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Banks and VCs pour cash into Saudi small businesses

By Shane McGinley
A rebound in Q4 is 'enough to dispel the idea that VC funding dried up', says one expert on the Saudi market Shutterstock/Gorodenkoff
A rebound in Q4 is 'enough to dispel the idea that VC funding dried up', says one expert on the Saudi market
  • Bank loans up 17.8%
  • Startup funding up 47%
  • Bucks global trend

Funding for small companies in Saudi Arabia from banks, financial institutions and venture capitalists rose sharply in 2023, bucking regional and global trends.

Figures released in December by Sama, the kingdom’s central bank, show that the total value of loans to micro-, small and medium-sized enterprises (MSMEs) rose 17.8 percent year on year to SAR268.6 billion ($71.63 billion) in the third quarter of 2023.

The proportion of total credit allocated to MSMEs by Saudi lenders was 8.3 percent in the third quarter of 2023, up from 7.7 percent in 2022 and 5.8 percent in 2018.

A Deloitte report published last year said SMEs across the GCC accounted for just 3 percent of bank lending in 2019.

Micro companies are classed as those with up to five employees and revenue of up to SAR3 million. Small companies have 6-49 employees and revenue of up to SAR40 million while medium-sized companies have 50-249 employees and up to SAR 200 million in revenue.

There are 1.27 million SMEs in Saudi Arabia, according to the Q3 2023 report by the General Authority for Small and Medium Enterprises (Monsha’at). More than 40 percent are based in the capital, Riyadh.

Venture capital funding for Saudi startups has also accelerated, rising 159 percent to $2.36 billion in 2023.

This bucks the global outlook, with business data company Crunchbase reporting a 38 percent year-on-year drop in startup funding worldwide. Investment totalled $285 billion in 2023, the lowest since 2018.

The bulk of Saudi VC investment in 2023 was allocated to debt financing, which amounted to $1.26 billion of the total. Even without the debt figures, funding for Saudi startups was up 47 percent.

“Saudi investors have become the most active in the region,” writes Triska Hamid, editorial director at Wamda, in her latest column for AGBI. “Well-funded startups in the kingdom have become the much needed acquirers of others in the rest of the region.”

Hamid predicts that Saudi Arabia will maintain this growth momentum in 2024, especially if oil prices rise. 

The year-on-year surge in Saudi funding is a result of a strong rebound in the fourth quarter, according to Eyad Albayouk, general manager for Saudi Arabia at venture capital firm Flat6Labs. The increase is “enough to dispel the idea that VC funding dried up”, he said.

Albayouk pointed out that there is a big difference between lendable small companies supported by Saudi banks and high-growth startups backed by venture capital. 

Lendable small companies have to demonstrate operating profits and are able to provide guarantees on their loans.

In contrast, “VC-backed startups have little to no assets to use as guarantees/collateral and are wildly unprofitable as they still are prioritising growth”.

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