Small Biz Loan Default Has UAE Banks In A Panic

The United Arab Emirates has become a powerhouse in the region for the small business finance community. The nation’s alternative lending sector has seen significant growth in 2015, while government efforts to prop up SME performance has signaled renewed support for the businesses.

But SMEs in the UAE continue to struggle.

According to reports this week in Arabian Business, the instances of small businesses defaulting on their debts has spiked, and it’s causing the market to call for legal reform to protect small business owners.

Attributing the news to “banking sources,” SMEs are fleeing the UAE because they cannot pay their debts; the publication highlighted the stringent penalties for even a bounced check.

Reports said there have been hundreds of these cases, whereas the small business owners that remain in the country defaulting on their loan repayments have been arrested in some cases.

The banks said that up to $1 billion worth of small business loans have been defaulted on in the last three to four months alone.

“Banks are panicking and are recalling loans or stopping lending,” said one banker, the publication said.

[bctt tweet=”Banks are panicking and are recalling loans or stopping lending.”]

A Long Time Coming

The country witnessed an exodus of major banks, which, while leaving room for alternative lenders, left a gap in supply for small business financing. Earlier this year, researchers from MEED found that nearly half (45 percent) of small business respondents agreed that access to working capital is a problem.

“While many financial institutions have significantly increased allocations for loans and other financing packages for aspiring startups and small business owners, there remains a need for a more SME-friendly support system that will provide easy access to funds for aspiring entrepreneurs and support the growth aspirations of existing businesses,” said Gulf Capital CEO Dr. Karim El Solh in a statement at the time of the research’s release.

And while large, multinational banks exited the UAE, small banks saw their own struggles. According to Cedar Management Consulting International Chairman Sanjiv Anand, the reduction of players in the UAE’s banking market means small businesses will be considered higher risk for the remaining financial institutions.

“SME lending in the UAE is approximately 5 percent of all lending in the market,” Anand said in an interview with reporters last July. “There are about 300,000 SMEs in the country but only a third, approximately 100,000, are bankable.”

Legislative Efforts

According to Arabian Business, some policymakers and industry players are calling for the creation of bankruptcy laws to protect both investors and SMEs. Less than a year ago, the UAE launched a national credit bureau — the first time, reports said, that the market has seen the scale of indebtedness in which consumers and businesses are.

Reports said analysts claim bankruptcy legislation could decriminalize bounced checks and lend greater protection to defaulters. But the laws have been in the works for about six years, so it is unclear when — or if — the legislation would come into fruition.

“It would help in loan restructuring, thereby reducing the amount of provisions banks will have to take, while improving valuations across the sector,” said Chiradeep Ghosh, banking analyst at Bahraini investment bank SICO, in an interview with Arabian Business.

But opponents of bankruptcy rules say that the existing penalties enforce repayment. Some banks, however, disagree, instead pointing to the small business owners that flee the country rather than face the penalty of their defaults.

Reports said that lobby group UAE Banks Federation will submit a whitepaper next month to the central bank urging officials to move forward with the bankruptcy law.