Bankruptcy law helps spur SME bank lending
dubai — A lower oil price and tighter liquidity will continue to impact general business confidence in the UAE, but the new federal bankruptcy law should improve the business environment, as it will allow companies in financial distress to restructure their debt, analysts at KPMG said.
The bankruptcy law, which came into effect by end-December 2016, provides three options for distressed small and medium enterprises aimed at helping to promote SME bank-lending in the UAE and encourage potential ‘skippers’ to try to restructure their debts and save their businesses, they said.
SMEs, which constitute around 90 per cent of all companies operating in the UAE, are on track to boost their share of the gross domestic product from 60 per cent to 70 per cent under a new government initiative.
The three options include preventative composition (a pre-insolvency “debtor in possession” rescue scheme akin to the US’ Chapter 11), restructuring and liquidation.
“Under the new law, a court application for preventative composition allows for the possibility of obtaining new financing on a priority basis, provides for a moratorium on enforcement and includes measures allowing the cram down of unsecured claims,” KPMG analysts Keith Buck and Abbas Basrai said in their perspectives on the UAE’s banking sector.
Restructuring is an out-of-court process that involves the newly established committee of financial
Banks should be asking themselves how they can better support the growth and development of the national economy Ellyard, Luke KPMG Partner
reorganisation supervising the restructuring in a manner mutually agreeable to debtors and creditors, they explained.
“The liquidation option ensures that full bankruptcy proceedings can be brought in the courts. While the law contains aspects that make preventative composition or bankruptcy more attractive, creditors, banks and SMEs are still likely to restructure debts in a consensual manner,” they said.
Emilio Pera, partner and head of Financial Services, said the UAE is a developing banking market with operators and customers at varying levels of complexity and maturity.
“Tighter liquidity — some of it caused by external forces — has stressed a number of financial institutions. It is to the credit of the regulator and the leading financial institutions that the sector has emerged relatively unscathed from
UAE is a developing banking market with operators and customers at varying levels of complexity and maturity Emilio Pera, Partner, Head of Financial Services
the experience.” He said the financial services sector has not only been directly impacted by lower oil prices. “We have seen lower levels of government spending, as well as more restrained spending by GCC investors and tourists. In an overbanked market, a number of investors have identified synergies and potential savings, although consolidation can be easier in theory than in practice.”
He said established UAE banks face a number of explicit and implicit threats, ranging from new and emerging external threats like cyber security to existing and recognized risks like conduct and regulatory changes. Like other private sector businesses, banks are under pressure to make a return for their stakeholders — whether that is dividends for shareholders or improved job satisfaction for employees. “At a time when GDP growth is slowing, banks and other financial institutions are also being hit by rising impairments and non-performing loans, while being encouraged by the government to support the growth of SMEs. VAT will have significant implications for the financial services industry. It is increasingly likely we will see consolidation and accelerated structural reform over the next 12 months,” said Pera.
Luke Ellyard, a KPMG partner who heads the firm’s financial services audit practice in the UAE, said the increasingly complex regulatory landscape means banks have to change. “Banks — not just here in the UAE but regionally and globally — should be asking themselves how they can better support the growth and development of the national economy, for example by encouraging SMEs that are the lifeblood of the UAE economy, while also ensuring that they clearly understand the risks of a changing banking universe,” said Ellyard.
According to KPMG analysts, despite dollar-driven appreciation of the dirham, which has weighed on competitiveness, the UAE has continued to benefit from its perceived status as a safe haven, with political stability and a comparatively diversified economy.
“While low hydrocarbon prices have depressed government revenues, the UAE’s non-oil economy grew by over two percent in 2016, driven by increasing tourism, a resilient real estate sector and a thriving financial services sector. The banking sector grew by 5.4 per cent in 2016 to reach Dh711 billion,” they said.
— issacjohn@khaleejtimes.com