Small and Medium

enterprise (SME) in Oman

Contents

Definition:.............................................................................................................. 2
SMEs in Oman:...................................................................................................... 2
Central Bank policies regarding SMEs:..................................................................3
Omans chamber of commerce and industry (OCCI)s role in development of SME:
.............................................................................................................................. 3
Financial institutes dealing in SME facilities and services:.....................................4
Programs promoting SMEs in Oman:....................................................................4
Bank Dhofars Mid sector banking:.....................................................................4
Needs for finance:.................................................................................................. 5
Procedures and problems faced by SMEs in obtaining finance:.............................5
Problems faced by Banks in dealing with SMEs:...................................................5
Reference:............................................................................................................. 8

Definition:
Small and medium enterprises mainly categorized on the basis of number of
employees or their value of assets. Such limits for distinguishing SME are
different for every country. Ministry of commerce and industry defined SME in its
circular 1/2012. A company is said to SME if it fulfills the criterias stated by
ministry of commerce. SMEs are also categorized as micro enterprises, small
enterprises and medium enterprises. Micro enterprises are those companies with
less than five employees and 25,000 OMR turnover. Small enterprises comprises
employees ranging from 5 to 9 and turnover value between 25,000 OMR to
250,000 OMR whereas medium enterprises comprises employees ranging 10 to
99 and turnover value should range between 250,000 to 1,500,000. Despite of
being small scaled enterprises they contribute majorly in development of the
countys economy through assisting employment and boosting economic growth.
SME serves majorly important for Oman, who is looking forward to diversify or
expand its production base.

SMEs in Oman:
Small and medium enterprises in Oman encompass a diversity of production
units. Oman has been identified and grouped the SMEs into 15 economic
groups by Ministry of National Economy. The 15 sectors are agriculture,
mining, fishing and quarrying, manufacturing, construction, electricity gas
and water, wholesale-retail trade and car repairing businesses, transport
storage and communication, hotels and restaurants, financial
intermediaries, real social insurance, health and social work, estate and
renting services, community and personal services and domestic services.
Ministry of national economy states that the sum number of small and
medium enterprises registered in Oman is between 160,000 and 170,000.
OCCI (Oman ministry of chamber and industry) projects 90 percent as
SMEs in Oman. They actively contribute 23 percent of GDP to the country.
Khalifa al Abri, CEO of the Public Authority for SME Development, states SMEs as the backbone of
The labour
the private sector, as they are involved in providing major employment in the country.
force is figured 156,135 in 2010 (ministry of national economy, 2010).
These data signifies the importance of SME in Oman due its contribution
to GDP and employment rate.

Central Bank policies regarding SMEs:

According to central bank of Oman in circular BM 1108, 5 percent of total credit
of banks should be allocated to small and medium enterprises. The banks should
lend/ provide credit facility to SMEs and their target should not be less than 5
percent. Further the banks having additional stipulated shares should further
increase their credit. Central bank has taken measures and encouraged bank to
increase credit facility to SMEs at lower rate of interest. Central bank also
promotes every bank to start up a separate department for SMEs to fulfill the
needs of such companies. Liberal policies and procedures should be used while
lending funds to SMEs.

Omans chamber of commerce and industry (OCCI)s role

in development of SME:
OCCI has taken various steps in development of SMEs in Oman. They assist in
development of working environment which suits the small and medium
companies. They even deal with various obstructions facing the SME sector. OCCI
encourages the leadership spirit between the new businesses and motivate them
to adopt creative and innovative measures in development of their company.
They improvise the management culture for small and medium enterprises.
Guidance and consultation is also provided for owners in promoting their
projects. For leadership purpose trained international as well as local expertise
are provided for management consultancy of member companies. In some cases
support is provided for SME companies for solving issues. Communication
networks are also provided for the committee member of OCCI and also facilitate
opening of new communication channels for coordination with OCCI for
recognizing and fulfilling the committee objectives. With the request of the
member company data base is also provided for investment opportunities and
for decision making process of SME. They represent Oman in conferences put up
by regional as well as international forums regarding SMEs. Further OCCI helps
the owners of SME to resolve their troubles and thereby generate various
solutions associated to their issues. Lastly OCCI even organize seminars between
small and medium companies and various associated authorities for coordination
with OCCI for finding better ways in development of SMEs.

Financial institutes dealing in SME facilities and

services:

Financial institutes for financing SME include commercial banks of Oman and
other external sources. Total of 17 commercial banks operates in Oman. Bank
Muscat, bank Dhofar, National bank of Oman, bank sohar, Oman Arab bank etc
are some commercial banks in Oman. All the commercial banks serve SMEs in
Oman. Other financial institutes like tageer finance, Muscat finance etc are also
available for getting finance for the business. Total of six finance and leasing
companies operates in Oman. These leasing companies help to expand and
modernize SME by acquiring working capital requirements. Regardless of this,
government has opened two specialized banks. Oman Development Bank (ODB)
has an important role in the development of SMEs. it has launched programmes
and pioneering loan plan for working capital requirements of SMEs.

Programs promoting SMEs in Oman:

Many programs were developed by the government in support of the SMEs in
Oman. Sanad program was designed to motivate entrepreneurs of SMEs and
assist them in obtaining finance, training and guidance. Private sector also
contributed in the economic expansion of SMEs by participating in various
programs. Shell launched ten million dollar fund called Intilaaqah for providing
capital and continual support to SMEs. Further, other project by youth fund
project, business diagnostic centre and PEIE innovation centre all contributed in
promoting SMEs.
Bank Dhofars Mid sector banking:
Bank Dhofars mid sector banking targets the banking activities of small and
medium enterprises. This department actively participates with SMEs to
recognize their requirements for working out on possible solutions. Financial
needs are met for activities such as investments, working capital and projects
indicate that credit facilities are provided for such activities. Bank Dhofar focuses
on maintaining satisfactory credit and other facilities. The bank deals in the
following facilities/ services:

Grant loans: Loans are provided for specified periods with a range of
maturities for capital expenditure as well as working capital requirement.
Mortgage loans, loans against receipt and other customized loans are also
provided by them.
Overdraft: Overdraft facility is majorly required by small scale companies
for easy and quick finance.
Assuring the seller of the goods on credit by SME through Letters of credit
facility.
Bill discounting: Bank Dhofar involves in discounting of bills on behalf of
their customers as well as collection and payment of various customer
bills.
Bonds: Deals with all kind of bonds like performance, Bid, guarantee of
advance payments etc.

Needs for finance and SME benefits:

Small and medium enterprises require finance for various purposes. Start up
costs of new project can be obtained through external sources. Lack of
availability of huge funds leads to seek external source of finance. Purchasing
new assets also urges finance or leasing activities. Working capital requirements
are another need for financial purpose. Finally expansion and diversification of
business require funds. These needs of SMEs lead to seek out for external
sources of finance.

In these days there are many benefits given by the bank to SMEs. Majority of the
banks have opened up different department just to deal with SMEs through their
promotional techniques. In past there were only two units of finance dealing with
these sector. Their tasks comprises initiating appropriate legislation, assist in
making favorable environment for functioning of SME on smother grounds. Like
large firms SMEs also benefits many privileges. Low investment requirement
serves as a plus point in obtaining finance thus making them less exposed to
risks. SME has opportunities of better administration, development in technical
grounds and for creating scope of individual ownership as well as for promoting
self-sufficiency among the young generation. In addition various government
programs and other policies prove beneficial in supporting SMEs. Recently Bank
Dhofar has disclosed devoted SME banking services with quick processes and
tailored interest rates, whereas HSBC has launched a banking business unit for
offering the same services.
Procedures and problems faced by SMEs in obtaining
finance:

The common barrier which SMEs are facing in global economy is the Access to
finance. The reason for such hurdle is because of the banks avoiding financing
small companies because of their nature and size of operation. This problem is
faced across the globe. Some local Omani banks credit portfolio is less than 5%.
The

The most important limitation which SMEs encounter is its cost of capital, which
reflects straight on the success of these projects. Inflation rate also causes the
prices of cost of labour and material to rise, which affects the cost of operation of
the products. They even encounter competition from large firms thus leads them
to keep their prices low regardless of high operating costs to avoid cut
competition from large enterprises.

Another problem faced by SMEs is high interest rates. The interest rates paid
by them are usually higher than those of large firms. In addition problems like
lack of security and putting forward of proposals are reasons for obtaining
finance. Many SMEs faces problems through the process of obtaining finance.
Bank identify some SMEs as risk full (i.e.) the business proposal lacks is
profitability to return back their amount, therefore SMEs dont even pass the
first stage of selection. Further complexity and time taking process serves as a
disadvantage too.

Problems faced by Banks in dealing with SMEs:

Besides various problems faced by SMEs in obtaining finance, there are various
more problems faced by the Banks while providing finance to the small
enterprises. The first main reason is the complexity in providing funds without
guarantees and absence of knowledge about customer credit history. As OCCI
and central bank encouraged banks to giving funds on easier grounds, the bank
faces loyalty risks while financing SMEs. New projects which are unsuccessful or
undergo loss find it difficult to pay back the loan amount. The reason for fruitless
business is due to ineffective and inefficient utilisation of financial resources.
Other obstacles are legal procedures, shortage of raw material and market
competition. Owners personal traits also contribute to the failure or success of
the organisation, factors like lack in planning and entrepreneurial skills in
Omanis, inefficient forecasting skills also contribute to the failure of the business.
The government in Oman contributes tremendously for development and solving
issues related to SMEs, many project target SME awareness and guidance.
Interest free loans are also provided by the government for their support. Still
these small and medium enterprises undergo failures at a high rate due to the
reasons stated above.

Further the banks find it profitable to provide loans to large enterprises than
SMEs, as returns generated through large enterprises are higher. But due to the
central bank policies the bank is forced to maintain a minimum 5 percentage of
its credit facility to the SMEs. And the interest rates should be minimum for
SMEs and in some cases nil as per the policies for supporting SMEs. Therefore
the policies by central bank and OCCI measures in promoting SMEs on financial
grounds may prove demerit to the banks.

The banks should properly evaluate the management practices and financial
management of the firm, for perceiving the SME and the future benefits though
its activities. SMEs should maintain proper books of accounting records,
periodically analysing its performance, calculating and analyzing its cash flow as
well as financial ratios will help SMEs to improve its financial performance. The
owner should actively participate in the training programs as well as perform
long term profit

Reference:

1. Oman Chamber of Commerce . 2014. Welcome to Oman Chamber of

Commerce . [ONLINE] Available

at:http://www.chamberoman.com/en/Content.aspx?SecNo=108. [Accessed

27 January 2014].
2. SMEs in Sultanate of Oman: Meeting the Development Challenges . Dr.Ayoob
C.P, Balakrishnan Somasundaram
3. Central bank of oman(2014) [ONLINE] Available at: http://www.cbo-

oman.org/annual/annual2009.pdf. [Accessed 27 January 2014].

4. Ministry of National Economy (2002). The general framework of the sixth five-year

development plan, 2001-2005, Vol. 1. Muscat: Sultanate of Oman.

5. Info Center: Oman Funding | Wamda.com. 2014. Info Center: Oman Funding | Wamda.com.

[ONLINE] Available at: http://www.wamda.com/country/info-center/oman/funding. [Accessed 26

January 2014].