Muhammad Al-Jasser: Small and medium enterprises
Opening speech by His Excellency Dr Muhammad Al-Jasser, Governor of the Saudi Arabian
Monetary Agency (SAMA), at the symposium on "Small and Medium Enterprises", organized
by the Institute of Banking in cooperation with the International Financing Corporation,
Riyadh, 2 November 2010.
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Excellencies and honored audience,
It gives me great pleasure to welcome you all in the headquarters of the Institute of Banking.
I'm delighted to receive an invitation to deliver the opening speech for the symposium on
"Small and Medium Enterprises" before this distinguished elite of participants and audience. I
would like to express my thanks and appreciation to the colleagues at the Institute of Banking
and International Finance Corporation (IFC) for organizing this symposium. I will try in this
speech to shed light on some ideas related to the importance of the role of these enterprises
in the national economy, challenges facing their growth, and provision of appropriate funding
for them.
Dear audience,
The national economy consists of an integrated wide range of public and private enterprises
which utilize available material and human factors of production for providing continuous
flows of goods and services to meet the needs of the domestic society and part of external
demand. As a matter of fact, the sizes of local firms vary according to the size of labour,
capital, sales...etc. It is mistakenly believed that large-scale enterprises are the main impetus
for economic activity. Such belief has stemmed from the attention paid to these entities by
different mass media. However, the true state of affairs emphasizes that small and medium
enterprises (SMEs) play an important role in the economic activity in both advanced and
developing countries through their massive absorption capacity to employ labour force,
including those with modest and average training and scientific qualifications, apart from their
role in the daily movement of goods, services and commercial activity. For instance, small
and medium enterprises in the Euro area account for 99.8 percent of total business
enterprises, 60 percent of value added, and 70 percent of total employment. Such
percentages are not confined to the Euro area only, but many other countries in the world
may have similar percentages as well. Small and medium enterprises are considered the
most efficient and capable instrument to accelerate the pace of economic and social
development, especially in remote areas with less opportunity to benefit from development.
Apart from being the nucleus of large-scale enterprises, small and medium enterprises
provide a fertile environment for training workers and developing their skills; and help in
speeding up the turnover of small amounts of invested funds. Based on this perspective,
governments have long since paid great attention to such enterprises and enacted laws to
provide the infrastructure that would contribute to their growth and development, particularly
after having proved their capacity to reduce pressure on the public sector as regards the
provision of job opportunities. Moreover, small and medium enterprises serve as a wide
arena for developing workers' technical and management skills. They also assist large
enterprises in the marketing process and providing crude materials and primary commodities
throughout the phases of production.
Most regional and international donor institutions and organizations have a growing tendency
to provide financial resources and technical assistance to these small and medium
enterprises to be self-dependent and play their necessary role in the economy.
Dear audience,
Some may wonder what small and medium enterprises are, how we can differentiate
between them and do they have an international definition. In fact, there is much difference in
their definition at the international level, and it is difficult to reach a uniform definition. If we
depend on the capital criterion, for example, we will find that an enterprise with a capital of
10 million Euros is considered a small-sized enterprise in the European Union while it is
regarded as a medium or probably large enterprise in some developing countries. Moreover,
"small" and "medium" are two comparative words and have relative concepts that vary from
one sector to another and from one country to another. However, the general practice in
every country or region is to depend on a number of criteria, including manpower numbers,
capital, volume of annual sales and total financial position at the end of the period. In the
European Union region, small enterprises are defined as those having 50 workers and an
activity volume of 10 million Euros, while medium ones are those with 250 workers and an
annual activity volume of 50 million Euros. In the kingdom of Saudi Arabia, the Saudi
Industrial Development Fund adopts the criterion of the annual sales for defining small and
medium enterprises whose annual sales do not exceed Rls 20 million for financing purposes
according to "Kafallah" program. The World Bank has distributed a questionnaire to
commercial banks to determine a definition for small and medium enterprises. The result of
the questionnaire has showed that there is difference in banks' definitions. However, it may
be concluded that small enterprises are those with annual sales ranging from
Rls 100 thousand to Rls 5 million and workers from 2 to 49. Medium enterprises are those
with annual sales from Rls 5 million to 50 million and workers from 50 to 200.
Dear audience,
SMEs are characterized by many features including, simplicity of their establishment due to
the low value of the capital needed for their foundation and operation, simplicity of their
establishment procedures, and low cost of their establishment and administration because of
the simplicity of their administrative structure. Moreover, SMEs are featured by the
independent management by their owners who seek as much success as possible. Their
other features are: low administrative and marketing cost, and labor wages, simple routine
procedures, highly efficient communications and readily available information needed for
work therein, the usage of uncomplicated production and operation methods, the ability to
cope with new changes with regard to meeting consumers' preferences and tastes, the ability
to change the composition of labor force, production, marketing or finance polices to face
quick changes without any hesitation, helping them to overcome economic cycles and
changes. In addition, SMEs are also characterized by the freedom to enter and exit the
market because of the modest ratio of their liabilities to fixed or full assets, and the easiness
to convert small enterprises into liquidity in a short time without incurring a significant loss.
Furthermore, the exit of a SME will have no significant impact on the market. Finally, SMEs
are flexible to move and spread geographically. In spite of these features, the growth of
SMEs is facing a variety of challenges which may be similar to a great extent not only at the
level of one country only, but also at the global level. The most prominent challenges are the
high cost of capital as a result of high interest rates compared to large enterprises (LEs), the
difficulty of obtaining proper finance due to shortage of guarantees and modest credit record,
inability to compete and affect the market's powers and making advantage of economies of
scale as is the case with LEs, weak capacity to face and facilitate governmental procedures
to expand their work, and low spending on development research works.
Dear audience,
Business enterprises in the Kingdom of Saudi Arabia have witnessed notable growth over
the last years. The enterprises subscribing to the Social Insurance system have increased
from 121.5 thousand in 1426AH to 218.4 thousand in 1430AH, with an average annual
growth of 16 percent. Individual enterprises represent 93.1 percent, limited partnership
enterprises 4.7 percent, and joint enterprises 0.6 percent of the total number. These
enterprises' economic activity is concentrated in three areas, namely, commerce with
34.3 percent, construction and building with 32.3 percent, and manufacturing industries with
14.6 percent. Small enterprises employing less than five persons have accounted for the bulk
share, representing 45.5 percent of total enterprises at the end of 1430AH, enterprises with
5-59 employees constitute 42 percent, while the remaining 3.8 percent has been accounted
for by enterprises with more than 60 employees. These data show that most enterprises in
Saudi Arabia are small ones, based on the number of employees. The SME's contribution to
total GDP is low. The share of private sector gross product, which SMEs are part of, is
33 percent, while the share of SMEs in GDP is 57 percent in Japan, 64.3 percent in Spain,
56 percent in France, 44 percent in Austria, 43 percent in Canada, 33 percent in Australia
and more than 50 percent in the United States. The SME's modest contribution to GDP in
Saudi Arabia could be ascribed to the immensity of the oil and public sectors, being the main
catalyst for economic activity.
SMEs coverage in the national income accounts might be low.
Dear audience,
Small and medium enterprises are facing clear challenges to obtain the necessary funding to
meet their expansion needs because of several reasons; one of which is the lack of
guarantees for granting credit. To overcome this problem in the Kingdom, the Ministry of
Finance, in cooperation with Saudi banks, has established "Kafalah Program" for financing
small and medium enterprises. It is a program administered by the Saudi Industrial
Development Fund with a capital of Rls 200 million to cover a proportion of the risk of the
funding entity in case the guaranteed enterprise fails to repay the finance or part thereof, and
to encourage banks to finance viable small and medium enterprises, which cannot provide
the necessary guarantees or accounting records that prove their eligibility for funding. The
program has been performing well since its inception in 2006 up to the end of 2010. The
number of guarantees approved during the period amounted to 1,668 with a total value of Rls
644 million against loans to the tune of Rls1.6 billion granted by banks under the umbrella of
the program, which benefited about 1,113 small and medium enterprises. This is in addition
to loans provided by the Saudi Credit and Savings Bank, for financing young people and
small enterprises, as well as the Centennial Fund, and Abdul Latif Jameel's "Finance
Program" that provides material support for youth's projects and training courses.
Dear audience,
In conclusion, I wish to emphasize that the status of small and medium enterprises in the
Kingdom still needs a lot of care and an appropriate environment to perform their required
roles in the economy, especially in the field of Saudization of jobs. This important symposium
may, hopefully, discuss this topic from its different aspects and provide the necessary
recommendations to assist competent authorities in making appropriate decisions for this
important sector.
Thank you all for listening and wish you success.