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Sat 10 Sep 2016 12:21 AM

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Banking on new bankruptcy legislation

The UAE’s approved insolvency law is its most valuable investment in the economy in years, says Courtney Trenwith

Banking on new bankruptcy legislation

The UAE is about to enter a new era for doing business in the country, with the approved insolvency legislation announced last week removing one of the greatest risks in the economy.

The fear of falling into unpayable levels of debt had no doubt deterred many from either launching a small business or attempting to take their existing operations further.

The support of bankruptcy legislation will unleash a new vigour in the business community, providing investors with an unprecedented layer of confidence that their money will be at least partially protected if the idea they are supporting does not go to plan.

Stock markets will also experience a positive effect as confidence is boosted, while the UAE’s ranking in global indicators measuring ease of doing business, competitiveness and entrepreneurship should all go up.

Although the legislation is expected to come into effect early next year, it is likely to take some time to have an enduring impact. The practice of formal restructuring is rare in the Middle East, partly due to the stigma associated with publicly admitting failure, and the anti-sharia implications of borrowing large sums of money.

Thus, it will take some time for business owners to voluntarily opt for bankruptcy and for prospective entrepreneurs to feel confident in a law that is yet to be tested. With little precedent in the Gulf, all eyes will inevitably be on the first firms that take advantage of the process, and the regulators who monitor it.

They should be comforted by the experience of many developed economies that have indisputably proven that insolvency enhances business. For example, in 2012 Bahrain-headquartered Arcapita Bank became the first company in the Gulf to prove the benefits of insolvency legislation when it filed for Chapter 11 bankruptcy proceedings in the US (part of its company was based in New York, giving it the right to access the US legal system).

At the time, it had $1.1bn worth of debt but after 18 months of court-supervised restructuring it emerged with a solid balance sheet and even went on to secure $100m in fundraising from Gulf shareholders to make new investments, including $200m into Abu Dhabi’s Saadiyat Beach.

Hundreds, if not thousands, of other indebted businesses in the Gulf, however, have not been so fortunate, with many forced to flee the country to avoid jail. Consequently, that makes it harder for banks to recoup losses, in turn fuelling their reluctance to lend to other small businesses, creating a devastating cycle in a country keen to increase the level of economic input from SMEs from 60 percent of non-oil GDP currently to 70 percent.

The new protection also comes ahead of Dubai’s hosting of the World Expo 2020, in which the government has said it intends SMEs to play a pivotal role. It has promised 20 percent of its total direct and indirect spending on the event — worth at least $1.36bn — will be allocated to local and international SMEs. Without the insolvency law, that promise may have backfired for some eager entrepreneurs.

Meanwhile, many have been highlighting a missing element of the new law: it does not protect individuals. They remain at risk of jail for a bounced cheque or defaulting on a personal loan.

However, Minister of State for Financial Affairs Obaid Humaid Al Tayer said on September 2 that insolvency legislation for individuals was being drafted. 

Both advancements will be welcomed by all — from wannabe entrepreneurs to banks and private investors. This magazine has long argued for insolvency legislation and welcomes this exciting development in the UAE’s evolution.