Many small and medium enterprises (SMEs) fail in their infancy. The process of transforming a sound business idea into a successful enterprise is a difficult one and that is not necessarily a bad thing. Without failure there can’t be success. Faced with this, SMEs need flexibility when it comes to debt repayment and loan restructuring. Failure to recognise the fact that many SMEs fail will only increase the debt burden over time.
The UAE Banking Federation’s plan to help struggling SMEs restructure their debt is a step in the right direction. At a time of low oil prices, the SME sector is a valuable area of the national economy. We need our businesses to be focused on new ideas and ventures that help the economy expand.
Under the federation’s plan, an SME with multiple loans can enter a scheme whereby lenders “coordinate their position and work to assist the company in restricting its future payments”. In effect this is a step towards bankruptcy protection and falls in line with a proposed insolvency law. The law, based on French insolvency practices, was approved by the Cabinet in July but is still waiting to be assessed by the Federal National Council. When passed, it will allow companies to escape criminal charges for bouncing cheques while undergoing a bankruptcy administration process.
While these changes might seem small, they are necessary to help grow the SME sector and to protect banks. Most of the industrialised world has some form of bankruptcy legislation that facilitates certain protections for banks in the case of insolvency. Given the state of the global economy, investment banks such as EFG-Hermes have warned of fallout thanks to rising levels of bad debt held by SMEs. Debt could spread to individual banks and lead to a much deeper financial crisis.
Insolvency protection and loan restructuring will stave off a crisis, help banks recuperate debt and ensure that SMEs are nimble in challenging markets. A coordinated approach that balances the needs of SMEs and banks is in the national economic interest.