One small step for starters, but no giant leap

Entrepreneurship in the UAE gets a major shot in the arm this week with a decree that eliminates the minimum capital requirement for new enterprises.

Powered by automated translation

Entrepreneurship in the UAE got a major shot in the arm this week with a decree that eliminates the minimum capital requirement for new enterprises. Under the old law, which dated back to 1984, anyone setting up a limited liability company, or LLC, in the UAE had to have paid-up capital of at least Dh150,000 (US$40,838). Somewhere along the line, the emirate of Dubai doubled its own minimum to Dh300,000. Now, entrepreneurs will decide for themselves how much they need to get a new business up and running. Conceivably, one could now set up a business anywhere in the UAE with a single dirham. And by one I mean two, because an LLC still requires a minimum of two partners, at least one of whom must be an Emirati. Imposing a minimum level of start-up capital was a sensible requirement in theory. It ensured that new LLCs would have enough cash to get going and offered suppliers and creditors a measure of confidence they could do business with unknown start-ups without worrying too much whether they would be able to pay up. Most of all, it demonstrated a level of seriousness by the partners. Eliminating the rules, therefore, may give pause to some lenders and service providers about doing business with LLCs, the preferred vehicle for small companies with less than 50 partners. Limited liability companies protect those partners, as the name suggests, with limited liability. If the company gets overextended and defaults on payments, its owners' losses are limited to how much capital they have already put into the company. The same, however, goes for shareholders of joint stock companies, even those such as Nakheel Holdings whose stock is ultimately owned by the Government. Investors who lent Nakheel $3.5 billion by buying its bonds may have thought those bonds were backed by the Government of Dubai. They are not; they are guaranteed by Dubai World, another joint stock company that happens to be owned by the Government. It is hard to find anyone who thinks Dubai won't use its $10bn in Central Bank money to make good on Nakheel's debts. Restructuring or rescheduling the debt stands to raise the cost of borrowing not only for Dubai, but for the rest of the UAE and the Gulf, for years. That would forestall efforts to promote a non-oil private-sector economy that reduces the dominance of oil and government in providing income and jobs. That said, if Nakheel did decide not to pay in full when the bonds come due in December, investors could scream all they want at Dubai: legally they would be able to go only as far as Dubai World. Nakheel's bonds are also Islamic, meaning they are structured to comply with Sharia's prohibitions against riba, or usury. The principles of Islamic finance enjoin lenders not to lend money to borrowers that borrowers cannot repay. Risk in Islamic finance is shared. In Islamic finance, there are not supposed to be any guarantees. Caveat emptor, as they say - let the buyer beware. The old minimum capital requirements on limited liability companies did not achieve anything that prudent business practice shouldn't do by itself. "One needs to do some due diligence and think about who you're doing business with," said Sadiq Jafar, a managing partner at Hadef and Partners in Dubai. The paid-up capital at an LLC, after all, is not an escrow account or cash reserve against future claims. It can be spent immediately for business purposes, such as paying bills and rent. LLCs have always been required to have an office, too. In the UAE that means paying a year's rent up-front with a cheque from a bank account where this formidable sum has already been deposited. LLCs are also required to produce audited financial statements annually. But this is something bankers and other creditors would demand to see as a matter of course. Having the Government impose a size requirement on start-ups, therefore, was an unnecessary piece of nannying, a layer of false security as suffocating to business as the rules that make bouncing a cheque a criminal offence punishable by imprisonment. Worse, the capital constraints contributed to the rat's nest of red tape that stifles innovation and entrepreneurship. Obviously, Dh150,000 does not buy as much as it did back in 1984. Even so, not everyone with a good business idea has Dh150,000 lying around, especially not in the current economic climate. Fulfilling the requirement meant depositing the cash in a bank and getting documentation certifying that it was there. That is not a particularly daunting task by itself, but one that added three days to the 17 the World Bank estimates that it takes to start a business in the UAE. The World Bank ranks the UAE 113th among 181 economies in terms of the ease of starting a business, behind Namibia. The UAE ranks 46th in terms of the overall ease of doing business here, behind Bulgaria, Armenia and Tonga. This is an urgent problem for a country trying to diversify its economy away from oil. Until recently, property and construction provided a vital source of jobs and investment. But the consequences of swapping the UAE's over-reliance on oil for an over-reliance on property are now all too clear. Sayed Bozorgnia, a visiting assistant professor of economics at Abu Dhabi University's College of Business Administration, says the future lies not in buying up blue-chip western companies, but in fostering the creation of small, innovative start-ups. That is hard to do when doing business in Dubai is tougher than in Yerevan. Starting a business is by no means the biggest hurdle in the UAE. When it comes to enforcing contracts, the UAE ranks 145th behind Sudan. It takes more than 20 months to go from filing a lawsuit to receiving an award, a costly process that generally eats up more than a quarter of the claim. And coming up with the minimum capital requirement for a start-up was only a small part of the hassle intrinsic to starting a business. According to the World Bank, there are no less than eight steps to setting up in the UAE, the most time-consuming and costly of which is filing all the company documents with relevant authorities and obtaining commercial registration certificates from them. That takes six days. Eliminating the minimum capital requirement for start-ups is thus an important step forward. But it is only one of many that will need to be taken.