3 key digital drivers for SMEs in the Gulf
SMEs in the Gulf are lagging behind when it comes to female participation. Image: Pexels
- SMEs in the Gulf are lagging behind their global counterparts in terms of economic output.
- A thriving SME sector can create new economic opportunities but it needs government support.
- Digitization can drive the development of a vibrant SME sector in the Gulf region.
Across the Arabian Gulf, countries have made bold plans to diversify and grow the economy. A common thread is the need to nurture small and medium enterprises (SMEs) as an engine of long-term growth, economic diversity, and social stability.
Digitization is critical in achieving these goals to drive the development of a vibrant SME sector in the region. Small businesses and entrepreneurs can’t do it alone. Governments and businesses in the region will need to work together closely to create an ecosystem and value chains that allow SMEs to thrive.
Gulf SMEs are lagging behind
SMEs in the Gulf Cooperation Council (GCC) have lagged behind their counterparts in the share of economic output. SMEs in the Arabian Gulf contribute 15-30% of GDP, with their share toward the lower end of that range in most Gulf countries. By contrast, SMEs contribute 40% of national income in emerging markets globally, so the gap is clear.
GCC SMEs are also lagging behind when it comes to female participation – a critical weakness because globally the small business sector generally presents fewer barriers to working women and has a greater share of female business owners. Only 14% of SMEs in the broader Arab world are led by women, compared to the global average of 34%, according to the IMF.
It’s all about jobs
At the heart of the issue is diversification from the oil sector and job creation.
A thriving SME sector creates new economic opportunities. Around the world, the vast majority of jobs are to be found in the SME sector. In OECD countries, SMEs account for 70% of employment.
The demographics of the Arabian Gulf are young, with around half of the local population under the age of 25. Job creation in the private sector simply has not kept up with the number of entrants to the workforce, which leaves young people unemployed, underemployed, or joining the ranks of an already bloated public sector. It’s a costly problem, as rising public deficits across the region show.
Governments are onboard
Governments across the GCC are conscious of the challenges and have set bold targets to address the issue. For example, Saudi Arabia wants to increase the SME share of GDP from 20% to 35% by 2030, and the UAE is looking to boost non-oil GDP contribution from SMEs from 52% to 60%.
How can digitization act as a change driver?
What will it take to get there? There are many reforms that need to occur, but digitization offers us at least some of the answers, in particular:
1. Digital solutions can help close the finance gap
Smaller businesses struggle to get access to capital. The finance gap for SMEs is well-documented around the world, and the GCC is no exception. The SME Finance Forum estimates that $123 billion is required for SMEs across the Arab region to realize their full potential, including job creation. Today, Arab SMEs are underfunded by banks and even fintechs. Only one in 20 SMEs makes use of commercial banks in Saudi Arabia today. In Kuwait, SMEs represent only 3.6% of Kuwait’s overall loan book, and in the UAE, credit to SMEs is only 5% of total bank lending – all well below the OECD average. Only 5% of regional fintechs finance SMEs in the Arab world more broadly.
Acceleration of digitization in banking and finance could broaden access to capital for smaller businesses by expanding access to banking in rural areas, shortening time-to-credit, and expanding the range of financial products offered. China’s MYBank offers a powerful example: lending almost $300 billion to 16 million small companies with near instant cash dispersal – and a default rate of under 1% – through just a few taps on the smart phone.
2. Building a digital ecosystem can improve cross-border trade
The region’s SMEs also require expanded market access to thrive. Outside of Saudi Arabia, many GCC markets are relatively small in terms of population. Giving smaller businesses the ability to sell across the GCC instead of purely locally is an important growth lever. Building a robust ecosystem for trading across borders is important.
The good news is that momentum is growing in this space. E-commerce in the Middle East surged during the pandemic and is expected to be a $50 billion market by 2022, with CAGR growth of 20% through 2022. Homegrown heroes like Mumzworld have seen a staggering 800% growth during the COVID-19 period, according to A.T. Kearney.
However, to sustain this momentum, it’s also important to build the infrastructure and ecosystem for cross-border trade. This includes investing in digital logistics platforms and operations to facilitate e-commerce logistics and last-mile delivery, as well as digitization of customs to further reduce clearance times and complexity. Agility research has found that customs digitization and reforms are particularly beneficial to smaller businesses, which are disproportionality affected by complex compliance and documentation requirements.
What is the World Economic Forum doing about shaping the future of the Arab region?
3. Digital skilling leads to digital demand
Finally, and perhaps most importantly, increasingly digitized economies require digital skills and mindsets to make them work. This has the potential to become a future area of competitive advantage for the Arabian Gulf, where we see some of the highest smartphone penetration in the world and a largely young population of true “digital natives.” That said, education systems and on-the-job training need to prioritize digital skilling with real-world business applications.
Unfortunately today, that’s not happening fast enough. Digital jobs in the GCC are fewer than in advanced economies by three times, and digital professionals in the region simply do not possess the same advanced technical skills as their counterparts elsewhere, according to PwC. Most of the digital jobs in the region are held by expats today, and 93% of digital professionals have degrees from foreign, rather than local universities, according to the same research.
That leads to a double problem: a digital skills deficit, as well as a digital demand problem – as companies in the region, including SMEs, are not adopting technology as quickly or comprehensively as they should be. Think of these issues as two sides of the same coin: companies that don’t have enough digital talent are also slower adopters of technology.
The role of businesses
Helping to build an ecosystem in which start-ups and SMEs thrive will require action from governments, and also from leading businesses in the region. As an example from our own business, Agility is working on: digital skilling and advocacy; financing and incubation; digital trade; community investments.
We want the region’s largest businesses to join us in creating value chains that allow SMEs to participate and grow – and to see SME empowerment as a core part of the value we bring to the table as successful companies. This area is one of the most critical levers for future diversification and sustainable economic growth, and we all have a role to play.
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