The finance gap and the government tax policy for small and medium size enterprises in Oman

Entrepreneurship growth and sustained evolution is one of the effective means to promote competition, and innovation and to promote private sector growth and economic prosperity. Entrepreneurs are opportunity seekers and are prepared to take risks to pursue creative and innovative ventures. Nurturing and promotion of entrepreneurship have been recognised as a practical policy to promote economic development (Taylor & Plummer, 2003a), within the context of Oman, entrepreneurship has gained traction amongst policymakers over the last three decades (Al Shukaili et al., 2018). Entrepreneurship in developing economies is considered a tool to revitalise economies as well as promote innovation and growth (Jones, 2019). In the case of Oman, the uniqueness of the government policy is to promote entrepreneurship reduce dependency on state jobs, grow the jobs market for youth unemployment, and transition the economy away from oil revenue to tax revenue generated from enterprise. Therefore, this research investigates the evolutionary policy development within Oman and the government initiatives over the last three decades to develop support infrastructure as well as access to finance for small and medium-sized enterprises (SMEs) as the sector is considered to be associated with high-risk (Al Qubtan et al., 2021).

Literature suggests SMEs within the Sultanate of Oman have traditionally relied, as is the case in all economies, on the pecking order (Mazur, 2007) (Due Hoang Quan, 2002) theory. Given the underdeveloped financial market and heavy reliance on a few banks since the 1970s, has meant that SMEs tended to be limited to accessing external finance and remained reliant on family and friends once internal sources are exhausted, they seek external finance, conventional banking and that too was a barrier as they tended to offer interest-based finance. However, over the recent past, sharia-compliant products and banks have emerged. SME owners can exercise preference to choose between Islamic or non-Islamic compliant finance. The literature also suggested that the development of support agencies and infrastructure for SMEs has evolved over the last three decades. For this reason, SME support via conventional, Islamic banks and government funding has gained significant grounding within Oman. The impact of access to finance is investigated and suggests there are divergent views of end users and policymakers but from the analysis of responses, it is evident that financial infrastructure, education and training, and awareness amongst youth and policymakers have grown. Thus, the study findings suggest the thesis contributes to the understanding of the issues faced by SMEs and how government policies are alleviating the barriers to entering self-employment in Oman.

This research used semi-structured questionnaires to seek the views of SME owners/managers about access to finance, institutional environment, education, training, and information to access finance. The semi-structured interviews took place over 6 months in Oman, a capital city of Oman, Muscat, where the majority of SMEs are located. On the supply side, a cross-section of lending managers was interviewed. Responses recorded transcribed and analyzed. Support agencies, policymakers as well as government officials with policy formulation and implementations were interviewed. More specifically, a section of the questionnaire sought the views of all the stakeholders about the change in government taxation policy, their perception, and the likely impact. Using the responses of the stakeholders, the research findings attempted to establish whether there is any link between government taxation policy and SMEs' attitudes towards investment and demand for their services. The research approach used a pragmatic research philosophy, where the qualitative data was collected using a survey that consisted of questionnaires with semi-structured questions to ensure there was less rigidity and more flexibility to enable respondents to provide a comprehensive answer.

The findings of the qualitative study revealed an array of findings. There was a consensus amongst SME owner-managers that government initiatives to establish an enabling environment have been evolving. This is evidenced by the policy to persuade banks to lend 5 percent of their loan facility to SMEs. Banks, conventional and Islamic banks want to support government initiatives. However, lending banking managers and government loan support agencies reported that SME owner-managers, especially at the start-up stage lack the expertise to develop viable business plans and fail to see how best to succeed in securing loans. There was consensus amongst all lending managers that, they must protect banks from excessive SMEs failure. Consequently, there was excessive reliance on ‘personal guarantees’ that often served as a barrier to new entrants. The important point that emerged from this study was that there is a ‘mismatch’ between the expectations of lenders and borrowers. The borrowers failed to fully account for risk and often they believed, banks must lend. Whereas the lending managers had an absolute and rigid understanding that they must safeguard the interest of banks; the opposite position meant there was a high rejection rate amongst banks to SMEs. This suggested the need for the government to provide a loan guarantee scheme for new high-risk SMEs. However, the lending managers, believed their lending portfolio would increase with the loan guarantee scheme but this would lead to a disproportioned rate of business failure, resulting in greater costs for banks.

In terms of the impact of change in government policy to raise tax revenue. The analysis suggested, that there was limited if any awareness of taxation amongst the public, and the same applied to SME owner-managers. SME owner-managers reported, their businesses were impacted by taxation. However, further exploration and questions suggested, that there was a limited real understanding of the impact on individuals and businesses but there existed a general understanding that taxation policies will lead to a decline in consumer demand. More starkly, there was less acceptance of change in government taxation policy amongst the population above the age of 40 years than under 40s. From the analysis of responses, it was also evident that SME owners did not have systems in place to comply with changes in government policy.

The thematic analysis suggested that government agencies and policymakers appreciate the link between the economic prosperity of Oman and SME support. There is also appreciation between banks, policymakers and SME owner-managers for a greater share of information between all the stakeholders. A thorough review and the findings from this study have the potential to positively support policymakers to support potential as well as the existing enterprises to succeed. However, there is a need to narrow the financial gap, demand, and supply, and reduce information asymmetry. This study has the potential to assist policymakers, government agencies, banks, and SMEs in improving support and sanctioning loans. Support agencies in collaboration with government agencies could develop policies, training, and awareness amongst schools and universities to inspire youth to enter entrepreneurship rather than to seek public sector jobs. This empirical research provides in-depth empirical evidence and policy recommendations for all the stakeholders to promote the growth of SMEs, job creation, economic growth, and tax revenue and as a result, reduce dependency on public sector jobs and lessen dependency on oil revenue. Finally, the findings of this study aim to help them develop strategies to attract youths to choose entrepreneurship a choice career that will enhance Oman’s economic well-being as well as enhance its tax revenue base.