The UAE brokerage industry has set aside more than Dh380 million (US$103m) to account for debts that firms are struggling to collect.
The sum, while large, marks a small decline from last year, but is still weighing heavily on an industry desperate to improve margins and reverse a decline it has suffered for the past four years.
Eighteen out 50 securities companies are carrying impairment put at Dh382.3m, according to second-quarter financial statements published on the market watchdog's website. That is down from Dh390.9m in the second quarter of last year.
The fact that the large amount of receivables is not shrinking significantly is a major risk factor for the industry, executives warn.
"It depends on how much risk you can live with," said Mohammed Ali Yasin, the managing director at National Bank of Abu Dhabi's brokerage arm.
"If you have receivables in the millions overdue more than 30 days you should worry because the financial risk is high. You are not always going to have shareholders to replenish the capital."
Many brokerages closed their operations last year, amid battles to recover cash and in a climate of lower trading volumes triggered by the Arab Spring uprisings and the European debt crisis.
The value of equities traded by UAE brokerages declined 45 per cent to Dh57 billion last year, compared with the previous year.
The rapid rate of closures from a peak of 103 brokerages two years ago spurred concern by the Securities and Commodities Authority, and consequently led to the introduction of new rules to govern leverage. The regulator has accredited five companies with margin trading licences so far this year.
"The regulation gives us more enforcement rights from clients that take leverage from us," Mr Yasin said. "Under the old practice, companies gave margin based on their own risk assessment. Many of the assessments did not prove to be strong enough to protect brokerages when disputes came up. Lawyers found gaps they used to get their clients out of commitments because of a lack of a comprehensive legal framework."
The Dubai-based International Financial Brokerage is carrying the biggest provision across the industry, an amount of Dh178.9m at the second quarter, down from Dh185.5m in the same period last year.
The company's auditors note in their report that "the parent company has represented that it is their intention to provide such financial support as may be required to enable the company to meet its liabilities as they fall due."
Financial Brokerage could not be reached for comment.
Mena Corp, formally known as Wafa Financial Services, has set aside Dh65.72m for bad debts from clients, down from Dh66.70m the year earlier. The company declined to comment when contacted by The National on the status of the provisions due to ongoing legal court cases.
The shareholders "have undertaken to compensate the company for any losses that may arise on collection of trade receivables balances. Management has determined that no provisions or write-offs are required for the six month period ended June 30, 2012", the company's financial statement said.
Mena Corp has made an application to the market regulator for a margin licence.
"The major benefit of the current legal framework is that it is a proper product that is structured and regulated, which means brokerages can make additional income," said Nabil Al Rantisi, the managing director of brokerage at Mena Corp in Abu Dhabi.
In the past, brokerages could not charge interest on leverage, but only took commissions from the additional trading volumes, Mr Al Rantisi said.
