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Saudi Riches Don’t Reach Entrepreneurs as Bankers Shun Startups

March 27, 2013

Saudi Riches Don’t Reach Entrepreneurs as Bankers Shun Startups

The Kingdom Tower stands illuminated at night on King Fahad Road in Riyadh, Saudi Arabia. Saudi corporations are enjoying a lending boom, with the fastest credit growth since the global economic crisis. Photographer: Waseem Obaidi/Bloomberg

When Saleh Al-Zaid decided it was time to expand Twitmail.com, the Saudi Arabian entrepreneur figured it wasn’t even worth trying to get a bank loan.

“Saudi banks don’t want to take the risk with early stage startups,” Al-Zaid said over coffee and donuts in Riyadh. Instead, the 28-year-old obtained 1 million riyals ($267,000) from an investor in local venture-capital group Oqal, financing a trip to Silicon Valley for training. He left his part-time job, and now his website, which helps Twitter users share e- mails, has 400,000 visitors on a busy day.

The banking blind-spot may be an obstacle for King Abdullah’s efforts to create jobs and diversify the economy away from oil, which brings 90 percent of government revenue. The kingdom, the world’s biggest crude exporter, is investing $500 billion on industry, transportation and housing, a program Abdullah expanded after watching revolts sweep across other high-unemployment Arab countries two years ago.

The Saudi plan is for private business to take over the growth baton from government spending. Smaller companies may struggle to play their part so long as they’re constrained by a lack of financing. Just 2 percent of Saudi bank loans go to small and medium-sized businesses, compared with an 8 percent Middle East average that’s itself low by global standards, according to the International Finance Corp., the World Bank’s private lending arm.

“In a country like Saudi Arabia, where relationship banking is very important, there has been a tendency for banks to focus on big corporates,” said James Reeve, an economist at Samba Financial (SAMBA) Group in Riyadh. “Some observers feel the needs of small and medium-sized businesses have been overlooked.”

Extra Risk

Saudi corporations are enjoying a lending boom, with the fastest credit growth since the global economic crisis. Saudi Arabian Mining Co. was the biggest borrower last year with $2.9 billion, while Jabal Omar Development Co. (JOMAR) and Sahara Petrochemical Co. got loans of more than 1.2 billion riyals.

While the terms for such loans typically aren’t disclosed, banks demand higher rates from smaller companies, adding to the risks of getting a new business of the ground, said Shadi al- Zahery, chief executive officer of property developer iZ Group, which is building homes in the eastern city of al-Khobar.

“They kill you with interest,” he said in an interview at the Jeddah Economic Forum this month. “I’ve been to a few banks, the restrictions that they give you, the return on investments they are asking for are very high.”

King Abdullah, who turns 89 this year, has eased curbs on financial flows as he seeks to increase the private sector’s role in an economy that grew 6.8 percent last year.

No Progress

Non-Gulf investors have been allowed more access to the stock market, and some bankers expect further liberalization. The benchmark equity index dropped 7.5 percent in the past year, erasing most of the gains from a first-quarter surge in 2012.

Still, equity-market financing “is more for mid-sized companies,” said Emad Mostaque, a London-based strategist at Noah Capital Markets. “There’s not been significant progress in encouraging small-business formation,” even though state “megaprojects” were designed to spur private investment.

The government understands the importance of small businesses, especially for job creation, and has started a program to improve their access to financing and offer advice, Reeve said. He said Samba Financial is participating. Riyad Bank (RIBL) is also among lenders that have set up special centers for small-business customers.

‘Early Stages’

Advice is coming from outside, too. Endeavor, a New York- based nonprofit that helps entrepreneurs, has recently started operations in Saudi Arabia, according to Walt Mayo, its senior vice president for international expansion.

“Even with the wealth of the country, its entrepreneurial environment is still in its early stages,” Mayo said in a phone interview. “There is a growing recognition of the need for risk capital, for entrepreneurs.”

With banks largely out of the picture, there’s an opportunity for venture-capital groups such as Oqal to play a key role, said Yasser Almisfer, a board member.

“The object is to provide financing that supports young businesses and the economy,” said Almisfer, dressed in a traditional white robe, in an interview in Riyadh. “We also help them by providing advice about their businesses and how to expand it.”

Oqal, a collective with 85 members, sets a range of 50,000 riyals to 2 million riyals for its investments, and the investors get a stake in the companies in return.

Saw Potential

It has advanced 4.5 million riyals to six start-up ventures since 2011 including Shakwa.net, a website where consumers post complaints against companies and government ministries. This year, Oqal wants to “diversify its projects, into food, education and other sectors,” Almisfer said. The group also plans to expand to Kuwait and the United Arab Emirates, he said.

For Internet entrepreneur Al-Zaid, the venture capitalists are filling a gap.

Oqal was able to look beyond the revenue-generation problems that startups typically experience and “saw potential in me,” he said. “This is something Saudi banks would never do.”

To contact the reporter on this story: Glen Carey in Riyadh at gcarey8@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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