It is expensive to be unbanked in the US

By Bruno Gremez and Samir Kasmi, Fintech entrepreneurs and co-founders of Fincluziv

As Europeans, we started spending time in the US after our fintech startup Fincluziv was selected and invited to take part to the BECU Fintech Incubator in cooperation with the University of Washington earlier this year.

Obviously, we are not unbanked people, but having bank accounts outside of the US does not mean you can easily use them for day-to-day transactions in the US. This is how, in our day-to-day life, whenever paying bills, making payments, etc, we discovered that a number of simple things can get complicated when you do not have any US bank account (yet). We started to talk to Americans, including bankers, and discovered a financial world completely new to us.

As Europeans, we opened our first bank accounts when we were teenagers. It was easy, and more importantly, free. In Europe, anyone has the right to open a bank account. It does not offer any credit facility or credit card, unless you request one and qualify for it, but it is very handy. Through your bank account, you can pay and get paid fast, digitally, online without having to visit any branch, and you can also effect international payments. As there is usually no minimum deposit requirements, it is by no means a luxury.

A bank account becomes even necessary once you start working, since employers typically request you to share your bank account details in order to pay your salary digitally. Employers would usually not accept to pay salaries differently than through straight bank transfers. As more and more European countries want to ban cash in order to promote digital money as a way to combat tax evasion, money laundering and terrorist activities, this is surely not going to change any time soon.

When we arrived in the US, we naively thought that we would wire money from any international account to pay bills, rent, etc. Nothing was less certain. For instance, when you sign your rental contract, you cannot wire money internationally to pay for your accommodation. You also cannot withdraw cash from an ATM and pay your rent in cash. You can only pay from a local bank account, or with so-called money orders.

In the US, around 25% of Americans have either no bank account or use alternative finance channels. That does not mean they are unable to work and collect their wages. To the opposite, if you have no bank account, you can receive your wage through for instance an old-fashioned paper paycheck. There is actually a significant number of US employers that pay their employees by checks.

Once you get you paycheck, you can cash in it. There are several ways to cash in a check if you do not have any US bank account. You can go to the bank where that check was issued, to major retailers or to payday lending stores (see later). For that, you will pay a fee for the service, usually a percentage of the check’s value that you cash in. Fees usually amount from around 1% at banks and retailers up to 5% at payday lending stores.

Once you get your cash in hand, you can use it in stores to buy goods. But there are services you will not be able to pay in cash. For instance, as mentioned above, it was not possible to pay for our accommodation by international wire transfers, nor in cash. You need to turn your cash into so-called “money orders” to pay your rent. Money orders are a kind of check to the order of a third-party, the beneficiary of your payment. You can have money orders issued at some retailer shops or at US post offices. In order to get a money order issued, you will pay yet another fee of around USD 1 for each money order.

So in short: you incur fees in order to cash in your wage check, and you pay yet other fees each time you need money orders to pay your bills. But it does not stop here. If you need money for more important transactions like buying a car, which you may very well need in order to get to work, you may require a loan. If you have no bank account, you have no credit history. The problem is that the US banking industry is based on credit history and the so-called credit scores.

The logic behind a credit score is that it shows your ability and willingness to service your debt based on existing borrowings. In Europe, if you need a mortgage loan or a car loan, you are more likely to get one from your bank at good conditions if you can demonstrate a stable source of income and no debt because it shows you have no financial obligations. Having no financial obligations actually increases your financial flexibility.

In the US, the absence of debt, hence of a credit score, prevents you from accessing any bank loan, irrespective of your proof of income and details of expenses and obligations. Without credit score, you are left only with very expensive options in the market.

There are many expensive borrowing options in the US. To name a few, some car dealership for instance will charge exorbitant monthly installments in order to offer you a car on credit, often charging triple-digit APR. Another form of controversial borrowing option are the so-called pay-day loans, which often end up charging very high triple-digit APR for a loan that is supposed to be extremely short-term, sometimes only 2 weeks.

At the end of the day, from the moment you cash in your wage until you pay your bills and eventually contract some loans in order to afford so major purchases, being unbanked forces you to pay extra fees and bear often exorbitant interest charges. As we found out, it is definitely expensive to be unbanked in the US.

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UAE Bankruptcy law is effective: first company restructured successfully.

By Bruno Gremez, Co-founder of Fincluziv, Smart Fintex and CT&F, ex-ABN AMRO and BNP Paribas.

I wrote end of 2017 about the new UAE Bankruptcy Law (Federal Law No. 9 of 2016) that came into force on 29 December 2016. This new law, in essence, offers protection for employees, shareholders and directors of companies undergoing court-led insolvencies.

Most people in the UAE believe that any company facing financial hardship will not be able to seek protection from creditors while restructuring its debts in an orderly way. In the absence of adequate laws, any such company and its shareholders and directors face the potential threat of being arrested and of facing criminal prosecution for unpaid debts. Often, those shareholders and directors will flee the country to avoid jail, leaving behind them unpaid employees and a pile of defaulted debts to their creditors.

Hopefully for those companies, their employees and their creditors, this is now about to change. Gulf News recently reported that a UAE company has, for the very first time, successfully restructured its debts under the country’s new bankruptcy law. The Abu Dhabi Judicial Department — through the Bankruptcy Department of the Abu Dhabi Court of First Instance — has allowed the company to restructure its debts and resume business under Federal Law No. 9. 

The company, whose name remains undisclosed, is a limited liability company (LLC) founded in 2008. The company had actually debt in excess of 18 times its capital and had requested the proceedings.

Under the law, the court appointed a secretary and relevant experts to oversee the company during its restructuring. They conducted their duties until the restructuring process was successfully completed, by paying off the company’s debts, renewing its commercial licence, and achieving a level of liquidity five times the size of the company’s capital, enabling it to resume its business.

The UAE law identifies different ways to avoid bankruptcy cases and the liquidation of debtors’ assets, including consensual out-of-court financial restructuring, composition procedures, financial restructuring and the possibility to secure new loans under terms set by the law.

The purpose of the new law is to assist troubled companies and protect their creditors, with a view to improve the country’s economic and investment environment. It applies to all private sector companies established in the UAE incorporated onshore or in freezones (with the exception of companies incorporated in the Dubai International Financing Centre – DIFC and Abu Dhabi Global Market – ADGM, which have both their own insolvency regimes).

One should underline the positive effects of such laws.

Banks will lend more if they know they can be protected by a legal framework that enables an orderly and transparent restructuring of debts in the unlikely scenario where their clients face unexpected financial hardship, instead of the gloomy prospect of creditors competing with each other to seize assets of their failing clients in an uncoordinated way in order to limit the bank’s losses.

Entrepreneurs and businessmen will be less afraid of facing the reality of any financial hardship if they know they can directly benefit from legal protection and have time to restructure their debts in an attempt to return their business to profitability as a going concern without banks stepping in by freezing account and without the threat of facing criminal prosecution.

Employees will also indirectly benefit from the new law whenever their employers will be able to restructure their debts to navigate through the business cycle and avoid letting people go whenever they are prevented from paying salaries as theirs banks stop supporting their companies.

This first example of a private company successfully restructuring its debt is great news for the UAE economy. In the long-term, the local economy should greatly benefit from this new development. One can only regret that no more details were made available, as any such example should be widely publicised.

 

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

By Bruno Gremez, Co-founder of Fincluziv, Smart Fintex and CT&F, ex-ABN AMRO and BNP Paribas.

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!

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 Fincluziv, Smart Fintex and CT&F, ex-ABN AMRO and BNP Paribas.

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.

 

 

 

 

How can FinTechs concretely improve business for small entreprises in Dubai.

By Bruno Gremez, Co-Founder of Fincluziv, Smartfintex and CT&F, ex-ABN AMRO and BNP Paribas.

I read recently a very interesting article published in Business Matters, a UK publication for SMEs. The article described a number of transformations experienced by the financial sector in recent years with the so-called FinTechs and explained that these changes were gradually translating into a number of advancements that are improving the way small entreprises can conduct their business and get access to financing.

I will summarise below these main changes and insist on one particular improvement that can, and should, revolutionise the way small businesses fund their growth.

The first of these improvements is the increased transparency of small businesses. With the help of digitised payment recors and supply chains, SMEs can more easily document and maintain their financial books. That only improves their transparency and eventually reduces the asymmetry of information between potential lenders and SMEs.

A second improvement is derived from the ease and cost of effecting and receiving payments. The likes of PayPal have in recent years brought to the market affordable and convenient payment solutions. These solutions can help SMEs save time and a lot of money when dealings with payment flows.

FinTechs translate into a third improvement. The digitisation of lending through online platforms means that the customer experience greatly improves at every stage from the loan application, through the loan processing and the loan approval and disbursement. This reduces the time and the complexity of applying for any loan.

A fourth improvement is derived from lower international transfer costs. Any small entreprise doing business overseas, which is the case of a vast majority of companies in an open economy like Dubai, incurs huge costs due to transfer charges. Next to transfer charges, conversion rates often translate into huge costs for the business.

The last, and to my view, most important improvement brought by FinTechs for small businesses is what Business Matters calls the shift towards cash-flow based lending. Traditional banks rely on collateral in order to grant credit. The problem is that many banks around the world have a narrow definition of what they consider as acceptable collateral. Traditional banks often prefer to get security over immovable assets. The problem is that start-ups usually have working capital, i.e. short-term liquid assets used in their business, and no fixed assets.

I have met countless SMEs in Dubai that experienced that issue when they approached traditional banks. While most SMEs need credit in order to fund part of their inventories and receivables before those are converted into cash a few weeks later when they are sold to customers and when cash is eventually collected from customers, banks require mortgages on some fixed assets, or worse, cash collateral in order to open a credit line.

FinTechs are gradually bringing improvements on that field too by carefully granting collateral value to some short-term liquid assets in order to enable SMEs to get access to short-term finance, meet their immediate funding needs, and grow their business. That may be the most needed (r)evolution expected by the SME community in thriving economies like Dubai, where they contribute close to 50% of the GDP but represent less than 5% of the balance sheet of traditional banks.

SME Dubai opens the door to 100% ownership of onshore companies with a view to boost innovation.

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

The above title may sound bizarre for foreigners who are less familiar with the UAE or the Gulf region. All the more since the UAE are known as a hub for business in the MENA region and have built up a strong reputation as a business-friendly country in the world.

One has to realise though that while foreigners can have 100% ownership of their business if their company is established in so-called free zones, companies established “onshore”, i.e. outside any free zone, must be owned for 51% by a local partner, leaving the foreign shareholders with a minority stake of maximum 49%. Why bother? Because onshore companies can do things that offshore companies cannot. For instance, doing business inside the UAE and domestic transactions falls in principle outside the scope of any free zone company.

This is the reason why this new initiative by Dubai SME, an agency of DED (Dubai Economic Development), may be very significant. It could unlock initiatives and investments by enabling entrepreneurs and startups to enter the UAE as full-fledged local, onshore companies with new and innovative ideas and giving them the opportunity to rapidly scale up their business in the UAE.

Dubai SME has offered 100% ownership to small and medium entrepreneurs if they are able to demonstrates that they have completely new and innovative business ideas and the ability to execute them.

This step shows that the government of Dubai is not only taking measures to attract big businesses, but also and even small and medium entrepreneurs, which will be provided with incentives to grow and contribute to the diversified local economy. Currently, SMEs contribute 40% in the GDP of the Emirate of Dubai and the government has the ambition to increase this share up to 45% by 2021 (in less than 4 years time!).

This step is especially important for entrepreneurs who have bright ideas and less capital, and especially the ambition to conquer parts of the local market with their ventures.

The difficulty for SMEs in the UAE to access financing, by Bruno Gremez and Samir Kasmi.

Bruno Gremez and Samir Kasmi are partners of Fincluziv, Smart Fintex and CT&F and ex-ABN AMRO, BNP Paribas, Societe Generale.

Over the last four years, we have noticed increasing difficulties for SMEs in the Gulf region to access financing from local banks.

At first sight, we thought that the main reasons behind this could be company-specific, like their sector of activity or their financial situation in terms of profitability, etc. Over time, we have started to realise that this phenomenon is a structural issue for local SMEs. So much so that we had to approach foreign banks to finance local SMEs that had mandated us to structure financing for their business needs, which we did successfully.

Local banks in the UAE are generally quite proactive in serving retail clients, large corporates and government-related entities, and they do that quite well. However, their exposure to SMEs is still unfortunately very limited.

The Khalifa Fund for Enterprise Development, which was created in Abu Dhabi to support Emirati entrepreneurs, warned already back in 2013 that the SME share of bank lending in the UAE was only 4%, even less than the average of the MENA region, which was around 9%. When we look at the statistics published by the Central Bank of the UAE, we calculated that total loans to SMEs compared to total business loans was around 5,6% in 2013.

We did not find more recent statistics but we believe that the situation has certainly not improved since then, to the contrary. Indeed, the Credit Sentiment Survey from the Central Bank of the UAE for Q2 2017 reported a tightening of credit conditions to SMEs compared to larger corporates.

In a country like the Netherlands, the Nederlandse Vereniging van Banken, the local bank association, published in its last fact sheet that lending to SMEs amounted to EUR 126 billion or 45% of total corporate loans. That is 8 times the level of the UAE.

To add to this figure, one should note that Holland is known to be a country with a relatively high number of large multinationals on which any major Dutch bank will naturally be largely exposed.

The comparison between the UAE and the Netherlands is pertinent, not just because we have worked in both countries. Both countries have relatively limited internal markets compared to larger countries, but compensate that by having built very open economies where a large proportion of SMEs contribute to their GDP.

So, the question is why local banks in the UAE are so reluctant to take risks on SMEs. To put this question into perspective, one should realise that SMEs represent nearly 85% of all establishments in the UAE, but more importantly, they account for 60 to 65% of the workforce and contribute around 50% of the total country’s GDP.

Lending to sovereign entities is, like in any country, the safest risk that a bank can take. Capital requirements from regulators for sovereign types of risks are usually very limited, which also helps banks generate attractive risk / returns.

Retail clients offer banks the advantage of risk diversification: banks spread theirs risks over a large number of small individual clients by lending relatively limited amounts of money to each of them individually. Next to that, lending to retail customers can be largely be collateralised. A significant portion of these loans is usually made of mortgage or car financing. Banks have recourse on fixed assets in case the customer defaults. That protects the bank whenever a customer faces any financial hardship.

Large corporates offer local banks lots of comfort thanks to a combination of elements: their size and strong market position, their financial transparency, the strength of their balance sheet, and their financial flexibility. Local large companies have indeed usually access to a wide variety of financial instruments to fund their corporate developments, which consist of a combination of equity and debt capital markets products on top of bank financing. Large corporates are less dependent on banks and this improves the risk perception of banks.

Most of the time, SMEs we come across have very basic and reasonable needs. They do not require banks to finance complex, long-term investments. They mostly need working capital finance for their next business cycle.

When it comes to banking SMEs, local banks tend to use the same strict criteria that they apply to larger corporates. They typically require from smaller companies audited financials over a minimum period of time, usually three years. Successful start-ups will typically fail to meet such a criteria. They also require companies to meet minimum equity and turnover thresholds. Many profitable companies may fail to comply with these criteria because they have not yet grown enough to meet these hurdles.

Most of the time, local banks impose these strict requirements because they look at the financials of those SMEs as if they were performing the credit assessment of larger corporates. They especially do not look at the underlying business to be financed, since banks are not comfortable or used to collateralise their exposure on SMEs with those current assets that the banks would finance, like inventories and receivables.

Actually, local banks feel comfortable with mortgages on local fixed assets. However, in case of default, converting a fixed asset into cash, in order to repay a loan, may take a long time, sometimes many months, if not years. Converting current assets into cash is normally much easier and quicker. Of course, this assumes that credit facilities are properly structured.

Dubai has very successfully positioned itself over the last two decades as a major trading hub between countries of the Middle East, Asia, Europe and Africa. Trading is a buoyant sector of activity where SMEs are dominant. Given the importance of these SMEs to the local economy, local banks would be wise to look at the example of European banks in general and Dutch banks in particular that have developed for a very long time their technical capabilities to serve SMEs active in trading by securing their exposure with primarily current, liquid, self-liquidating assets.

European banks have proven over many years that such business can be developed responsibly and profitably in a way that enables SMEs to grow their business and banks to earn money. We would welcome discussions with local banks to share with them our experience in putting in place solid financing structures that have proven to fully preserve the interests of banks in the unlikely scenario where a client faces any financial hardship.