Saudi Arabia’s landmark bankruptcy law, which is now being implemented, will strengthen the kingdom’s business environment by helping cash-strapped firms restructure and incentivising more foreign investment.
"The new law will protect companies and allow them to show the reality of their financial situation, ultimately improving business transparency," Mazen Al Sudairi, head of research at Al Rahji Capital, told The National.
Saudi Arabia is following in the footsteps of the UAE, which approved a bankruptcy law in 2016 to better deal with corporate insolvencies. Previously, neither country had a single law setting out procedures for businesses that ran into financial trouble, but the issue has become more pressing after years of economic slowdown in the Middle East and worldwide.
The kingdom's bankruptcy legislation was published in February and took effect on Saturday, according to Majed Al Rasheed, secretary general of the bankruptcy committee at the Ministry of Commerce and Investment (Moci), who was quoted in Makkah Al Mukarramah newspaper. In practical terms, the law will only be implemented after Eid Al Adha, because civil servants are on public holiday this week, he added.
“[Mr Rasheed’s] comments signal that the momentum to implement key changes published in February is undiminished,” said Paul Latto, a partner at law firm DLA Piper. “The next immediate focus will be publication of the implementing regulations referred to in the law, which are expected soon and are the technical trigger for the law coming into force.
“In principle, the law could help with bankruptcies both large and small,” he added.
The world’s biggest oil exporter is revamping its economy through the Vision 2030 economic roadmap to help lower the country’s dependence on oil, attract foreign investments and create more jobs for Saudi citizens.
Improving the business regulatory environment is a key plank of Vision 2030 and policymakers have already revised several outdated commercial laws and introduced new ones to offer better protection to investors.
The bankruptcy law, which has been in the works for years, sets out general regulations for insolvencies, as well as preventive actions, measures for financial restructuring, and settlement procedures. It will allow borrowers and creditors to reach restructuring solutions more quickly, and speed up liquidation of non-viable companies, cutting the risk for lenders.
The legislation is expected to help small-to-medium enterprises in particular, as they suffer the most from delays in payments and lack of availability of bank financing, analysts say.
“This law will give SMEs a chance to restructure and stabilise their finances without having to cease operations,” Mr Al Sudairi said. “Over the longer term, it could help lower the provisions of Saudi banks, by increasing transparency and reducing the risk for lenders.”
It will also help integrate Saudi Arabia into “the international business club”, by bringing the kingdom’s legal structures more in line with global standards, he added.
The law is a “positive and significant development for Saudi Arabia, and part of a wider set of reforms to increase private sector activity,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Egypt is another Mena region country that is introducing insolvency legislation – it approved a bankruptcy law in January. The country’s two largest banks, National Bank of Egypt and Banque Misr, have taken more than 10 years to recover from legacy problem loans and reduce the ratio of nonperforming loans to gross loans to around 2 per cent as of June 2017 from more than 25 per cent a decade ago.
Ratings agency Moody’s said in a report in January the new law would be credit positive for Egyptian banks because it will provide them with “more options to deal with viable troubled companies, making loan workouts more flexible and faster”.
The law aims to:
1 – Protect companies from collapse
2 – Raise the kingdom’s rating as an attractive destination for investments
3 – Reassure investors about their creditors and stakeholders
4 – Take into consideration the size of the entity during bankruptcy proceedings
5 – Identify small-scale debtors and setting out criteria to evaluate their size
6 – Set out different procedures for small and larger debtors
7 - Establish a Bankruptcy Committee in coordination with the general authority for SMEs
8 – Solidify trust in the credit market and commercial transactions
9 – Enable the bankrupt entity to resume its activities rather than shutting it down