation of growth-opportunities could be a continuing â€Å"pipeline† or business linkage of investment. Threat It can be perceived that the prevailing â€Å"assimilation† of SMEs to industry-based economy of Saudi Arabia, as a result of comprehensive growth-opportunity scheme, could pave the way for strategic industry-market positioning of foreign investors. The effect of highly competitive domestic production could draw impact to the world economy, considering that Saudi Arabia is a major supplier of petroleum products to the world market. In addition, an â€Å"economic glut† may be a phenomenon in the production performance affecting the economic activities, in which when supply is high demand is low, and vice-versa. The control or monopoly in foreign trading on oil and its by-products may subsequently occur at the global distribution while â€Å"shrinking value† or total reduction of prices is thrown at the feet of local producers. The threat in foreign trading may only subsist by major stakeholders (wholesalers) and rich consumers like the European countries, US and Japan, to exemplify a few. However, generally the poor economies may end up into recession as a result of decelerated spending due high cost of commodities related to energy-dependent industries on manufacturing of goods. To sum up, the SWOT analysis aim to â€Å"explore the gaps† of the small business sector in Saudi Arabia, in which the gaps could be used as a derivative to reach out in understanding the critical role of SMEs in the general and specific perspectives of the industry. The perceptions may lead to â€Å"measures of undertaking† an assertive and extensive method of studies. Findings and conclusion The SMEs in Saudi Arabia could achieve substantial growth opportunities through intensive institutional support. It is critically viewed that the business environment policy must totally establish a prime-fund-facility that facilitates the crediting scheme, wherein sound financial management accountability would be reflective of governmental fiscal administration to account the financial needs of the private sector. As briefly reviewed, Director Fatin Yousef Bundagji of Women Empowerment and Research at the Jeddah Chamber of Commerce and Industry (JCCI) has found that the SDIF and CSCCI guideline is burdensome and highly extensive that results lesser applications. Bundagji implied that the Saudi Arabian General Investment Authority (SAGIA) and the Saudi Arabian SME Development Authority (SASMEDA) are not officially a functional authority to provide overall facilitation to the SMEs (Bundagji, 2005). Thus, the earlier finding of Bundagji addresses the current issue of SMEs that must be unified or organized as a coalition to promote its national identity, role and legal representation to the industry. It may be then concluded that the unification process of the SMEs may create â€Å"decentralized† corporate governance to empower the industry sector in Saudi Arabia. This perspective may totally supplant the â€Å"foreign archetype† with ingenuity of locally-generated development-framework of SMEs, to propel the sustainable technological-economic restructuring of the Kingdom from its â€Å"keepers† that amass the wealth of the desert and dwarfed the socio-economic-cultural autonomy of future population. References AME Info (2008). ‘Saudi economic reform to accelerate in 2008’. Retrieved 12 July 2008 from http://www. ameinfo. com/144599. html. Bundagji, F. Y. (2005). ‘Small Business and Market Growth in Saudi Arabia’. Arab News. Retrieved 12 July 2008 from http://www. benadorassociates. com/article/18663. CSCCI (2008). ‘40 Billion Riyals Funding For the National Industrial Strategy Programs’. Council of Saudi Chambers of Commerce and Industry. Retrieved 12 July 2008 from http://www. saudichambers. org. sa/index_en_6341_ENU_HTML. htm. SAGIA (2008). ‘Why Invest in Saudi Arabia? ’. Saudi Arabian Investment Authority. Retrieved 12 July 2008 from http://www. sagia. gov. sa/english/index. php? page=why-invest-in-saudi-arabia. SIDF (2008). ‘Saudi Industrial Development Fund’. Retrieved 12 July 2008 from http://www. saudinf. com/main/e32. htm. SIDF (2008). ‘Progress in Industrial Investment’. Saudi Industrial Development Fund. Retrieved 12 July 2008 from http://www. sidf. gov. sa/english/Saudi-Indu/Industrial/Progress-i/index. htm. WEF (2007). ‘Assessing Competitiveness in the Arab World: Strategies for Sustaining the Growth Momentum’. The Arab World Competitiveness Report 2007. http://www. weforum. org/pdf/Global_Competitiveness_Reports/Reports/chapters/1_1. pdf.