In my last article I wrote about the darkening clouds over the UAE’s bank lending environment. Every banker I have spoken to agrees, but strangely, this is not reflected in revenue targets set for the SME and mid-market commercial banking divisions of most banks.

Every one of them is expected to grow revenues by 30-40 per cent in 2015. Lending officers want to, or have to lend. Risk managers want to go slow. This eternal tension is even more pronounced this year. What is to be done?

This will naturally result in a larger number of deals being sourced, smaller exposures taken and far more due diligence done. There is more banks can do. Banks are key stakeholders in the mid-market space and need to display far more initiative in playing an activist’s role in handling their SME/mid-market clients to reduce risk.

In more developed markets where the equity culture is advanced, capital providers are aggressive and watch over companies’ managements like hawks and do not hesitate in forcing change if performance parameters are not met.

Banks here can be more activist in their approach to help them manage risk by helping (forcing?) clients adopt better practices, display more transparency and financial discipline in running their businesses. Admittedly, this will be difficult when clients have multiple banks financing them, as is the case most of the time.

Hence, activism needs to extend to banks reaching out to the other lenders as well, to try and collectively manage key stakeholder banks’ approach to individual SME borrowers. This is still possible in the SME space.

This will make for better business and lending environments if corporate governance improves, and lenders adopt a uniform approach. The danger of a cartel forming is minimal, as the absence of bankruptcy laws has spawned an ‘every man to himself’ attitude among banks when clients face tough times.

There is an individual scramble to recover dues, and all togetherness is quickly forgotten. Until then, banks can act together to proactively and collectively interact with clients to asses and monitor processes, systems, controls, use of finance, reporting and so on to ensure a higher level of corporate governance.

What exactly does activism here refer to? In a nutshell, it means the main bankers to a client, say who account for 70 per cent of lending, get together, to advise and work with their client, to improve governance. If they cannot do it themselves, these activities can be outsourced to firms such as ours.

Banks can also use this forum to improve their understanding of the clients’ business model and of its internal workings — of vital importance in assessing risk. What I am suggesting is a positive forum to help clients and banks — to shore up governance to improve the risk profile of borrowers.

This will result in lower lending costs to the latter and lower portfolio risk to banks. What I am not suggesting is a cartel to rip clients off. The fact that the UAE is over-banked will ensure this will not happen in any case …

Bank activism is required on another front as well. It is an open secret that informal networks among bankers exist and opinions are sought and information exchanged on an ‘off-the-record’ basis. There are numerous benefits in banks coming together to form a forum or even several, with a view to exchanging market information, trends and so on. The forum can be productively used to:

Exchange information.

Insist on multi-bank meetings for large SME borrowers and/or high risk clients on a periodic basis.

Take collective and helpful action at very early signs of trouble.

Agree on basic standards — for e.g., a uniform rating system to rate auditors (there is none now, with hundreds of auditors producing dodgy accounts).

The UAE lending market is remarkable for its absence of such activism — both client facing and internally, for the banking industry, given that the nature of lending to the SME/mid-market space entails high risk for a variety of reasons. Malpractices in the borrower’s market, aided and abetted by pliant or ignorant auditors have made the lending scenario worse in the last five years.

It is astonishing how little banks talk to each other formally, given the above. It is therefore of no surprise that this information gap is being happily exploited by unscrupulous borrowers.

I will be accused of naivety by bankers and of being too clever for my own good by borrowers. However, both sides will agree that there has been a marked deterioration of ethical business practices and a sharp rise in dodgy accounting. Good borrowers are tainted by the bad ones. More of the same will produce more of the same. It is time for banks to do something radical, even if baby steps were taken. While vast changes for the better may be too optimistic to expect, the pace of deterioration of malpractices may just be slowed.

The writer is the Managing Director of Vianta Advisors DMCC (www.viantaadvisors.com).