An examination of the Saudi Arabian Kafalah loan guarantee programme for small and medium-sized enterprises

This thesis examines the role of Kafalah programme in bank lending to small and medium-sized enterprises (SMEs) in the Kingdom of Saudi Arabia (KSA). The Kafalah programme is a government sponsored guarantee scheme bank loan programme established in 2006 by the Ministry of Finance in collaboration with Saudi Banks to guarantee up to 80% of the total amount of the debt borrowed by SMEs. The objectives of the programme are to encourage Saudi banks to lend to SMEs, to reduce the need for collateral, to minimise the default risks and to assist start-up businesses, services firms and SMEs with a limited financial track record. The specific consideration and objectives of this study, therefore, were the identification of the SME characteristics that influence their success in securing debt-funding in KSA; examination of how well those characteristics can predict whether or not an SME successfully secures debt-funding through the KP programme; and the evaluation of the effectiveness or otherwise of the KP programme in facilitating bank lending to SMEs without collateral needs. In particular, the study aimed to determine whether the KP programme has met its stated objectives.

The study employs both quantitative and qualitative analysis to address all the research aims of the thesis. Initially, the research questions were addressed through a survey of SMEs geographically dispersed throughout the KSA. The questionnaire was then personally distributed to 500 SMEs and the final sample of data collection consists of material from 247 SMEs across all prime Saudi Arabian industries of construction, manufacturing, social services, retail, and travel and tourism and other sectors. The qualitative element focuses on the evaluation of the role of Kafalah programme on SME’s financing accessibility in Saudi Arabia through semi-structured interviews with the three key stakeholders of Kafalah programme, comprising the Director of the Kafalah programme administration, managers of six leading banks in the KSA and eight selected SMEs. In particular, the Kafalah programme was assessed in relation to its objectives for start-up businesses, the SME service sectors; and whether the demand for collateral from SMEs by banks has reduced.

Overall, I found that the SME’s age, size, sector, collateral, production of sophisticated financial information and the use of external expertise all have a significant relationship with securing debt funding for business expansion, after the SME start-up stage of financing. Those SME firms that successfully secured Kafalah bank lending are mainly based in the manufacturing and constructions sectors and are not evident in the services and tourism sectors. The SME characteristics that predict Kafalah bank loan success are size, collateral, growth prospects, production of sophisticated financial information and external expertise. Additionally, this study finds that the impact on collateral offered by SMEs to banks under the Kafalah Programme is mixed, with reduced personal account guarantees required and contrary to expectations, more tangible (fixed) assets (more pledged assets and property) required. This latter result conflicts with the aims of the Kafalah Programme, given that the SMEs without these tangible assets appear not to have equal success securing the bank loans for further expansion and growth. The interviews revealed that Kafalah has not yielded significant success especially, in relation to start-up businesses, service sector development and the reduction in collateral needs, confirming the quantitative findings. The programme is characterised with unnecessary procedures, rigidity and arbitrariness creating unpleasant experience to SMEs and at the end of it all, most of the applications are usually rejected. The banks still request collateral despite the Kafalah guarantee, thereby restricting loan accessibility to those SMEs with collateral.

The study makes a number of important contributions to understanding the SME sector in KSA, in particular which Saudi SMEs businesses are likely to attract debt funding and how successful the Kafalah bank loan guarantee was in the SME sector. It highlights in particular, the weaknesses of the Kafalah debt programme in sectors where reduced collateral (lack of tangible assets) is a feature of the SMEs (services and tourism). The Kafalah Programme as applied by the banking intermediaries, concentrated on sectors with existing tangible collateral, in opposition to the programme’s aims of supporting the entire SME sector through reduced collateral requirements. Finally, the thesis makes recommendations about the potential refinement of the Kafalah programme policy, to the SME sector itself to increase the likelihood of accessing bank credit and to the Chamber of Commerce as a supporting infrastructure for SMEs in KSA. The study also recommends that government-backed SME finance intervention programmes should be considered in the wider wheel of policy interventions to develop a nurturing SME ecosystem to enable SME growth and in particular support high-growth firms.