Banks in the UAE have been able to contain the damage from the growing debt crisis in the country’s small and medium enterprise (SME), the head of the banks’ industry association said yesterday.
According to Abdul Aziz Al Ghurair, the potential fallout was primarily capped with banks restructuring some of those loans that went sour in the aftermath of the oil price crash.
Al Ghurair has previously warned that a number of small business owners may have skipped i.e. left town without repaying debts, leaving about Dhs5 billion of unsettled loans.
“The UAE banking federation has put a framework to work out all the skip customers and this has been a great boost to stabilise our economy, stabilise our SMEs and stabilise the banks,” he said yesterday on the sidelines of an event hosted by Family Business Council.
A recent survey had revealed that a majority of SMEs in the UAE came under increased pressure in the first quarter of 2016 as the overall economy slowed down, affecting payment collection.
According to the survey, 25% of all respondents said that they had difficulty collecting payments in the first quarter although there was an improvement from the fourth quarter of 2015 in raising funds – still far below what it was during the first quarter of 2015.
One of the first moves made by the federation to counter this growing debt and subsequent skips was to stop criminal prosecutions of bounced cheques in the sector.
The ‘mini insolvency law’ allows debtors a 15-day period to agree a restructuring scheme with creditors, followed by up to 90 days in which the banks will refrain from “pre-emptive action” including prosecution in the courts or travel bans.
This applies to companies with a minimum borrowing of Dhs50 million or more, or turnover of more than Dhs100 million. And businesses already subject to legal action can appeal under the new arrangements, provided they can show “genuine commercial challenges” and an intent to repay.
The plan is a major departure from the UAE’s traditional financial system, which relies heavily on paper cheques as security in business transactions.
According to Al Ghurair, that move has has stopped customers from skipping. “Now some of them are volunteering and are saying ‘let me work out a solution’. We’re also getting banks to agree on a framework.”
Such problems with debt however are expected to continue into 2017, he admitted, adding that he expected loan growth in the UAE this year to be “flattish”, at about 2 or 3 per cent.
“Part of the loans are tagged to the commodity price,” he said, adding that the banking system was still flush with cash, despite the drop in government deposits amid lower oil prices.
“If the oil price comes down, if wheat price comes down, my financing these items will come down,” he said.
“We thrive on new activities in the market; projects, new infrastructure, new developments with our neighbours. All that is interlinked and lending to these activities go down if these activities go down. Re-export business has gone down because some of my neighbours have stopped importing.”