Move comes amid increasing level of default in the SME and corporate segments of UAE bank lending
Banks in the United Arab Emirates will suspend legal action against small and medium sized enterprises (SMEs) struggling to repay debt for up to three months to prevent a surge in defaults that may jeopardise the economy.
The initiative, which involves businesses working with lenders to restructure their loans, is intended to give breathing space to SMEs, which contribute around 60 percent of UAE's gross domestic product.
Banks have been hit by a spate of defaults, especially from traders of foodstuffs and oil, as a result of weakness in prices of commodities, as well as a gradual easing of bank liquidity.
"What we have put on the table is a mini insolvency law," said Abdul Aziz al-Ghurair chairman of the UAE Banks Federation, the industry body representing 49 banks. "We will give the customer time and space as long as they're genuine."
The federation was lobbying the government to "expedite" the new insolvency law, said al-Ghurair, also chief executive of Dubai-based lender Mashreq.
Fearing jail for unpaid debt, many cash-strapped expatriates opted to depart, making it hard for banks to recover payment.
The debts left behind by those so-called "skips" had reached around 5 billion dirhams ($1.4 billion), al-Ghurair estimated in November. On Monday, he said he was unsure what the latest figure was.
The plan will be open to companies that have borrowed 50 million dirhams or more from a number of banks and were showing signs of financial stress, typically leading to an inability to make repayments.
The federation will coordinate requests from companies with the lending banks, resulting in the signing of a standstill agreement ensuring that no lender will take pre-emptive action for a period up to 90 days. Led by the bank with the largest exposure, the lenders will then agree how to manage or restructure the borrower's debt.
The initiative had the backing of the central bank, as well as the unanimous agreement of banks, said al-Ghurair.
SMEs made up about 3 percent of banks' total lending, he said.
"We will lend as long as the economy is in good shape and the customer is in good shape. If the economy slows and the customer slows the bank will also slow its lending," he added.
To be honest, while a three month standstill is undoubtedly very welcome, based on the experience of 2009/2010, the 'holiday' should be more like a year , including suspension of trade licence charges and rent if in a FreeZone, with a debt restructure over several years if the initiative is to succeed in it's objective.
20 threatening phone calls a day and the threat of jail against a bounced guarantee cheque are still sufficiently unpleasant prospects to trigger a hasty exit. Cutting out the constant hassling by collection agents would at least allow a small business owner time to think straight and formulate a credible plan. In fact SME owners should be allowed to work for another company as an interim measure to earn money to refinance their business coffers and pay off loans as well as allowing them to pay their day to day living expenses. Jail would then not come into the picture at all if this was the case.
Three months won't make that much of a difference. Give the SMEs a chance to get back on their feet.
One of the biggest problem for SMEs in Dubai is the payment behavior! Big companies should be a good example but those are the ones that demand 90 days of payment time. Why should a SME be the bank for Emarat, Burj al Arab and all other big players in the marked? And even after 90 days one has to fight to get the money. And then they try to deduct from the amount. And if you don't agree, then you're out of the business. This is NOT correct. Give the SME's a chance to live!!!!
Big question is will banks and creditors actually pay heed to it, as there are many instances with other UAE law that says one thing but in reality is ignored, as I still had to give a security cheque for a bank credit card and I was sure that was stopped a few years back?
@Red Snappa, completely agree. Isn't it amazing that 60% of the entire country's GDP and hence employment comes from SME's yet they are always hit the hardest with every type of cost, inconvenience and red tape. The highest interest rates on finance, the debt collectors push the hardest, the highest 'credit risk' etc etc.....is it any wonder with the egregiously high cost of living underway since 2011 and outright wage deflation that businesses are going to the wall?
Really a good initiative, but it must be for all the SMEs. Not only for those who have loans more than 50 Million or above. The Mini Insolvency plans must be for small SMEs have even one million loan also. We have to give this chance for all small business Owners, really they will be genuine to re-structure & pay back to the Banks. And also,they have to unite all the multiple loans with the common interest rate with some flexible repayment plan.In my opinion at least 70% of the SMEs may have the loans below 10 Million. Hope small business owners will be included in the offer & in the Mini insolvency plans..Anyways a good move for many business owners ..