Financing small businesses in Saudi Arabia

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Financing small businesses
in Saudi Arabia
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• A Doctoral Thesis. Submitted in partial fulfilment of the requirements
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FINANCING SMALL BUSINESSES
IN
SAUDI ARABIA
by
* BANDAR M H HAJJAR
A Doctoral Thesis submitted in partial fulfilment of the requirements
for the award of Doctor of Philosophy
of the Loughborough University of Technology
© Bandar Hajjar 1989
DEDICATION
To my mother, the memory of my father, my wife Zekryat, and my children
Hamza and Hadyl.
11
ACKNOWLEDGEMENT S
I would like to express my sincere thanks and appreciation to a number
of people without whose support and encouragement this work would not
have been completed. First and foremost is my Supervisor, Professor
John Presley, who was extremely understanding and exceptionally helpful.
His constructive advice and considerate guidance added a significant
improvement to this thesis. I am also indebted to the Economics
Department, King Abdulaziz University, for giving me the opportunity to
resume my higher education in the UK. I would like also to thank my
Director of Research, Professor K Button. My thanks go to Professor M N
Siddiqi who introduced me to Loughborough University of Technology; I am
grateful for his valuable comments and discussion of the questionnaire
prepared for this study. I am also grateful to the following people for
providing me with material related to this study or allowing their
valuable time for discussion: Mr Siad Bin Siad, the Deputy Minister of
Finance and National Economy for the domestic economy; Dr Mohamed Al-
Saqqaf, the Manager of Research and Publication in the National
Commercial Bank; Mr Geoffrey Rimmer, Senior Manager of Credit Control in
Riyad Bank; Mr Hamdan Al-Ceryhi, the Head of the Chamber of Commerce and
Industry (Eastern Province); Mr Abdullatif Al-Benayyan and Mr Raad Al-
Sabah from the Chamber of Commerce and Industry (Eastern Province); Dr
Salim Darwish, Mr Hassan Nasir and Mr Ahmed Babiqy from the Chamber of
Commerce and Industry (Jeddah); Mr Salah Hammam, Economic Research,
Federation of Arab Gulf Chambers; Dr Gomaa Amer, Economic Consultant,
Council of Saudi Chamber of Commerce and Industry; Mr Ajad A1-Joaid and
Mr Ibrahim Alkosim from the Ministry of Finance and National Economy; Mr
Mohamed Sindy, Manager of Industrial Licences, Ministry of Industry and
Electricity; Mr Ghassan Badkook, the Head of Banking Protocol, Riyad
Bank.
I gratefully acknowledge the kindness of many Saudi industrialists and
merchants who contributed their views and time. I am also grateful to a
number of people who participated in distributing and collecting the
questionnaire, particularly Mr A Al Bana.
My sincere thanks and gratitude to my Mother who generously supported me
morally and financially and sacrificed much for my sake. I am also
111
indebted to my Wife, Zekryat, for her compassion, patience and
understanding throughout my stay in the UK.
Last, but not least, I would like to thank Miss Laura Walmsley for the
exceptional endurance she has shown while promptly and efficiently
typing this work. My thanks also go to Mr Max Hunt and the Data
Preparation Department, Computer Centre, Loughborough University, for
their advice and for typing the data.
iv
ABSTRACT
FINANCING SMALL BUSINESSES IN SAUDI ARABIA
by
Bandar Hajjar
The overwhelming dependence of Saudi Arabia on oil exports as the only
source of national income has exposed the Kingdom's economy to serious
exogenous shocks. In order to reduce the impact of this external
disruption, the Government, through successive five-year development
plans, established the basic physical infrastructure necessary for
developing the real and financial sectors. At the same time, it
encouraged the private sector through various incentives to participate
in the development process.
As government spending started to decline after 1982, the Government
urged the private sector to take a more prominent role in the future
development process. So as to sustain economic growth.
Small businesses, as a large segment of the private sector, can play a
significant role in this. This study aims to provide guidelines to
assist planners, decision makers and bankers in Saudi Arabia to design a
programme which will ensure effective participation of small businesses
in the development process.
To achieve this goal, the study concentrates on identifying the main
obstacles encountered by small businesses in their efforts to finance
their projects internally, or to have access to external sources of
finance. It also seeks to identify the main constraints that prevent
the government credit institutions and commercial banks from providing
adequate finance to small businesses.
By linking the demand side for finance, represented by small businesses,
with the supply side, represented by commercial banks and government
credit funds, the gaps in the lending system as a result of the
imbalance between these two sides are identified. Options for filling
these gaps are then considered.
vi
TABLE OF CONTENTS

ACKNOWLEDGEMENTS 111

CERTIFICATE OF ORIGINALITY V

ABSTRACT vi

LIST OF FIGURES ix

LIST OF TABLES x

INTRODUCTION xiii

OBJECTIVE OF THE STUDY xv

OUTLINE OF THE STUDY xvii

1. THE STRUCTURE OF THE SAUDI ECONOMY 1
1.1 The Structure and Growth of the Non-oil

Private Sector 1

1.1.2 The Manufacturing Sector 5

1.1.3 The Trade Sector 12

1.2 The Development Plans 18

1.3 Public Finance 26

1.4 Foreign Trade and Balance of Payments 30

1.5 Manpower 34

1.6 Inflation 41
2. THE SMALL BUSINESS FINANCING GAP IN BOTH DEVELOPED AND

DEVELOPING COUNTRIES 50
2.1 Reasons for the Existence of the Small Business

Financing Gap 51
"- 2.2 The Role of the Government in Some Developed and
Developing Countries in Bridging Small Business

Financing Gap 65

3. ANALYTICAL FRAMEWORK 78
3.1 The Definition of a Small Business in the

Manufacturing and Trade Sector 80

3.2 Sampling Method in the Manufacturing Sector 85

3.3 Sampling Method in the Trade Sector 88

3.4 Pilot Survey 93

3.5 Subsidiary Hypotheses 95

3.6 The Questionnaire 97
Vii
4. FINANCING SMALL BUSINESSES IN THE TRADE SECTOR 105
4.1 Financing Small Merchants at the Establishment

Stage 105

4.2 Financing Small Merchants After Establishment 113

4.3 Trade Credit 126

4.4 Musharaka 130

4.5 Mudaraba 135

5. FINANCING SMALL BUSINESSES IN THE MANUFACTURING SECTOR 140
5.1 Financing Small Industrialists at the Establishment

Stage 140

5.2 Financing Small Industrialists After Establishment 148

5.3 Trade Credit 160

5.4 Musharaka 163

5.5 Mudaraba 167
6. THE WEAKNESSES OF SMALL BUSINESSES IN BOTH MANUFACTURING
AND TRADE SECTOR 173
6.1 Management 173
6.2 Manpower 192
7. LENDING INSTITUTIONS 204
7.1 Commercial Banks 205
7.1.1 Indicators of Commercial Banks' Ability to
Finance Small Businesses 206
7.1.2 Constraints Encountered by Commercial Banks
to Finance Small Businesses 213
7.2 The Government Specialised Credit Funds 218
[8. FINANCING SMALL BUSINESSES: CONCLUSIONS, OPTIONS
IMPLICATIONS, AND RECOMMENDATIONS 231
BIBLIOGRAPHY
APPENDICES
viii
LIST OF FIGURES

1 Organisation of the Study xvi

3.1 Analytical Framework 79
8.1 The Integrated Approach for Financing Small Businesses in

Saudi Arabia 243
ix