An Examination of the Funding Sources for Small and Medium Size Enterprises (SMEs) in Saudi Arabia : in particular the role of Kafalah Programme on SME Bank Lending

Small and medium-size enterprises (SMEs) represent the biggest sector of companies in most of the world’s economies. They play an important role in the economy and boost local employment and growth. In Saudi Arabia, SMEs are... [ view full abstract ]

Small and medium-size enterprises (SMEs) represent the biggest sector of companies in most of the world’s economies. They play an important role in the economy and boost local employment and growth. In Saudi Arabia, SMEs are vital contributors to a culture of entrepreneurship. The Ministry of Finance, in collaboration with Saudi banks, has established The Kafalah guarantee programme in 2006. It provides a guarantee for Small and Medium Enterprises (SMEs) in order to secure external financing in all SMEs’ life cycles. It is managed by the Saudi Industrial Development Fund (SIDF) to offer guarantees to financial establishments in to encourage banks to finance SMEs.

This research aims to assess the impact of this Kafalah programme on the SMEs financial life cycle. The purpose of this research is to investigate how the Kafalah programme has influenced on relationship lending and the capital structure of Saudi Arabian SMEs, prior to and after its introduction and the variance, if applicable to structures evidenced globally. The Pecking Order being the most evidenced and researched theory in the financial life cycle of SME. This theory postulates that when internal sources of finance are insufficient, the firm gets access to external finance in the debt market. The research examines relevance of “Pecking Order Hypothesis" in the financial life cycle of SMEs and the impact on capital structure in the context of Saudi Arabia.

Research incorporated both qualitative and quantitative data collection. Survey sampling was considered a suitable research method for this study. Both questionnaires and interview schedules has been used as tools of collecting primary data. The target of the questionnaires was Saudi SMEs. The researcher contacted and interviewed Kafalah programme management. The questionnaire and interview questions have been prepared in English and translated into Arabic.

The survey sample of this research consisted of 500 small and medium-size enterprises in Saudi Arabia, and Kafalah Programme interviewees. These 500 companies from different geographical areas were chosen from the Chamber of Commerce database. The researcher received only 427 respond from the 500 questionnaires distributed. Only 343 questionnaires was reliable from the 427 responded. There are five main activities for SMEs in Saudi Arabia; Services, manufacturing, construction, retail and travel & tourism. The questionnaire covered those five industries in Saudi SME sector.

The researcher expects that the study will show the correlation between the Kafalah Programme and SMEs’ financial life cycle. The researcher also expects that SMEs in Saudi Arabia follows the Pecking Order Theory process where they prioritize their external and internal funding however, the SMEs in different sectors and variable in Pecking Order Theory.

SMEs; Kafalah programme; Pecking order; debt; equity [ view full abstract ]

SMEs; Kafalah programme; Pecking order; debt; equity