Dubai

WHAT BANKS CAN MEAN TO SME’S IN THEIR DAY-TO-DAY BUSINESS, AND VICE VERSA?

By Bruno Gremez, Co-founder of Smart Fintex and CT&F.

I have already written about the difficult access to financing for SME’s in the UAE, which is mainly explained by the reluctance of local banks to finance SME’s that they generally perceive as too risky.

This is very unfortunate in a country where SME’s contribute to around 50% of the GDP. This situation has increasingly drawn the attention of local authorities, which are exploring various solutions to this important issue, especially at a time when the leadership of this country wants to promote an increased diversification of the economy.

While a number of local banks may already be rethinking their strategy towards SMEs in an attempt to address this issue, many of these banks could also, in parallel, explore the possibility to support SME’s in their day-to-day administration. This would be risk-free and potentially rewarding.

As Seow-Chien Chew, Partner with Bain & Company recently explained, most SME’s dedicate their scarce resources on running and growing their business. That leaves them with limited means to deal with their day-to-day administrative burdens.

That creates an opportunity for local banks to play a key role in providing integrated digital solutions for their administrative work. Examples could typically include payroll and accounting services.

In today’s digital era, international banks increasingly help SME’s by not only effecting monthly salary payments to their employees for instance, but also by reporting related data and by enabling a smooth digital integration of such data into the SMEs accounting system.

The benefits for SMEs are huge. It makes them more efficient in their accounting. It allows them to save on resources used in their accounting and back office, and dedicate their efforts on the development of their business. It can also enable them to improve the reliability of their reporting and to become more transparent, hence more attractive, to their banks.

Banks can also greatly benefit from such solutions. First, banks can charge fees for such services and increase their clients’ revenue base. Second, and more importantly, banks can build closer relationships with their clients. By providing such integrated solutions, banks will collect data on their clients and increase their understanding of their business.

Improved client’s intimacy often enable banks to build more sticky relationships with their clients. Indeed, banks will be in a position to use data collected on clients to also provide other services and further increase revenues. Eventually, that may even help them finance those SME’s in a less risky way.

At the end of the day, lending risks are always related to some of sort of perceived asymmetry of information. Usually, banks are reluctant to fund their SME clients because they do not understand their business sufficiently. The more reliable information banks can collect on their clients’ business, the less risky these clients will be perceived by their banks, and the more comfortable banks will be about financing them.

Bain suggest that banks willing to pursue this avenue should do so by adopting a sectorial approach. I strongly believe in that strategy. If local banks in the UAE can combine sector knowledge with tools to help SME’s in their day-to-day admin, they will improve the quality of the integrated solutions they provide to make sure they correspond to the business reality of these SMEs, and that will increase the intimate knowledge that banks build on their SME clients.

Every problem is a source of opportunity. I can only urge banks in the UAE to take this opportunity very seriously to improve the business of their SME clients and, at the same time, increase their understanding of their clients’ business, and eventually their risk appetite for SME lending. But the key will be to properly use and optimise data collected. In today’s world, data is gold!

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The bankruptcy law in the UAE that offers local SMEs facing financial difficulties a number of solutions for their problems.

By Bruno Gremez, Co-founder of Smart Fintex and CT&F.

During the last few years I have lived and worked in Dubai, I often heard  that there was no effective bankruptcy law in the UAE. That would create an imperfect world where companies facing financial hardship would not be able to seek protection from creditors while restructuring their debts. In the absence of adequate laws, businessmen would face arrest and criminal prosecution for unpaid debts and would then often flee the country to avoid jail, leaving behind them unpaid employees and a pile of defaulted debts to their creditors.

Actually, many local businessmen ignore it, but the situation has changed. The new UAE Bankruptcy Law (Federal Law No. 9 of 2016) came into force on 29 December 2016. It applies to both onshore and free-zone companies established in the UAE and offers protection for employees, shareholders and directors of companies undergoing court-led insolvencies.

Some of the major changes

The new law designs a number of new procedures, each supervised by the court, to help companies facing financial hardship go through their difficulties in an orderly way. These include a “light” rehabilitation process for solvent debtors facing temporary financial difficulties called the “preventative composition”, a more substantial rehabilitation process for insolvent debtors that require deeper restructuring solutions, and an “end-of-the-line” liquidation process.

The most interesting option for solvent companies facing temporary difficulties is the preventive composition. The new law provides a court-sponsored process to allow a company in financial difficulties to reach binding agreements with its creditors, as an alternative to filing for bankruptcy.  This is a major change and a very positive move, which should encourage companies and their directors to deal with financial troubles and the company’s inability to meet its financial obligations as early as possible and in an orderly way.

In the UAE, everyone knows that a person who writes a cheque in favour of a third party that later bounces back in case insufficient funds are available to honour the payment faces criminal liabilities. When a company writes a cheque, the individual writing the cheque on behalf of the corporate entity potentially faces the same criminal liability. However, the offence may be remedied by payment of the debt at any time, including after the criminal court has passed its judgment.

Under the new law, criminal proceedings related to bounced cheques will be suspended if the cheque was written in the period before the company enters a preventive composition or a court ordered financial restructuring. After the terms of the repayment scheme have been approved by the court and the creditors, the debt, which is the subject of the cheque, may be settled under those terms and the consequent criminal offence remedied.

However, it is important to note that the potential criminal liability has not been removed entirely by the new law. If the company’s financial situation deteriorates further and it is eventually wound up in a bankruptcy process, criminal proceedings may not be suspended.

Potential offenses to keep in mind when a company faces financial hardship

Under the new law, there are a number of potential offences, which directors and managers of companies that are later wound up by court order should be very much aware of.

Preferences: approving the repayment of one creditor to the detriment of others, or giving special privileges to one or more particular creditors,  constitute an offence if the preference was granted after the company ceased to pay its debts when they fell due.

Sales at undervalue: it is unlawful to sell, in bad faith, any of the company’s assets under its market value. Companies selling distressed assets should carefully document what they do to avoid prosecution.

Non-core & speculative business: corporate activities that were not core to the licensed business activities of the company, particularly where such activities were speculative in nature and significant enough to have contributed to the company’s financial difficulties, are potentially criminal. This could be of particular importance for those many companies active in commodities trading in Dubai.

Fraudulent bookkeeping & falsified accounting: activities designed to deliberately conceal a company’s financial position or to dishonestly benefit certain parties over others may also constitute criminal acts.

Conclusions

Shareholders, directors and managers of companies going through financial difficulties should keep in mind the above-mentioned offenses when running their business and should be particularly careful not to do anything, which creditors could later on use against them after a company failed by arguing that they committed criminal offenses.

At the same time, the new bankruptcy law opens the door for structural solutions for any company that faces difficulties in its business and that cannot meet its financial obligations timely, the most significant being the possibility of a preventive composition. Business leaders should seriously consider this avenue, which may enable structurally sound companies facing temporary difficulties to trade themselves out of those difficulties in an orderly way while keeping their creditors quiet and relatively safe.

Companies facing financial hardship would often be well advised to do all the following: (1) identify and recognise the difficulties they face as soon as possible, (2) define, based on these new business conditions, the strategies that are the most likely to enable their company to recover, and tentative cash-flows associated to each of these strategies, (3) put forward potential debt restructuring plans that match cash-flows with debt repayment obligations, (4) do all the above in full transparency with all their creditors.

The above is often the best way out of financial hardship. Some companies are perfectly equipped to do that with they qualified and experienced staff. Some others might find it useful to be properly advised throughout the process to avoid the usual pitfalls and, more importantly, the potential criminal offenses that may result from any mistake.

Lastly, one should bear in mind that the above applies only to companies. Individuals who are unable to repay their debts will not get protection under the law and will not be able to resort to the new bankruptcy law to avoid criminal prosecution.