The move by UAE banks to halt legal action against cash-strapped small- to medium-sized business (SME) customers has been lauded as a landmark move for the country’s financial sector.
The UAE Banking Federation (UBF) revealed the plan in March aimed at struggling SMEs amid a slowing economy in the country. It allows for the temporary suspension and restructuring of debt payments, according to a statement from the federation. Banks also discussed the impact of decriminalising bounced cheques drawn by SME owners.
“Lending to SMEs is a high priority for us and we have agreed now on a plan which will definitely be a win-win for all involved,” said Abdul Aziz Al Ghurair, Chairman of the UBF, in the statement.
Defaults in the SME sector have been a cause of concern at several banks in the country. Financial institutions in the UAE had focused on boosting loans to SMEs last year. That shift also followed government measures to boost small business as a way to create jobs and diversify the economy.
“The UAE banks’ gentlemen’s agreement — to withhold pressing criminal charges against SME owners — is a landmark move,” explains Dr Saeeda Jaffar, Managing Director at Alvarez & Marsal Middle East, a consultancy.
“While it doesn’t replace the bankruptcy law currently under development, it does give those running a small business with good intentions a proper chance to figure out and resolve their issues. More broadly, it is another sign that the UAE banking community is maturing.”
Rohit Garg, Head of Business Banking at Mashreq, agrees: “It is a bold initiative from banks to support customers if their business is in stress.”
Despite the challenges, SMEs continue to play crucial role in the UAE’s economic diversification plans, explains Garg. “Currently, SMEs are facing a challenging environment. However, they continue to provide employment to a large part of the population, contribute hugely to the non-hydrocarbon economy. That has not changed and hence their significant has not changed either.
“If anything, in a difficult environment, the importance of SME only increases.”
Thriving sector
More than 22,000 small businesses were established in Dubai last year despite the economic headwinds. Dubai SME, part of the Department of Economic Development, estimates that the number of small and medium-sized enterprises jumped by 18 per cent last year compared to 2014.
Dr Jaffar says it is important to recognise that just because an SME may face some difficulties, it is not destined to fail or that the business model is flawed. “Growing an SME is challenging and a tough balancing act.
“It’s worth remembering that the large corporates of today were the SMEs of yesterday.”
Others agree to the potential of small businesses. “The segment is well diversified, resilient in the medium to long term, and time-tested over the past few economic cycles,” says Sunando Mukhopadhyay, Head of Emerging Corporates at Noor Trade, a division of Noor Bank that caters to SMEs.
While the weak oil price and strong dollar have hit business hard, the current situation is far from a crisis. “This is not 2008 and nothing like 2008. We have some challenges, but all businesses face challenges,” Abdul Baset Al Janahi, CEO of Dubai SME, told the SME World 2016 conference on March 16, as part of his keynote speech.
The International Monetary Fund has lowered its forecast for growth in the UAE to 2.5 per cent this year, from 3 per cent in February, with weakening investor confidence and a further drop in oil prices since October contributing to the revision.
Vote of confidence
SMEs may be going through a rough patch, but they have received a vote of confidence from Emirates Development Bank.
The government lender, which gives loans only to Emiratis, said it was still committed to funding SMEs at a time when many banks are reducing their exposure.
“Comprising around 300,000 companies and accounting for 86 per cent of the workforce in the private sector, SMEs play a critical role in the UAE economy,” said Rashid Mahboob, Acting CEO of Emirates Development Bank, in recent statement to the media.
“We want to send a clear message to SMEs and entrepreneurs that our door is open and we are here to help with expert advice and accessible finance.”
