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Sat 21 Nov 2015 01:52 AM

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Why the lack of a bankruptcy law hurts innovation

The UAE has laid out the welcome mat for entrepreneurs but the increasing number fleeing debt is yet more evidence of why the country must have a bankruptcy law, says Courtney Trenwith

Why the lack of a bankruptcy law hurts innovation

It is often said that Dubai is the prime example of innovation: in less than half a century it has transformed from a relatively inconsequential fishing and trading emirate to a global commercial hub.

Its story also has inspired countless others to pursue their dreams. Many of those were showcased during Innovation Week last week, with more than 800 events and activities and scores of businesses launching their new ideas.

The third annual Dubai SME 100 ranking was also released, promoting those young businesses that have managed to make an impact, not only locally but internationally.

But about the same time, more sombre related news also broke. An increasing number of small business owners are fleeing the UAE because of unpaid debt — a total that has now rallied to $1.4bn, according to UAE Banks Federation chairman Abdul Aziz Al Ghurair.

SMEs are often the first to feel the brunt of economic pressures and with banks’ liquidity gradually drying up due to lower deposits from state oil revenues and slower growth across much of the economy, they are finding it difficult to access financing.

These businesses — built on innovation — are the backbone of the economy, accounting for as much as 90 percent of non-oil revenues. Their input will only become more significant as the UAE diversifies from oil and its heavy reliance on the public sector, both in terms of employment and development projects.

There is only one reason for business owners to run away: to avoid jail.

The UAE’s lack of bankruptcy legislation and its insistence on criminalising bounced cheques is causing it to lose what could be some of the brightest minds in the country.

It takes guts to start a company, but it also requires support, not only from banks but the country’s regulatory system. Entrepreneurs need to know they are safe to give it a shot, safe to take a chance. They need to know that the law will help, not purely penalise them.

If they do not have this support they will go where elsewhere — and plenty of countries have created highly supportive environments for entrepreneurs.

The best people at anything rarely gain success the first time round. They fail and they learn from their mistakes and get back up again — and sometimes again, and again. But without bankruptcy protection, they are not able to fail, let alone try again. They have no option but to vanish, leaving behind a trail of debt that ironically makes it more difficult for the next entrepreneur to gain the financial support they need to get off the ground.

The government has implemented multiple pieces of complex legislation that have greatly improved the financial system since the 2008-09 crash, but the dithering over a bankruptcy law has lasted for the better part of a decade.

The ongoing announcements of funding to support entrepreneurs — now totalling several billions of dollars — have been intended to welcome talented pioneers from anywhere in the world. The creation of free zones and incubators also served to attract the brightest and best.

There are good measures in place and there is no doubt the doors are open for innovators but the hospitality needs to be improved. The country cannot achieve its innovation goals alone — but neither can entrepreneurs.

*Correction: The Arabian Business November 8 issue included a comment piece with the incorrect spelling of the Kuwaiti Emir’s name. The correct spelling is, Sabah Al Ahmad Al Jaber Al Sabah. We apologise for the error.

A M 3 years ago

Interesting article, and while I agree with the headline "that there is a chronic need for proper bankruptcy laws", though there appears to be an inherent message in the article which I find very worrying.

'Pick yourself up and try again' doesn't have quite the same meaning when you are trying with other people's money - the message appears to be that it's 'OK' to gamble with other people's money and lose it, and expect to be allowed to do it all over again until YOU win. This philosophy brought the United States and the world to it's knees in 2007, and we remain plagued with the aftermath of that disaster to this date.

I totally agree that failing should not result in an unreasonable sentence like Jail, but fraud certainly should be. The UAE has already set up a central credit scoring agency, this is the first step towards being able to differentiate between the two, and bankruptcy law follows this at some stage.

S H 3 years ago

Today,every other businesses thats making headlines is made with other people's money. When I say other, it's the VCs. They gamble too, knowing well they may not see 80% of the money come back.

A typical VC fund will have a $100M fund divided amongst with 20 such gambles, or investments as one may say, with the logic if that if even one can return 20 times its investment, the fund breaks even. For entrepreneurship to prevail, the environment must be conducive, the regulations should allow risk.

Countries like India are taking some steps in the same direction, creating, implementing bankruptcy laws that will protect the failed, and will not deter the newbie from trying and allowing entrepreneurship to spread. If you want to celebrate the last barrel of oil, there are a few more steps that needs to be taken. Incubators, and free zones were the first steps in the right direction.