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Sun 12 Jul 2009 01:00 PM

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Drastic actions tell the desperate tale of debts and defaults

Last week’s meeting of the Dubai Computer Traders Group had a distinctly different tone to it than the equivalent spectacle that marked the launch of the association this time last year — and the reason is irrefutably down to the perilous credit culture that has left the channel staring down the barrel.

Last week’s meeting of the Dubai Computer Traders Group had a distinctly different tone to it than the equivalent spectacle that marked the launch of the association this time last year — and the reason is irrefutably down to the perilous credit culture that has left the channel staring down the barrel.

While the DCTG — or Dubai Computer Group (DCG) as it is has been rebranded — lays claim to an agenda almost as long as Khalid Bin Waleed Road itself, it has quickly become clear that one topic is consuming the vast majority of its time and effort.

Self-induced or not, how to halt the growing trail of destruction left by companies that flee the market with unpaid credit lines remains the dilemma that senior figures on Computer Street are debating on a daily basis at the moment.

DCG bosses and representatives from the 150-plus traders who attended last week’s annual gathering spoke candidly about the “fear” that has manifested itself in the market following a spate of ‘runaways’ in recent months.

It is estimated that the Dubai channel has already lost AED$19m (US$5m) from companies defaulting on payments this year and as the barren summer season takes hold there are very real worries that this pattern of gloom will exacerbate.

While there are usually telltale signs to indicate a company might be in trouble or harbours sinister intentions, nobody can be 100% certain where the next bankruptcy is coming from in the current environment.

Every IT trader, wholesaler and re-exporter is painfully aware that they can easily slip into the irreparable cycle of woe simply by over-extending on the wrong partner or doing business with a buyer that they don’t know enough about.

Take last month’s episode when four traders fled the market owing AED14m (US$4m), for instance.

Sources on the Street claim that at least one of the companies who disappeared — Syntax Computers — had traded without problems for several years and was managed by a face well-known to the market.

Yet, it over-exposed itself to one of the other traders which is alleged to have deliberately built up credit lines it had no intention of honouring and subsequently took a hit that left it with no alternative but to scarper as well.

The situation is even more hazardous than usual given concerns that the threat of fraud in the channel remains abnormally high. Checks of basic things that could verify a company’s authenticity from the beginning — such as looking at the date printed on its trade licence — simply aren’t being carried out.

Mainstream distributors appear to be just as guilty of this brazen lack of diligence if talk in the market is correct. After all, they are often the ones that provide rogue traders with the credit lines they need to initiate the whole cycle in the first place.

For these reasons I can see why DCG chiefs have put their heads together and come up with the idea of introducing a credit rating system among members. Plans to launch such an initiative deserve to be commended when you consider that a substantial portion of the channel’s problems stem from credit being extended to companies with dubious credentials.

If it works — and it is a big ‘if’ — then I believe it will help to create a level of transparency not previously associated with the Middle East dealer and wholesale community, and reduce the current ‘trading blindfolded’ mentality that exists in the channel.

However, it is far too premature to hail it as a watertight solution to the market’s problems, especially as there are a ton of questions that still need to be answered over time.

For example, how will such a data-heavy system be managed, implemented and kept up to date? Who will be able to access such information? Is the DCG really capable of adopting the same financial verification standards as professional credit monitoring agencies? What happens if checks fail to detect discrepancies in a member’s application and it causes other companies that trade with it to lose money?

As far as I can see, the success of a credit rating system depends on the association’s ability to achieve two things. The first is to create a core group of 500 or so established traders that are willing to disclose all the information that is needed to get such a bureau off the ground. The second factor is convincing the members — and the wider distribution community — to only trade with one another.

These two aspects are a tall ask, but if they are achieved then it will encourage the companies that aren’t part of the circle to join up — thus increasing overall transparency — while simultaneously driving away the rogue outfits, or at least highlighting the fact they are not able to prove their integrity.

I’m sure the DCG is aware that establishing a working credit rating system will be a monumental task, but whatever the outcome the very fact that this action is being explored is an important step for a channel community desperate to restore credibility and prevent further financial turmoil.

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