Financial institutions in the UAE are currently facing a threat posed by a surge in the number of defaults on loans to small to medium-sized enterprises (SMEs). If this gathers an unsustainable pace, we could see a further tightening of controls over credit to SMEs, which could result in circumstances reminiscent of the 2008 crisis that saw expats living in the UAE taking flight after the real estate crash. Estimates suggest that SMEs constitute about 60 per cent of the UAE’s GDP, so they are a key contributor to the economy.
Figures that have been bandied around are significant: One recent estimate suggests that between $1.3 billion (Dh4.77 billion) and $1.9 billion of loans to SMEs are now at risk of default.
Business confidence is a fickle beast; economic optimism in the Gulf has dropped in light of crude oil prices dipping below $40 a barrel this month with no immediate signs of respite.
Unlike the 2008 crisis, loan defaults today primarily involve SMEs operating in the trading sector. However, small firms in the commodity trading sector are also beginning to be hit hard by lower prices, and these are now extending beyond oil and gas. It may surprise some, but prices in the UAE for rice and pulses, for instance, have remained stubbornly low, despite huge demand.
In contrast to the 2008 crisis that nonetheless allowed financial institutions to possess property, they today may not find themselves taking possession of tangible assets of SMEs for various reasons including lack of sufficient stocks or any at all.
Having said that, institutions are likely to start evaluating the utility of using post-dated cheques as security and may move to attempt devising and implementing more sophisticated collateral structures for SMEs, as they appreciate that despite having honourable intentions at the time of borrowing, owners may in light of financial difficulties feel that they should skip rather than face the prospect of imprisonment in the UAE on grounds of dishonoured cheques.
Many have highlighted the need for a new bankruptcy law, arguing that decriminalisation of dishonoured cheques will encourage SME owners to stay in the UAE and resolve or restructure their outstanding loans, whereas others have often argued that the risk of imprisonment helps guarantee repayment. This is a contentious issue, but financial institutions have responded by scrutinising and actively chasing individuals and businesses with far more vigour than they may have done previously. We are currently working with financial institutions — of varying scale — who are now far more eager to pursue those who have defaulted and skipped.
Financial institutions have already begun capitalising on experience gained from the 2008 crisis by implementing advanced processes for extending new loans. For example, the Al Etihad Credit Bureau is helping financial institutions to conduct pan-UAE creditworthiness checks — this kind of scrutiny was previously unheard of in the UAE. In light of the prevailing conditions, going forward, institutions will almost certainly take a more conservative approach to lending and will be keeping
a very beady eye on outstanding loans.
The UAE and broader global economy is in a far better shape than the nadir of the 2008 crisis. Growth opportunities for SMEs in the UAE still remain, but the slowdown in largely oil-based economies is filtering through to the country’s economy at a much quicker rate than many anticipated.
— Imran Shafiq is a Partner and Ali Iqbal Khan is an Associate at Galadari Advocates & Legal Consultants (DIFC) Limited. Email difc@galadarilaw.com for details
Help UAE SMEs survive
Rising cases of credit defaults among SMEs in the UAE could possibly signal another exodus remeniscent of the 2008 downturn