Non-oil sectors now contribute more than 70% to Dubai’s GDP and the emirate has made a significant effort to ensure SMEs have access to the most apt lines of credit to keep its economic diversification momentum on the up. H.E. Hani Al Hamli, Secretary General of the Dubai Economic Council, provides an insight into finance options for SMEs, the impact of Expo 2020, relations with the US, and and what is behind the emirate’s global success.
Could you please provide an overview of the economic evolution of the UAE, and Dubai in particular, and its transformation from a tiny Gulf oil producer to a global center for business, trade, and innovation?
The UAE has achieved record development since its inception in 1971. The visionary leadership of the country’s founders, the diversification model advocated by the government, and the measures to shape a conducive business environment have always been the driving forces for the rapid and continuous GDP growth of the UAE, relative to many other countries in the Middle East.
One of the distinctive achievements realized is the decreased GDP contribution of the hydrocarbon sector from 90% in the 1970s to less than 30% in recent years, owing to the boom in non-oil sectors.
The UAE has established itself as a regional and global hub for business and finance. This has led the country to be one of the main destinations of FDI in various sectors. Furthermore, there has been a paradigm shift in the development strategy from the focus on traditional sectors to the emphasis on high-value ones. An enabler of this economic model is the UAE’s knowledge-based strategy that is driven by innovation and creativity.
Dubai is an open and dynamic economy. It is now considered one of the fastest growing economies in the world. Diversification, world-class infrastructure, and pro-business policies, among many other factors, have contributed significantly to the success story of the emirate.
The Dubai Economic Council (DEC) reports unveil that Dubai’s overall economic growth has been exceptionally high over the past few decades. Dubai’s GDP grew between 1975 and 1990 at around 6% per year, and for the last 15 years it has grown at almost 9% per year.
In compliance with the UAE’s vision, Dubai has embraced innovation and smart-city solutions – in addition to measures to support the Islamic economy – to cope with the ongoing changes happening in the global and regional economy.
With the world’s sixth largest proven oil reserves and seventh largest gas reserves, it is generally accepted that the UAE’s economy relies on natural resources. However, this doesn’t clarify how in contrast to many oil-rich countries and despite the oil price collapse in 2014, the UAE’s GDP expanded by 4.8%. What has been the role of DEC in promoting economic diversification and sound macroeconomic policies?
Since its inception in 2003 at the initiative of His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, the Dubai Economic Council has been playing a major role in supporting the government of Dubai’s economic policy decision-making.
The DEC comprises leading businessmen and officials representing the most vital sectors of the emirate’s economy, and a Secretariat General encompassing a world-class team of economists, strategists, researchers, and legal advisors.
The DEC has transformed itself into a vital player in advancing Dubai’s economic agenda by providing the emirate with sound economic policy recommendations that are the culmination of extensive, cutting-edge research, and dynamic dialogue built on the contributions of representatives of the public and private sectors and world-renowned academics.
As Dubai’s position in the global economy gained momentum, the DEC evolved to accompany the growing needs of Dubai and the UAE as a whole, which stands as testimony to the DEC’s crucial role in shaping Dubai’s economic reality. Our ambitious agenda is shaped by a set of mandates from which our vision, mission, and strategic objectives are drawn with an eye to not only be an integral partner in Dubai and the UAE’s economy, but also to turn the DEC into a strategic center for economic policy research and study in the region.
The DEC’s vision is to be the strategic partner for the government of Dubai in economic policy-making. Our mission is to advise the government on innovative economic strategies, and advocate sound economic policies that promote a prosperous business environment, productivity, and a healthy investment climate, as well as to enhance Dubai’s competitiveness in the world economy.
Based on that, the DEC envisioned a number of strategic objectives, namely: to encourage the private sector to contribute to the economic development of the emirate through its involvement in the discussions of economic policies and strategies, and the offering of necessary advice; to improve the country’s economic performance, enhance the business environment, and increase productivity; to acquire the business community’s trust and enrich the local business environment in the long term; and to improve Dubai’s economic competitiveness in the international market.
What kind of measures is the DEC promoting to improve access to credit?
Two aspects need to be considered in this regard. First, banks usually request collaterals from the entities that proceed to get credit lines. Certainly the big businesses have such collaterals, but the challenge is with the SMEs. Second, one of the critical surveys conducted by the DEC in 2011 suggests that access to finance through the banking sector – opening lines of credit or securing lines of credit or loans – is not companies’ preferred finance avenue. Instead, firms in Dubai have a tendency to rely on internal funds and retained earnings to bankroll their working capital and investment operations. Such behavior could well reflect the adverse effects of the financial crisis on bank–lending behavior. However, it could also reflect the role of traditional impediments such as the lack of collateral that are more likely to affect SMEs.
Therefore, the limited use of bank finance by firms, we argue, is not entirely due to voluntary self–exclusion; but rather, it may be in part due to either demand or supply constraints.
Islamic finance recorded double-digit growth post 2008 crisis. Yet, financial experts cast doubts over the sustainability of interest-free loans, risk-sharing, and financing backed with real assets if the industry keeps growing. How would you describe the potential of Islamic finance as a viable alternative to conventional financing for SMEs?
With the government’s announcement to turn Dubai into the global capital for the Islamic economy, the emirate has been mobilizing its resources, redirecting its activities, and reshaping its regulations to materialize that goal.
From a purely financial perspective, Islamic finance schemes, such as Mudarabah and Musyarakah, integrate assets of lenders and borrowers; therefore, they allow Islamic banks to lend on a longer-term basis to projects with higher risk-return profiles and, thus, to support economic growth. However, as Islamic banks try to avoid uncertainties, the mentioned schemes are not widely used. Therefore, support from government and academia is needed to create innovation in the participatory financing scheme so that all related parties can share mutual benefits.
Given the size of an SME, its requirement for financing is typically not very high, and the issuance of corporate bonds or its Islamic finance alternative Sukuk would generally not to be recommended. An SME would benefit most from a standard financial solution, occasionally coupled with minor amendments to cater for specific company requirements.
Although it is the bank’s responsibility to ensure that the client is provided with all the required information to enable him to make the right decision regarding the transaction type and level of funding cost, for instance, the SME has also to take its own responsibility to ensure that the recommended financial solution is the right one.
Many of the reasons why Islamic finance might not be the right opportunity for an SME, or any other company, are very similar to the reasons for rejecting a conventional product offering. The financing arrangement offered by any financial institution should not be prohibitive in cost. Whether it is a conventional or an Islamic bank offering, the cost should be competitive given the investment opportunity and size of the SMEs – it goes without saying that typically the financial solution required is proportionate to the size of the company. Bank charges should also be competitive for the service the bank provides.
The financial institution has a duty to ensure that the instrument offered is suitable for the purpose and meets the business requirements of the SME. However, if the SME feels that the product offering does not meet its purpose, it has the responsibility for questioning the financial institution and ensuring that it becomes comfortable that its purpose will be met.
What is the expected impact of Expo 2020 in terms of investment inflows? What are the DEC’s recommendations to ensure that private investments will promote long-term stability rather than creating another market bubble?
Reflecting the growing level of support across the country for the UAE’s bid to host Expo 2020, the DEC announced its support as an official partner of the bid campaign in 2013. Among the activities that the DEC conducted post-win is raising awareness about the significant and long-term impacts of the event on Dubai and the UAE’s economy.
Moreover, the DEC has played a vital role in connecting and partnering public and private sectors. In its turn, the DEC has anchored strategic partnerships with a large number of decision-making circuits, private entities, and international organizations, as well as economic policy research centers. The main aim of these partnerships is sharing knowledge. This is in addition to the exchange of data and information. The DEC believes that strategic partnerships between the public and private sectors are vital to the success of the Dubai Expo.
As a channel between these sectors, the DEC is in a key position to reach out to a diverse range of stakeholders.
Among the significant actions undertaken by the DEC is conducting critical and evidence-based, policy-oriented working papers and reports on various issues of strategic significance to Dubai’s economy. The DEC has drawn lessons from the past experience of Dubai and tends to incorporate these lessons in its recent researches.
These lessons include, for instance, the importance of promoting financial sustainability of public funds. Also, the DEC underpinned a strategic partnership with the Dubai Land Department to work jointly to develop the real estate-related regulations in addition to other activities that sustain the real estate sector and enhance its contribution to Dubai’s GDP.
Bilateral trade between the UAE and US reached $24.9 billion in 2014 and the UAE remained the top export destination for the US in the MENA region for the sixth year in a row. What is the meaning of the MoU you signed with the US-UAE Business Council during your recent visit in the US?
We are really happy that the US-UAE Business Council is our strategic partner. Mr Danny Sebright, the President, is one of my best friends in the US. Broadly speaking, the US has been identified as a strategic partner to foster innovation in the UAE. When it comes to their economic relationship, the two countries have been enjoying wonderful relations and we are striving to reinforce them even more.
When it comes to innovation, the US is still by far the world’s leader. What we are aiming to do in the near future is to maximize the momentum of these ties to enhance the partnerships between Dubai and the USA in order to fulfill His Highness Sheikh Mohammed Bin Rashid Al Maktoum’s vision to make Dubai one of the most innovative cities globally.
In this light, I truly believe that Expo 2020 will provide an incredible platform to share best practices and innovative solutions towards global challenges. Dubai is already a fantastic knowledge hub that attracts the best talents from all over the world.