Business Environment Needs to Be Geared to Prop Up SMEs

Small- and medium-sized enterprises can boost the economy or weigh it down, given their large share in industrial activities.

In the past two years, the Iranian government has tried to empower SMEs by granting them loans. However, challenges beyond those pertaining to shortage of funds remain for the sector, which has been both a contributor to and a victim of a longstanding recession facing the industries.

“Small enterprises are extremely vulnerable,” the deputy head of Iran’s Small Industries and Industrial Parks Organization, Gholamreza Soleimani, told the Persian newspaper Etemad. “If business environment takes a small hit, this will cause issues compelling the SMEs to shut down or switch business.”

He highlighted the importance of providing low-interest loans for small businesses, as these businesses are poor in efficiency and do not benefit from the economy of scale.

By definition, enterprises run by under 50 workers and under 100 workers are considered small- and medium-sized respectively, according to Iran’s Small Industries and Industrial Parks Organization.

In the current fiscal year (March 2017-18), the government has allocated 300 trillion rials ($8 billion) to spur growth in Iran’s manufacturing sector. The move is a follow up to the administration’s policy adopted in the last Iranian year (March 2016-17) to grant $4.5 billion in facilities to help complete under-construction factories and support underperforming enterprises.

This year, in addition to backing new industrial projects, support for guilds and renovation of factories are also on the agenda. Therefore, the amount of credit has been raised, according to former industries minister, Mohammad Reza Nematzadeh.

The measure is part of a comprehensive plan to complete 6,000 unfinished industrial projects with more than 60% progress and help 5,000 industrial firms renovate their machinery.

Last year, loans were granted to “more than 25,000 industrial, mining and agricultural units”, the ex-minister said. “The facilities helped sustain and increase jobs, production and exports.”

A considerable share of the loans was granted to small- and medium-sized enterprises, which account for about 96% of the licensed Iranian businesses.

Nematzadeh noted that the loans helped a majority of SMEs emerge from recession last year, while helping create 7,000 jobs.

Soleimani underscored the role of the government in devising policies and modifying regulations to lay the basis for small businesses to thrive based on nurtured entrepreneurial ideas.

He said the government has taken steps in recent years to remove hurdles in the way of manufacturing sector. Nonetheless, entrepreneurs still face many problems ranging from receiving permits and loans to import/export restrictions and issues related to taxes and duties.

According to Soleimani, one of the conditions for industrial businesses to get financial facilities is that 50-70% of the investment should be made by the applicants.

“Since a majority of entrepreneurs and managers of small businesses are seriously cash strapped, they will be deprived of bank loans,” he said.

Another problem is the flexibility of banking regulations. “In fact, the banking system does not differentiate between small and large industries [when it comes to loans]. Due to the special characteristics of small industries, this situation has put them in a weaker position compared to large businesses in terms of benefiting from financial facilities granted by banks,” he added.

Because of this and similar issues, the official said, support for entrepreneurial ideas are considerably low in Iran.

SMEs are globally known to be engines of growth. In the European Union, they represent 99% of all businesses. In the past five years, they have created 85% of new jobs and provided two-thirds of the total private sector employment in the EU.

The European Commission considers SMEs and entrepreneurship as key to ensuring economic growth, innovation, job creation and social integration in the bloc.

This highlights the key role they play to help Iran reduce unemployment and achieve sustainable growth.

“SMEs have high turnover compared to the minimal investment they need,” Soleimani said. “They create jobs and an environment for innovation.”