The UAE's new bankruptcy law could encourage banks to increase lending to SMEs because it sets out a framework for insolvency proceedings and debt restructuring, according to a new research note from Fitch Ratings.
The ratings agency said it estimates that SME lending represents around 5 percent of total UAE bank loans, much of which is unsecured.
"We have not reviewed the new law, but based on media reports and legal commentary, we think it will provide alternatives to liquidation and offer broader options for debt restructuring, which should benefit creditors," said Fitch.
"The new bankruptcy law should help improve prospects for creditor rights and provide a more supportive environment for SMEs as they will be allowed to continue to operate while restructuring plans are being agreed."
The UAE's existing insolvency law does not provide for the rehabilitation of distressed companies through creditor agreements.
There are many recent examples of 'skip' cases, where SME owners have fled the UAE when they could not repay their bank loans because, as under domestic personal criminal law, expatriate borrowers can be jailed if they bounce a cheque or fall behind on their financial obligations.
Fitch said the introduction of formal bankruptcy laws might, in time, also help to stamp out the common practice among UAE banks of rolling over and restructuring impaired loans.
"A high level of restructured loans is not healthy for a banking system, and any steps taken to curb this practice would enhance transparency and make it easier to assess the true quality of lending in the UAE," it added.
Under the new law, a regulatory body, the Committee for Financial Restructuring, is set to be established, with members appointed by the Federal National Council. The Committee will oversee all bankruptcy proceedings and enforce rulings imposed by the courts. For example, it will be able to impose negotiated restructurings as long as a majority of creditors agree with restructuring terms.
The Committee will maintain all records of bankruptcy proceedings but Fitch said it believes court procedures can be more transparent.
"It may be that some transparency will be lost through the delegation of functions to the Committee. Investors and creditors benefit from transparency and it is still unclear to what extent this will be provided by application of the new law," the agency said, adding: "The Committee's operating style will become clear over time, but lack of transparency is a feature of UAE business negotiations generally."
Once passed, the law will apply to all companies established under the UAE's commercial companies' law. Companies established in the UAE's free zones are not included because these areas have their own insolvency and bankruptcy laws. Private individuals unable to repay their debts will not be affected, and personal insolvency laws are being developed.
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