Hammouda

Director SME Financing Guarantee Program, SIDF (K.S.A)

Mohammed Hammoudah

KafalahSME Financing Guarantee Program

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Conference Topics

• The reality of the SME’s sector in Saudi Arabia.

• The role of Kafalah Program in supporting SME’s.

• Kafalah Program Achievements during the period from 2006 till the 3rd Quarter of 2011.

• The challenges and difficulties which faces the program.

• Promoting the program.

The reality of SME’s sector in Saudi Arabia

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The reality of the SME’s sector in Saudi Arabia.

First : procedural, administrative and technical- difficulties :-

• Bureaucratic procedures by some government agencies when approached for the necessary permits.

• Lack of proper organizational structure and management experience.

• The owner-manager pattern, which usually combines the management, finance and marketing functions.

• Lack of advanced production methods.

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The reality of the SME’s sector in Saudi Arbia.

Second : marketing difficulties:-• Lack of marketing awareness and marketing inefficiency.

• Random pricing policy that does not take into account the prices of competitors as well as the production costs.

• Difficulties in marketing local products, while the consumer prefers foreign products.

• Shortage in research and marketing studies within the sector.

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The reality of the SME’s sector in Saudi Arabia.

Third : financial difficulties : -

Funding is the SME’s spirit, especially in the initial stages. The funding difficulties which faces SME’s are as follows: -

– High cost of finance (lending rate).

– banks and lending institutions refuse to lend SME’s for several reasons, mainly because:-

• SME’s high risk.

• Lack of sufficient collateral.

• The absence of regular accounts of the existing projects.

The need of a new source in SME’s sector to reduce the funding risk, creates

Saudi Banks

SME Financing

Guarantee ProgramKafalah

The role of Kafalah program in

supporting SME’s.

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Kafalah Financing Guarantee program

Kafalah Program :-

• Kafalah Program was established in January 2006, to guarantee the banks financing for SME’s, by guaranteeing a percentage of the banks loans to encourage them to lend SME’s.

The SME’s definition according to the program :-

• Any profitable SME , established in Saudi Arabia, with annual sales not exceeding SR 30 million.

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* Compatible with the Islamic Regulations.

Credit facilities types *Types of financing

Fixed Assets Working Capital

Kafalah percentage

80%

Murabahaloan

Tawaroy trade

Letters of guarantee Tawaroy

Loan Letters of Credits

Others Murabah

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• For any one project the program guarantee 80% of the value of the loan for a maximum of 426,000 US $ while the minimum is 21,000 US $.

• For the client who owns more than one activity (individual institution), the total value of guarantees granted to all individual institutions must not exceed 1,3 million US $.

• Companies who own more than one project can get guarantees up to 2,6 million US $, provided each project will not get more than 426,000 US $ in guarantees.

Amount of guarantees provided by the program

Kafalah Achievements during the period

from 2006 till the 3rd Quarter of 2011.

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The program achievements during the period from 2006 until the 3rd Quarter of 2011.

YearsThe Value Of

Funding *The Value Of

Guarantees*

Number Of

Guarantees

Number Of Beneficial

Projects

2006 49 22 51 36

2007 278 128 263 211

2008 279 118 292 207

2009 464 181 504 315

2010 716 271 777 480

2011** 935 437 873 536

Total 2,721 1,157 2,760 1,785*conversion rate 1 US $ = 3.75 SR.

** the 3rd Quarter of 2011.

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Relative importance of the guarantees according to the economic sectors

Service22%

Industrial19%

Commercial10%

Others4% Contracting

45%

15

95

5

0

20

40

60

80

100

Men Women

Percentage of the guarantees according to gender

95

320

20

40

60

80

100

Nationality

Saudi Non Saudi Mix

Percentage of the guaranteesaccording to nationality

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The program achievements in the field of training and education• In the context of expanding the base of clients with the program,

and increase awareness of the role of SMEs in economic development, the program accomplished the following: – Organized (26) seminars under the name of (the day of SME’s) in

cooperation with the Chambers of Commerce and Industry and the participating banks to promote the program.

– Organized (22) training courses across the Kingdom in cooperation with the World Bank, IFC and Chambers of Commerce and Industry under the name of (the basics of starting and managing new business) targeting owners of SME’s, (trained 567 trainees, including 402 male and 165 female) .

– The program organized in collaboration with the Institute of Banking (13) workshop about the program targeting the staff of the participating Saudi banks.

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The program achievements in the field of training and education

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22

13

0

5

10

15

20

25

30

seminar training course workshope

The challenges and difficulties which faces

the program

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The challenges and difficulties which faces the program

First : Challenges and difficulties of the founders (banks): -– Slow progression in the interaction of participated banks

with the program’s objectives.

– Lack of advertising and promoting the program by the banks.

– The large number of securities required.

– The high cost of lending.

– Centralization.

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The challenges and difficulties which faces the program

Second : Challenges and difficulties of the investors (SME’s owners) :-

1. Misunderstanding of the SME’s owners about the program and its objectives and mechanism.

2. Failure to meet credit standards.

3. Lack of knowledge in how to prepare and complete a funding request including the preparation of a feasibility study for the project.

4. Lack of seriousness of some clients.

5. Some clients think that Kafalah is a grant from the government.

Promoting the program

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Promoting the program

• The program executed 4 campaign to activate the program in all the KSA areas.

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2.30

5.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2008 2009 2010 2011

M.SR

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Promoting the program

• Regular meetings with banks to activate the program.

• Activating the role of bank branches in supporting SME’s .

• Focusing on increasing the advertisements and promotions of the program

• Training courses for the banks employees, in cooperation with the Institute of Banking.

• Training courses for investors in how to manage SME’s.

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Thank you for listening