Poverty in Saudi Arabia

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Table of Contents

Introduction
Background of the Study
Hypothesis
Methodology
Results and Discussion
Conclusion
Reference List

Introduction

Saudi Arabia is the world’s largest crude exporter with several million barrels of oil being sold on a yearly basis to a variety of international clients through a mostly government controlled oil sector. As a result, it is considered one of the richest countries in the world with an estimated $400 billion coming into the country from the oil industry alone.

Yet, despite such wealth nearly 60% of the country’s population lives below the poverty line based on the latest statistics. Despite having a reputation for extravagance as evidenced by its numerous upscale malls, massive high rises and a proliferation of luxury cars, the fact remains that there has been little head way by the government in helping worker class citizens elevate the quality of life that they are currently experiencing.

The main problem as stated by studies such as KAYED & HASSAN, (2010) is that access to capital for business ventures is increasingly being isolated to a few select groups within the urban elite and, as such, this has in effect excluded the poor resulting in them being unable to raise themselves up from poverty through entrepreneurship (KAYED & HASSAN, 2010).

It is based on this that what will be analyzed are the various methods of capital access available to the urban poor within Saudi Arabia and the inherent difficulties associated with the process of obtaining sufficient funds to start a profitable business venture.

It is expected that through the various facts and arguments presented in this paper. the reason behind the high poverty rate within Saudi Arabia despite its oil wealth as compared to its neighbors will become clear and should act as the basis behind an assessment that would create effective suggestions as to how the government within the country can best respond to the financial opportunities that need to be put in place in order to help the urban and rural poor within Saudi Arabia.

Background of the Study

Within the study of KAYED & HASSAN (2010), it was explained that in most market economies small to medium scale enterprises (SMEs) make up the bulk of a country’s enterprises constituting 80 to 90 percent of local businesses (KAYED & HASSAN, 2010). Such an orientation can also be seen in the case of Saudi Arabia wherein SMEs make up 92 percent of local businesses within the country and employ up to 80 percent of the workforce (KAYED & HASSAN, 2010) (KAYED & HASSAN, 2010).

H.M. King Abdullah bin Abdul Aziz Al-Saud himself has been quoted as stating that “entrepreneurs are the backbone of the Saudi Arabian economy and are instrumental towards its continued growth and prosperity” (Ahmad, 2011).

Despite this, it must be noted that despite the fact that SMEs constitute 92 percent of local businesses they are still overshadowed by the country’s oil and natural gas industry which accounts for 90 percent of export earnings, 45 percent of the GDP and 80 percent of the government’s budget revenues (KAYED & HASSAN, 2010).

This is in stark contrast to the situation found in countries such as the U.S., U.K., China and other industrialized countries where local SMEs makeup more than 70 percent of GDP, 60 to 70 percent of local government revenue and 75 percent of export earnings.

An examination of the development of local industries within the country reveals that entrepreneurial growth has remained anemic at 3.3 to 3.5 percent annually with the much lauded Saudi Fast Growth 100 group (a listing of the top 100 locally owned corporations that were started by entrepreneurs) gaining a combined annual revenue of $2.4 billion equivalent to $9 billion Saudi Riyals) with 90 percent of their revenue originating from within Saudi Arabia itself (KAYED & HASSAN, 2010).

While $2.4 billion may seem like a significant sum for the accumulated revenue of the top 100 companies within Saudi Arabia, this pales in comparison to the hundreds of billions accumulated by the top 100 companies started by entrepreneurs in countries such as the U.S., U.K, and China. Even a developing country such as the Philippines has a local SME industry where the top 100 companies started by entrepreneurs reach revenues of $10 billion or more (Wilson, 2001).

Despite the fact that Saudi Arabia is widely recognized as a leader in promoting and supporting entrepreneurial activities, it actually has a financial sector that is not as conducive towards small to medium business loans as one might expect.

It is usually the case that if a country is known for supporting entrepreneurial activity this would in turn result in a commensurate effect on its local banking sector wherein loans for small to medium scale enterprises and ventures would be more readily given but this is not the case and in fact it is actually more difficult to obtain these types of loans within Saudi Arabia as compared to other countries within the same region (i.e. the U.A.E, Egypt, Jordan, Israel etc.) as well as in countries such as China, the U.K. and the U.S. Evidence of this can be seen in Saudi Arabia’s 3.3 to 3.5 percent anemic annual entrepreneurial growth which shows the negative impact that the current loan system has on creating better entrepreneurial activities within the country (Ahmad, 2011).

Hypothesis

Lack of access to proper capital for startups within Saudi Arabia encourages the proliferation of poverty within the country since the poor are unable to develop the means to become successful entrepreneurs.

Methodology

Research Subjects

The research subjects for this particular study will consist of individuals recruited from various areas within Saudi Arabia who have attempted to or have started their own business ventures. Whenever possible, the researcher will attempt to find research subjects who actually understand English in order to minimize the amount of time needed in order to properly translate the results.

Justification for Utilizing Questionnaires and interviews

It was determined by the researcher that utilizing a combination of questionnaires and interviews was the most appropriate method to obtain firsthand accounts of connection between poverty and business opportunities within Saudi Arabia.

Deciding on the Questions to be used in the Interviews

The questions for the interviews were based on an evaluation of the research questions and the data and arguments presented in the background of the study section of this paper. The aim of the researcher was to develop the questions in such a way that they build up on the material utilized in the background of the study.

Thus, the questions place a heavy emphasis on confirming the data in the background of the study, revealing the current state of the SME sector from the perspective of entrepreneurs and members of the local financial sector and determining what factors influence the financing of business startups.

Data Collection

Collecting qualitative data by interviews from participants who are geographically spread out can present a challenge to the researcher. One of the methods that the researcher will utilize to collect data is a direct face to face interview. This should enable the researcher to appropriately gauge the reactions of the research participants regarding the questions asked.

Since the researcher will contact a variety of businesses and institutions beforehand it is possible to arrange an interview via alternative means. Communication technology such as videoconferencing, email or instant messenger can act as an effective alternative means from having to physically go to several locations.

Questions Utilized

“The questions used in the interview can be viewed in the Appendix section at the very end of the paper”

Results and Discussion

The examination that was conducted through various was intended to discover how small to medium scale enterprises within Saudi Arabia were normally funded and how did this type of funding differ from what can be seen in other countries.

It was seen that in the case of Saudi Arabia, family played a crucial role in the funding and development of small to medium scale business ventures wherein more than 75% of local businesses started by entrepreneurs were a result of family members contributing towards the initial starting capital of the entrepreneur and actively gave advice regarding the proper management of the business.

As stated by the people interviewed, this has actually resulted in the local banking sector developing in such a way that they cater more towards large scale enterprises or higher tier medium scale businesses as compared to small or lower tier medium scale companies.

The problem with this is that this in effect isolates a large percentage of the local population who do not have access to considerable family funds to start their business thereby contributing to the continued proliferation of poverty in the country since the poor in effect do not have the means of starting their own businesses.

Some of the problems pointed out by researchers was that the inherent weakness of the “family fund system” currently utilized by a vast majority of entrepreneurs is that when it comes to expanding the business beyond its current form and structure this is when family members at times balk and refuse to or are unable to provide the necessary funds for the development of the business beyond its current form.

The reason behind this constitutes a plethora of reasons ranging from the belief that after a business has been established an individual should be responsible for its own expansion or that expansion itself is potentially risky without sufficient added benefits.

As a result this curtails the potential for various entrepreneurial ventures to expand to foreign locations and is evidenced by the fact that nearly 90% of all local entrepreneurial revenue is derived from within the Saudi economy alone instead of through outside ventures. It must also be noted that another problem with the “family based” method of funding is that it actively promotes insufficient market examinations and a more lax behavior when it comes to developing processes that are more efficient and less costly.

The research subjects indicated that family based methods of funding were considered a relatively “safe” and “easy” method of funding for a business which did not have the same stringent procedures and viability checks that are necessary when it comes to a bank loan. As such, entrepreneurs under this particular system are less likely to favor processes that maximized the usage of capital and utilized more efficient methods of operations due to the rather “easy” way in which funds could be obtained to run a business.

This often results in them becoming careless and, as a result, more likely to make bad business decisions. Combined with the fact that there are insufficient government programs aimed at properly educating people resulted in the various problems noted by those interviewed in starting and maintaining a successful business.

Conclusion

Based on the results of the study, it can clearly be stated that the tack of access to proper capital for startups within Saudi Arabia encourages the proliferation of poverty within the country since the poor are unable to develop the means to become successful entrepreneurs. As such, if Saudi Arabia is to resolve such an issue they need to put in place the proper loan programs and free entrepreneurial teaching courses in order to help the urban and rural poor get out of poverty.

Reference List

Ahmad, S. (2011). Businesswomen in the Kingdom of Saudi Arabia Characteristic, growth patterns and progression in a regional context. Equality, Diversity & Inclusion, 30(7), 610-614.

Kayed, R. N., & Hassan, M. (2010). Islamic entrepreneurship: a case study of Saudi Arabia. Journal Of Developmental Entrepreneurship, 15(4), 379-413.

Wilson, R. (2001). Merchants, Mamlucks and Murder/The House of Saud in Commerce…(Book). Middle Eastern Studies, 37(4), 255.

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