The great American business magnate J Paul Getty famously said: “If you owe the bank $100 that’s your problem; if you owe the bank $100 million, that’s the bank’s problem”.
Yesterday, the UAE Banks Federation (UBF) took a big step towards recognising that high levels of indebtedness were everybody’s concern, a potential problem for debtors, creditors and economic policymakers alike.
The “mini-insolvency law” announced by Abdul Aziz Al Ghurair, chairman of the UBF, is a welcome first step towards giving the country what it has needed for many years: a comprehensive strategy for dealing with over-indebtedness and potentially bankruptcy in the UAE corporate sector.
True, it is fairly limited at the moment. It applies only to SMEs within a range of Dh50m to Dh1 billion of debt.
Personal borrowers are not protected by the new scheme, nor are the giant corporations, many of them government-related enterprises (GREs). SME debt only adds up to a small proportion of banks’ exposures, between 3 and 5 per cent, Mr Al Ghurair estimated.
But the SME sector is vital for the overall financial health of the UAE, accounting for as much as 60 per cent of economic activity, and growing, so it has to be safeguarded.
The scheme will go some way towards doing that, mainly by lifting the threat of legal prosecution and travel bans by creditors. The temptation to “skip” will be substantially lifted if there is an arrangement for businesspeople to stay and work out their problems in cooperation with understanding creditors.
But there are some wrinkles that still have to be ironed out.
The banks and the central bank have given it their blessing and signalled their “moral commitment” to making it work. But creditors do not run their businesses solely on “moral” grounds. The law requires them to take all fiduciary steps to protect depositors’ funds and shareholders’ value and these imperatives might easily conflict with the new proposals. Legal clarification is required here.
On the road map proposed by the UBF, there are also several grey areas. What are the criteria for cases of “commercial challenges”? Who will decide if a case is a “genuine” example of economic duress?
And why has the “standstill” on prosecutions been set at 90 days? What is to stop a determined creditor from resuming legal action at the end of three months? Hopefully these issues can be ironed out and clarified as the scheme is implemented.
The bigger issue is whether the scheme can be extended at both ends. Scrapping criminalisation of dishonoured personal cheques would be the single biggest thing the UAE could do to bring financial standards in line with international best practice.
Likewise, a universal bankruptcy law, applicable to the biggest debtors as well as the smallest, would be a huge benefit for the GREs, many of which have multibillion dirham debts reaching maturity in the next couple of years.
The “mini-insolvency law” is very good as far as it goes, but it should be seen as the starting point for a comprehensive rethink of the national attitude to debt, which is everybody’s problem.
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