The Dubai Government's US$10 billion (Dh36.73bn) bond sale has helped revive confidence among risk-averse banks in the emirate, but small businesses are still waiting for the benefits to trickle down as lenders remain cautious amid rising bad loans. Companies with any exposure to the struggling construction and property sectors are finding it especially hard to raise new capital, bank analysts say.
"Banks are allocating a smaller part of their loan portfolio to SMEs," says Marisha Stock, the business development manager at the Dubai Chamber of Commerce and Industry. "Small and medium-sized enterprises [SMEs] are coming to the chamber and complaining that they can't get financing." Bankers are wary of extending lending while bad loans are on the rise. Abu Dhabi Islamic Bank said it expected bad loans to increase last month, as investors lost money from property and share portfolios.
Emirates NBD, the region's largest bank by assets, also warned that it expected non-performing loans to rise to as much as 1.7 per cent of lending by the end of the year, up from 1.2 per cent in March. It set aside Dh93 million to cover bad loans in the first quarter, an increase of almost 150 per cent from Dh38m last year. Gulf economies have injected billions of dollars into their banks to try to thaw frozen credit markets and encourage spending. The UAE last year launched a Dh70bn emergency facility to boost bank liquidity, while Dubai has already started distributing the $10bn raised in its bonds sale.
However, the UAE needs to inject more than Dh100bn into bank deposits for normal lending activity to begin again, Standard Chartered Bank said in February. "In an ideal world with unlimited resources, there should be a package for the SMEs, as they are a big part of the economy," said Robert McKinnon, the head of research at the investment bank Al Mal Capital. "It will be a trickle-down effect in the long term."
New lending by UAE banks is likely to pick up in the third quarter of this year, according to the chief executive of Emirates NBD, Rick Pudner. However, that may be too long to wait for some firms that require capital to bridge loans or buy new stock while they wait for late payments from cash-strapped clients. SMEs account for 98 per cent of companies in Dubai and employ about 40 per cent of the economically active population, the Dubai Chamber of Commerce says.
The lending squeeze is now threatening the solvency of some SMEs that rely heavily on bank finance to maintain turnover, analysts warn. While small businesses look forward to a resumption of lending among local banks as their deposits rise, they may have to wait some time before they see the benefits in the form of approved loan applications to buy new plant and machinery and replenish inventories.
Wadah al Taha, an independent market analyst in Dubai, said: "The business structure of SMEs relies largely on financing, and under circumstances where cash flow is strapped, most will not survive the second quarter of this year." The vice chairman of the Central Bank, Omar bin Sulaiman, acknowledged the problem facing small businesses seeking loan finance last month, although he said the situation was improving. "There was a worry in the Central Bank a few months ago that all the banks were holding back on lending [to SMEs]," Mr bin Sulaiman told a gathering of British businesspeople in Dubai last month. However, he said that while lending to SMEs was not back to previous levels, "it's still better than it was at the beginning of the year".
All the same, one businessman, Bassam Yildirirm, the owner of a Dubai-based building materials firm, complained that he could not secure the funding his company needed to expand. Before the financial crisis hit, bank finance to fund purchases of building materials was just a phone call away, Mr Yildirirm said. Now, he could not even secure a loan on a lorry. "I understand the problems of the banks. They are sensitive because we are related to construction and the fear is that they will lose more money in fresh financing if our payments get stuck with the contractors," he said.
Mr Yildirirm, who also owns three businesses in the Jebel Ali Free Zone in Dubai, said lenders were less willing to finance companies based in free zones because it meant they could not seek payment from local partners in case of default. "I'm not the exception here," he said. "I am hearing the same thing from my business colleagues." The Central Bank said the ratio of liquid assets to short-term liabilities within the country's banking system increased from 76 per cent in January to 92 per cent in April. The ratio measures how much extra cash banks have on hand compared with their upcoming payments, and is used to determine their solvency. Banks had also continued to increase their deposit base while slowing loan growth at the same time, said Saeed al Hamiz, the director of banking supervision at the Central Bank.
Sharjah is the only emirate so far that has launched a stimulus package, amounting to hundreds of millions of dirhams and aimed specifically at SMEs. The sector accounts for 80 per cent of the emirate's economy and 40 per cent of the UAE's manufacturing industry, according to Hussain al Mahmoudi, the director general of the Sharjah Chamber of Commerce and Industry, which is in the final stages of negotiations with banks over the new loan packages. "We are joining hands with banks and are working on a few different programmes to provide different packages to SMEs," Mr al Mahmoudi said.
The Dubai Chamber of Commerce sees a lack of access to bank finance as one of the big constraints for SMEs in the emirate and believes smaller players are suffering more than their larger counterparts. "SMEs with the weakest financial structure and lower credit ratings will suffer most," said Dr Belaid Rettab, the senior executive director at the Dubai chamber. "Therefore more attention should be paid to the accessibility of SMEs to bank finance."
Dr Rettab said research by the chamber indicated that SMEs faced greater hurdles accessing finance, relative to large firms, even before the credit crunch hit. Now, he said, the situation for SMEs was getting even worse. Banks in the emirate disagree with the chamber's findings, however. Rakesh Arora, the regional head of business banking at HSBC Bank Middle East, said: "Governments in the region place much emphasis on developing a strong SME sector as it is critical to the growth of local economies, and HSBC aligns itself with this strategy. We continuously adapt our cautious approach to assessing our customers' creditworthiness, and offer loan amounts based on repayment capacity."
Mr Arora said that interest rates offered to SMEs depend on the risk assessment of each business, its size and the extent of the loan security. "We can confirm that the rates have been maintained at more or less the same level over the last six months," he said. Mr Pudner said: "Supporting SMEs is part of the requirement of the deposits placed by the Ministry of Finance. It's clear that they need much assistance. They are an important part of the UAE and it is our continued focus to assist the SME market. We have not changed our criteria for lending and we are always trying to support SMEs as a key customer."
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