An Overview of Bahrain s SME Sector

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1 An Overview of Bahrain s SME Sector Ramprakash Bharateesh Kasi * The strategic role and significance of Small and Medium-sized Enterprises (SMEs) as engines of economic growth, source of job creation, innovation and entrepreneurship; have long been acknowledged by both economic and social policy makers and researchers in the developed and developing countries. Development of the SME sector is assuming a strategic role in the political and economic policy agenda of the Gulf Cooperation Council countries in their attempts to diversify their non-oil revenue. SMEs represent 99% of all commercial establishments registered in Bahrain. The SME sector contributes 28% to Bahrain s gross domestic product and provides direct and indirect employment to over 400,000 people. Despite the role and significance of SMEs to Bahrain s economy, not much is known, researched or published about them. The purpose of this study is to provide a conceptual overview of the Bahraini SME sector, describe unique challenges that SMEs face and the SME support ecosystem that has emerged in the Kingdom in the last few years. The study contributes to the build-up of the nascent research literature on Bahraini SMEs. Field of Research: Small and Medium Enterprises (SMEs), Small Business Management, Entrepreneurship 1. Introduction During the past four decades the member countries of the Cooperation Council of the Arab States of the Gulf, popularly known as the GCC, which consists of the Kingdom of Bahrain, State of Kuwait, Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia, and the United Arab Emirates; have witnessed an unprecedented economic and social transformation fueled by the Oil and Gas sector. The GCC countries are said to hold 45% and 17% of the world s proven oil and natural gas reserves respectively. The Kingdom of Saudi Arabia, United Arab Emirates, Kuwait and Qatar are among the World s top 15 oil producers. The Oil and Gas sector is the prime source of revenues and exports to the GCC countries, constituting 80% of GCC budget revenues. (IMF, 2014) New demographic and economic challenges are fast emerging due to the rentier model adopted by the GCC countries. Countries are now faced with high population growth, high rates of unemployment and a reduction in capacity of the already over-capacitated public sector as a potential employer. This has led them to look at SMEs as a potential driver of non-oil growth and employment. (Fasano and Iqbal, 2003) The strategic role and significance of Small and Medium-sized Enterprises (SMEs) as engines of economic growth, source of job creation, innovation and entrepreneurship and effective tools for poverty alleviation; have long been acknowledged by both economic and social policy makers and researchers in the developed and developing countries. (Ayyagari et al, 2003; Jiantuo et al, 2007) * Dr Ramprakash Bharateesh Kasi, Assistant Professor, College of Business & Financial Sciences, Royal University for Women, Kingdom of Bahrain, bharteshkr@gmail.com 1

2 Despite the role and significance of SMEs to Bahrain s economy, not much is known, researched or published about them. It was only in recent years that a national definition of SMEs was agreed upon, which collectively grouped SMEs into micro, small and medium enterprises (MSME) based on criteria like number of full-time employees, capital investment and turnover. The purpose of this paper is to provide a conceptual overview of the Bahraini SME sector, describe unique challenges that SMEs face and the SME support ecosystem that has emerged in the Kingdom in the last few years. The paper contributes to the buildup of the nascent research literature on Bahraini SMEs.. 2. Literature Review According to the ILO (2015), it is estimated that there are anywhere between 420 to 510 million SMEs worldwide, of which 80% to 95% of them are based in the low and middle-income countries. SMEs are said to account for over 95% of all enterprises in OECD countries and 99% of all businesses in the European Union (European Commission, n.d.). SMEs are said to make crucial contributions to job creation, income generation and economic growth; they are said to account for two-thirds of all jobs worldwide and provide 33% of national income (GDP) in emerging economies. (World Bank, 2015) The contribution made by SMEs to employment was analyzed in a longitudinal study by Ayyagari et al. over the period of 2006 to 2010, covering 99 countries. The results show that SMEs have a large share of employment in all countries, irrespective of the countries income level and is especially high in developing countries. The median share of employment of the SME size class is 67%. (as cited in ILO 2015) A study by Leegwater and Shaw (2008) explored the role of micro, small and medium enterprises in economic growth, findings indicate that countries with larger share of SME employment have higher economic growth than their counterparts. There is no universally accepted definition for small and medium enterprises. Different countries and multilateral development institutions define SMEs differently. Available definitions of SMEs use quantitative dimensions like number of employees, capital employed, sales turnover and asset values. For example, number of employees and turnover or balance sheet totals are used by the European Commission in classifying enterprises into micro, small and medium-sized. (European Commission, n.d.) In the United States, to be certified as a small business, businesses must fulfil the industry size standards that are established by the US Small Business Administration (SBA). The SBA has established two generic size standards, which are, 500 employees for manufacturing and mining industries and $7.5 million in average annual receipts for non-manufacturing industries. (SBA, 2016) In UK, businesses are categorized as small and medium enterprises based on turnover ( 6.5 million/ 25.9 million), balance sheet total ( 3.26 million/ 12.9 million) and number of employees (50/250). 2

3 In India, SMEs are categorized into micro, small and medium enterprises based on the value of investment made in plant and machinery. (Ministry of Micro, Small and Medium Enterprises, n.d). 3. Methodology Even though most of the information for writing this paper is based on available secondary data, efforts were made to collect primary information so as to validate the published data and better understand the unique challenges Bahrain SMEs are exposed to. In this direction, a panel discussion with key members of the Bahrain SME society and personnel of Tamkeen and Bahrain Development Bank was organized. The panel comprised of seven individuals, of whom five were owner-managers of SMEs and the remaining two, represented Tamkeen and Bahrain Development Bank. Of the five owner-managers, three represented small enterprises, one represented medium enterprise and one represented the micro enterprise; all enterprises represented were in business for the previous three years. The panel addressed three key discussion areas challenges SMEs face, SME support ecosystem in Bahrain, validation of available information on the Bahrain SME sector. The discussion was facilitated by the Author of this paper. Sources from which secondary information has been obtained for use in this paper has been cited and referenced. 4. The Findings 4.1 Profile of Bahrain s SME Sector The Kingdom of Bahrain is an island with a total land area of square kilometres, situated in the western shores of the Arabian Gulf. Bahrain was the first country in the Arabian Gulf where oil was discovered in the 1930s. The Kingdom of Bahrain is classified as a high income economy with a GNI per capita of US$ 28,272 and a population of 1.3 million, half of whom are expatriates. Today, Bahrain is ranked 39th in the 2015 Global Competitiveness Index rankings and 65th in the World Bank s 2016 Ease of Doing Business rankings. (World Bank, 2016) According to the Ministry of Industry, Commerce & Tourism, Bahrain, SMEs or MSMEs (micro, small and medium enterprises) make up 99 percent of all commercial establishments registered in Bahrain. (BNA, Feb 2015). The SME sector contributes 28% to Bahrain s gross domestic product (GDP) and provides direct and indirect employment to over 400,000 people. Plans are ahead to increase the contribution of the SME sector to the GDP to 35% by The sector also contributes 8% of the total exports. (MOIC, 2016). Bahrain was one of the first country in the GCC to have come up with a formal policy statement and a definition of micro, small and medium enterprises. (MOIC, 2013). 3

4 Table 1: Definition of SMEs in Bahrain. Category Number of Employees Capital Investment (Bahraini Dinar) (Manufacturing Annual Turnover (Bahraini Dinar) (All Sectors) Sector) Micro Up to 10 Up to 20,000 Up to 100,000 Small (up to 100 for 20, , ,001 1 million Construction Sector) Medium (up to 400 for Construction Sector) Source: MOIC SME Definition 500,001 3 million 1,000,001 5 million Micro enterprises are defined as those businesses that hire up to 10 employees, and have capital investment of up to Bahraini Dinars (BD) 20,000 for the manufacturing sector, and an annual turnover of up to BD 100,000 for all other sectors. Small enterprises, on the other hand, are defined as those with 11 to 50 employees (and up to 100 for the construction sector), and have a capital investment between BD 20,001 and BD 500,000 for the manufacturing sector, or alternatively an annual turnover between BD 100,001 and BD 1 million for all other sectors. Medium-sized enterprises are those with 51 and 250 employees (and up to 400 for the construction sector), and have a capital investment between BD 500,001 and BD 3 million for the manufacturing sector, or alternatively an annual turnover between BD 1,000,001 and BD 5 million for all other sectors. Table 2: Distribution of Micro, Small, Medium and Large Enterprises in Bahrain Micro Small Medium Large Total enterprises enterprises enterprises enterprises Number of 84,319 5, ,887 enterprises Percentage of enterprises 92.77% 6.03% 1% 0.19% 100% Source: LMRA, as cited in Zawya From Table 2, it can be seen that micro enterprises represent 92% of total SMEs registered in Bahrain. The distribution of micro, small and medium enterprises more or less follow distribution patterns elsewhere in the developed countries. Given the total population of Bahrain (1.33 million), there is a high density of business enterprise per inhabitant. Conservative estimates of the true number of SME s are said to be around 49,000, providing employment to 447,780 individuals, of which only 14% are Bahrainis. A number of reasons are provided as to why there is a difference between the quoted (84,319) and the real (49,000) figure, chief among them being the tasattur system, wherein expatriates operate their own businesses in the name of Bahrainis and secondly 4

5 updated data on inactive commercial registrations or enterprises that have closed down are not available. Figure 1: Sectoral Breakdown of SME operations Social Services 8% Real Estate & Business 9% Others 4% Restaurants & Hotels 10% Trade and Repairs 43% Construction 12% Source: Gulf Investment Corporation Weekly Economic Digest (2013) There is absence of specific data on sectoral distribution of SMEs in Bahrain. Information for Chart 1 has been culled from figures cited by GICWED. From the Chart, it can be seen that Bahrain s SMEs are focused mostly in three main sectors trading (43%), manufacturing (14%) and construction (12%). 4.2 SME Support in Bahrain Manufacturing 14% In the last few years Bahrain has established two major organizations - the Labour Market Regulatory Authority (LMRA) and Tamkeen. While LMRA gathers taxes from foreign workers, Tamkeen utilizes this amount to undertake and implement programmes that support businesses and nationals through its different schemes. These two organizations, along with a number of government and non-government organizations support SMEs in specific areas. The following section provides a brief overview of some of the main SME supporting organizations in Bahrain Labour Market Regulatory Authority (LMRA): LMRA is a government body tasked with regulating and controlling work permits for expatriate employees, issuing licenses for manpower and recruitment agencies and introducing Labour Market reforms. (LMRA, 2015) 5

6 4.2.2 Tamkeen: Tamkeen was established in 2006 as part of Bahrain s national reform initiatives and is tasked with supporting and developing the private sector and enhancing the productivity and growth of enterprises and individuals. Tamkeen s support programs are classified at two levels enterprise support programs and individual support programs. Enterprise Support Program (ESP) aims to support new and existing Bahraini businesses through various schemes like subsidized incubation support, acquisition of machinery and equipment, ICT support (Techania), marketing support (Tasweeq), support for participation in exhibitions (Tarweej), support for business consultations (Istishara), support for quality improvement (Jawda) and provision of financing schemes in association with a number of Bahraini commercial and Islamic banks. By 2014, Tamkeen s Enterprise Support program has supported over 9,100 enterprises (BD 78.2 million). (BNA, 2014; Tamkeen, 2016) Tamkeen supports the following schemes for individuals. Career Progression Programme, a program that supports employed individuals in acquiring training and pay increases to enhance their job skills and job loyalty. Professional Certification scheme that supports candidates in attaining professional qualifications. The Basic skills training, that aims to help Bahrainis to acquire or enhance their employability skills. Mashroo3i, a business plan competition for young Bahrainis in schools and colleges, helping them learn about entrepreneurship through preparation of business plans and prototypes and a9eel, a countrywide campaign to develop in young Bahrainis work ethics and positive work attitudes. (Tamkeen, 2016) Bahrain Development Bank (BDB): The Bahrain Development Bank is a stateowned development bank that was established in 1992, tasked with promoting entrepreneurship, innovation and development of small and medium enterprises in Bahrain. Bahrain Development Bank offers a wide range of financial and advisory services specifically designed to meet SME needs. Over the years, BDB has expanded its financial and advisory support services to a broad spectrum of economic sectors, which include manufacturing, tourism, health, education, fisheries, agriculture, business and professional sectors and activities. (BDB, 2016). The Bank in association with Tamkeen, offers a variety of funding and training support to start-ups and growing SMEs United Nation Industrial Development Organization (UNIDO): The Investment and Technology Promotion Office (ITPO) in Bahrain was established in 1996 by the UNIDO and was co-funded by the Government of Bahrain to promote industrial investment opportunities, identifying and mobilizing resources required for implementation of investment projects and fostering business cooperation between foreign investors and potential partners in Bahrain. The ITPO has over time evolved a highly successful program aimed at stimulating entrepreneurship in Bahrain, known as the EDIP programme (Entrepreneurship Development and Investment Promotion). These initial experiences and success prompted UNIDO to establish the ARCEIT (Arab Regional Centre for Entrepreneurship and Investment) in 2001, which aims to replicate the Bahrain model in other Arab countries. It is estimated that the EDIP programme since its inception has assisted 1500 entrepreneurs and helped create 13,000 jobs in Bahrain. (UNIDO; Hussein, H) Bahrain Business Incubator Center: The Bahrain Business Incubator Center (BBIC) is a fully owned subsidiary of the Bahrain Development Bank. It was established to supplement BDB s efforts in developing the SME sector in Bahrain. BDB operates three 6

7 business incubations. Bahrain Business Incubation Centre focuses on manufacturing startups. Riyadat, caters for Bahraini women entrepreneurs, and Rukn.me supports ICT-based start-ups. (The Gulf, 2016) BBIC offers various services which include advisory, training, access to finance, business linkages, marketing support, shared facilities, etc. besides providing physical space for each business within the Centre s premises. (BDB, 2016) Ministry of Industry and Commerce (MOIC): The MOIC is responsible, inter alia, for promoting SMEs in the Kingdom of Bahrain. A special administrative unit the small and medium enterprises unit, has been created within the Ministry to oversee three key programs (Industrial Investor Development Program, Industrial Marketing Development Program, and Industrial Talents Development Program) designed to develop and support existing SMEs and guiding new entrepreneurs to potential industries and technical expertise. (MOIC, n.d) 4.3 Issues identified during the Panel Discussion The following are some of the key issues that were identified by the participants of the panel discussion: Most of the SME owner-managers were of the opinion that financial challenges were holding them from scaling their activities, updating their technology/products, hiring qualified staff and advancing their marketing activities. When probed further on this issue, SME owner-managers pointed out the following: i. There are no development banks (besides BDB) to cater specially the SME sector; ii. Borrowing from commercial bank is not an easy task; interest rates are too high; iii. Commercial Banks adopt a conservative approach towards lending to the SME sector due to associated risks. One of the panelists referred to a report by the World Bank, which found that the average share of SME lending in the GCC is less than 3%. The panelists representing the support organizations attributed this phenomena to sketchy accounting and book keeping practices followed by SMEs SME owner-managers were of the opinion that marketing as practiced in SMEs relies on business development through personal contacts and networks rather than conventional marketing tools. SME owner-managers needed handholding in areas like market research, branding, advertising and promotion, pricing, client/customer approach methodologies; given the skeletal and non-professional staff available with them SME owner-managers were also of the opinion that SMEs face heavy administrative burden in complying with various regulatory requirements which are time consuming and cumbersome (especially when dealing with hiring staff or financing a purchase) As to the issue of why there was lack of regional/international focus among Bahraini SMEs, the panellists justified local orientation, given the nature of business involvement (trading and services). They were also of the opinion that the process of opportunity identification outside Bahrain is a time and money consuming process, which few SMEs can afford. 7

8 4.3.5 Hiring Workers: Owner-managers expressed high levels of concern on their ability to hire expatriates after the labour market reforms introduced in the Kingdom during 2006, with the establishment of LMRA. They were of the view that labour market reforms have made expatriate workers more expensive and difficult to hire. When asked why there were very few Bahrainis working for SMEs, owner-managers expressed that Bahrainis were unwilling to work for SMEs, which they perceive to offer inferior jobs, longer working hours, less salary and benefits Panellists representing BDB and Tamkeen, expressed reservations on all the issues mentioned by the SME owner-managers, pointing to the varied types of business support initiatives and programmes available to support SMEs, besides provision of credit. 5. Conclusion Given that micro enterprises represent more than 90% of the SMEs in Bahrain, with small and medium enterprises comprising a minuscule 6% and 1% respectively; there are serious doubts expressed over the size and contribution of Bahrain s micro sector to economic growth, employment, innovation and exports. Further, most of the micro enterprises employ expatriates rather than Bahraini nationals, supporting the observation made by Hertog, S (2010) that micro enterprises in particular offer very little employment to gulf citizens. The scenario is further complicated with the involvement of tasattur system. Bahrain SMEs are highly concentrated in four sectors - trading (43%), manufacturing (14%), construction (12%) and restaurants and hotels (10%); thereby supporting the observations made by Hertog, S (2010) that the sectoral structure of gulf SMEs is skewed towards simple contracting and trading operations. Bahrain has over the years invested in building a well-entrenched business support ecosystem that is necessary for entrepreneurship development. This model which is sometimes known as the Bahrain model has been developed with the assistance of specialized agencies like UNIDO. Bahrain has also been in the forefront of finding innovative ways of financially supporting SMEs and human capital development of the national workforce through labor market reforms. In spite of all these developments, Bahraini SMEs still find it challenging to access low-cost finance and marketing support, face bureaucratic and administrative hurdles in hiring workers thereby supporting the findings of various research studies conducted in the context of challenges that SMEs face (Storey, 1994; Bhattacharya and Wolde, 2010; Herzog, 1982; Smallbone, 1991; Cromie, 1991). References Ayyagari, M, Beck, T, and Demirgüç-Kunt 2003, Small and Medium Enterprises across the Globe, World Bank Working Paper WPS2127. BDB.2016, Bahrain Business Incubator Center.Retrieved from Incubator-Center- Bhattacharya, R. and Wolde, H Constraints on growth in the MENA region, IMF Working Papers: Lausanne. 8

9 Cromie, S.1991, The problems experienced by young firms, International Small Business Journal, 9 (3), pp Devine, M 2016, A new breed: Bahrain s SME sector is adapting to a new economic landscape with more agility. The Gulf. January Retrieved from European Commission. N.d. Entrepreneurship and Small and medium-sized enterprises (SMEs). Retrieved from European Commission.N.d.What is an SME? Retrieved fromhttp://ec.europa.eu/growth/smes/business-friendly-environment/smedefinition/index_en.htm Government of India, Development Commissioner, Ministry of Micro, Small and Medium Enterprises. N.d.What are Micro, Small & Medium Enterprises? Retrieved from Gulf Investment Corporation Weekly Economic Digest.2013, Sectoral Distribution of SMEs in the GCC. Volume 3, Issue 109. Hertog, S. 2010, Benchmarking SME policies in the GCC: a survey of challenges and opportunities. Eurochambres, Brussels, Belgium. Retrieved from Herzog, H.1982, Small and medium-size firms in Sweden and government policy, American Journal of Small Business, 7 (2), pp Hussein, H. N.d, Enterprise Development & Investment Promotion Program / Stimulating Entrepreneurship. Retrieved from ILO. 2015, Small and medium-sized enterprises and decent and productive employment creation, International Labour Conference, 104th Session: Geneva. Retrieved from: ocument/wcms_ pdf IMF, 2003, GCC Countries: From Oil Dependence to Diversification. Fasano, U. and Iqbal, Z. IMF, 2014, Economic Diversification in the GCC: Past, Present, and Future, IMF Staff Discussion Note.Retrieved from Islam Al Zeini, 2015, Bahrain targets 35% SME contribution to GDP by Zawya. Retrieved from 9

10 Jiantuo, Y., Minquan, L., Jing, W., Jiming, Z., Min Z, G.H.E., Huawei, L. and Cheng, E. 2007,SME development and poverty reduction, Case study of Xiji County,China, Retrieved from: LMRA Our mandate. Retrieved fromhttp://lmra.bh/portal/en/page/show/56#.v17femjjniu Leegwater, A. and Shaw, A. 2008, The Role of Micro, Small and Medium Enterprises in Economic Growth: A Cross-Country Regression Analysis. USAID. Retrieved fromhttp://pdf.usaid.gov/pdf_docs/pnado560.pdf MOIC, 10th December 2013, Dynamic SMEs sector is vital to economy. Retrieved fromhttp:// MOIC, N.d,Small and medium enterprises. Retrieved from m%20industries/pages/small%20and%20medium%20industries.aspx MOIC, N.d, SME Definition. Retrieved from SBA, 2016, Summary of Size Standards by Industry Sector. Retrieved from SMEs make up 99% of Bahrain-registeredcompanies, 25th February 2015, Bahrain News Agency.Retrieved from Smallbone, D. 1991, Success and failure in new business start-ups, International Small Business Journal, 8 (2), pp Storey, D.1994, Understanding the small business sector. London: Routledge. Online. Tamkeen, 2016, Programmes. Retrieved from Tamkeen meets BCCI Board, 29th September 2014, Bahrain News Agency. Retrieved from UNIDO, N.d, ITPO Bahrain. Retrieved fromhttp:// World Bank, 2015, Small and Medium Enterprises (SMEs) Finance. Retrieved from World Bank, 2016, Doing Business 2016: Measuring Regulatory Quality and Efficiency. Washington, DC: World Bank Group. DOI: / %20business/documents/profiles/country/BHR.pdf 10

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