Question

Discuss the best funding options for Small and Medium Business Enterprises (SMEs) in Saudi Arabia to keep cost of capital optimum.

Answer 1

Best funding Options for SMEs in Saudi Arabia

1.SME Loan Guarantee Programme managed by the Saudi Industrial Development Fund (Kafalah Programme)

Kafalah program was established with the support of the Ministry of Finance through the Saudi Industrial Development Fund (SIDF) and the banks of KSA. The program is tailored to guarantee the participating bank on the financing given to Small and Medium Enterprises (SMEs). The main purpose of this program is to encourage banks to provide support to the SME segment, which plays a significant role in the growth of the local economy.  Several industries and business activities may qualify for the guarantee program such as Education, Tourism and leisure, Constructions, Medical-related, Commerce, Contracting Services, Transport and communications, Service-related among others. This criterion, however, shall still be subject to the credit standards and target industries of the bank.

• The Kafalah guarantee only applies to Sharia-compliant financing allowed for banks
• The maximum financing amount eligible for this program is SAR 2 million
• The guaranteed amount offered in line with Kafalah is for a maximum of SAR 1.6 million and a minimum of SAR 80,000.
• The above-mentioned limits depend on the guarantee amount, which should not exceed 80% of the total finance amount granted to the client by the bank
• The guarantee issued must match the financing duration granted by the bank but only to a maximum period of seven (7) years

2.Monshaat

Established in 2016, the objectives of the General Authority for Small and Medium Enterprises “Monshaat” are to organize, support, develop and sponsor the SME sector in accordance with best global practices, to increase the productivity of these enterprises and increase their contribution to the GDP from 20% to 35% by 2030.Monshaat works on supporting, developing and nurturing the SME sector in line with best global practices by implementing and supporting programs and projects to promote the cultural and spirit of entrepreneurship and innovation, and diversifying sources of financial support for SMEs, and stimulating venture capital initiatives, setting policies and standards for financing projects classified as small and medium enterprises.It also provides administrative and technical support for the establishments and support them in developing their administrative, technical, financial, marketing, human resources and other capabilities.In addition to supporting the establishment of specialized companies in financing, activate the role of banks and lending funds and stimulate them to play a larger and more effective role in financing and investing in enterprises, establishing and supporting the programs required for the development of enterprises, in addition to establishing comprehensive service centers for establishments to issue all the regulatory requirements

3.Commercial Banks in Saudi Arabia

Talaat Hafez, Secretary-General of the Banking Awareness Committee, spokesperson for Saudi banks, told to newspaper “The growth of banks’ financing for SMEs has increased from 2 percent two years ago to exceed 6.2 percent. Financing exceeded 133 billion riyals.”It is very low on compared with developing and developed country criteria in lending to SMEs.So Commercial Banks loan convenants are very less stringent on compared with other countries.Commercial Banks in saudi arabia are

1.Al Bilad Bank 2. Al-Rajhi Bank 3. Alinma Bank 4. Arab National Bank 5. Saudi British Bank 6.Riyad Bank 7. National Commercial Bank 8. Samba Financial Group 9. Saudi Hollandi Bank 10. Bank Al-Jazira 11. Banque Saudi Fransi 12. Saudi Investment Bank

4.Government Lending Institutions

Government specialised credit institution are providing immense funding help to sme's are

Agricultural Development Fund (ADF)

Saudi Credit and Savings Bank (SCSB)

Saudi Industrial Development Fund (SIDF)

Real Estate Development Fund (REDF)

5.Centennial Fund

The Centennial Fund is a Saudi Arabian charity established in July 2004 with a royal charter to help young Saudi men & women achieve financial independence through helping them start their own commercially successful businesses.It is an non profit organisation management.It helps saudi youth in esatblishing sme's.It also helps to increase the mangement skill of youths.

6.Murabaha (Cost-Plus Sale)

7.Private sources like from Friends,Family members,Venture capitalist firms etc..

8.Mudaraba (Partnership Financing)

9.Musharaka (Constant or Diminishing Partnership)

10.Ijara (Islamic Leasing)

11.Bay’ Al-salam (Deferred Delivery)