Banking arena are all in pursuit to aid the SMEs in best financing their trades

A broad range of schemes have been initiated over the preceding two decades for aiding the SMEs.

Often, we hear regarding the data points that depict the position of the Small as well as Medium Enterprises for progression of the native economy, and amongst it they account for 95 percent of the firms in UAE as well as employ around 86 percent of the operational workforce.

These are few of the most amazing numbers that demonstrate for UAE’s achievements in building up a trade-free hub progressed by a long history of the mercantile activity, one that has required to nurture an ecosystem of entrepreneurship, today a core constituent of the National Agenda. The government recognizes the position of SMEs as a power of entrepreneurship to aid in advancing economic diversification.

From the presentation of Dubai SME in 2002 and the Khalifa Fund in 2007, through to a 2014 SMEs law and the unveiling of the Emirates Development Bank a year later, many inventiveness has been rolled out over the preceding two decades to provision SMEs.

The EBD’s directive was, and still is, to offer financial provision done over a variety of credit contributions that conservative banks don’t normally extend to small firms. The impetus procedures deployed by the Central Bank of the UAE during Covid-19 to provision SME liquidity has also reinforced the sector during the fresh macroeconomic hurdles.

Lenders tend to pay their attention on balance sheet data at the expenditure of analysing finance flow profiles and, moreover, apparently underutilize resources such as the Al Etihad Credit Bureau, a points-based credit rating system to benefit and evaluate affluence.

However, the 2019 annual report by the Central Bank of the UAE recognizes that almost two-thirds of the SMEs measured felt “financially constrained” and incapable to access credit at a practical rate.

As and when with the pandemic’s entry, the government and central bank’s impetus and economic sustenance answer was instantaneous.

A commercial survey by the central bank found that the overwhelming utilization of AECB, the Etihad Credit Export Insurance (a government trade credit provider pitched towards SMEs) and the Moveable Collateral Registry (a source on which collateral can be recorded and searchable by lenders) “may be proof to the lack of consciousness about the position of these facilities to help diminish deriving costs and ease access to credit”.

Complete advances under the view of a federal “small business administration” agency that regulates SME borrowing privilege and offers a level of peril justification can aid in incentivise bank lending and upsurge financial provision for justified SMEs but with sensible protections in case plans go wrong and a default loom.

And what do banks do in the face of a default? The options are:

1. Do nothing and hope for the best;

2. Enforce on security and assume the laborious task of monetising assets that lenders would rather not own or manage;

3. Sell the debt (to the extent there is a secondary market);

4. Embark on a consensual restructuring.

Option 1 is too often the genuineness outside of large-scale distress scenarios when it, of course, is option 4 that best preserves value, avoids vagueness and pre-empts insolvency.

No matter the complexity of the insolvency laws, creditors and borrowers alike will always favour to avoid the notions of a court process and beat out a deal if there is a deal to be had.

This system has come a long way with modern insolvency laws, including those of Abu Dhabi Global Market and Dubai International Finance Centre.

A consensual conclusion boosts debt recovery in more cases than not, but necessitates pragmatism and patience. A consistent framework for bigger risk sharing between banks and government would benefit SMEs, as would SMEs being wise to the fact that, small though they may be, they have more influence vis-à-vis their creditors than they think.

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