Why Bank lending to SMEs is very low in the UAE?

A survey of more than 700 small and medium enterprises (SMEs) conducted in the UAE has shown that 83% of them have no access to bank loans. Similarly, a panel discussion held at the SME World 2014, a two-day summit organized in Dubai on March 26 and 27, 2014 revealed that bank loans to the SMEs across the UAE adds up to just 4% of the total lending as compared to double digit figures in the developed world. This may sound shocking when one realizes that 90% of the companies registered in Dubai are SMEs.

Some other complaints that SME owners have against local banks include high interest rates being charged on loans, various problems encountered while opening of bank accounts, banks unilaterally closing down some of the accounts despite the concerned enterprises maintaining sufficient balance with the bank, among others.

Top bankers cite reasons like regularity-compliance and transparency-related issues for the reluctance of local banks to extend loans to SMEs. Therefore, MoneyGulf.com conducted a study to precisely know more about these issues and found that SMEs in the UAE find it tough to access bank loans because of the following reasons:

1. The SME sector in the UAE lacks professionalism and financial transparency because of which many promoters tend to mix up their personal and business expenses. Senior bankers maintain they cannot extend credits or loans to such SMEs unless they initiate robust financial planning and start maintaining transparent financial records.

2. Banks view some of the SMEs as risky loan clients because of their erratic management and unsound financials. Bankers believe lending money to SMEs that lack financial discipline and formal management structures may not only prove very costly at a later state, but it is also fraught with risk in the light of their high-risk operations.

3. The limited size of most SMEs in the UAE coupled with lack of appropriate credit history is another deterrent for banks considering financial support to most small and medium-sized firms. Many of these SMEs fail to draw up a clear business strategy and some of them even lack a robust business model to inspire confidence of bankers.

4. Many SME owners do not bother to maintain proper books of accounts or prepare accurate financial statements. Those who meticulously maintain them, fail to get them audited because of which such entrepreneurs and their finance managers lack comprehensive understanding of their own financing requirements and banking needs.

5. While some of the SME owners may understand their business very well, they fail to implement good corporate governance measures and the essential standards within their business operations. Furthermore, most SMEs are unable to offer tangible or real assets as security that financial lenders can fall back on in the event of loan defaults.

6. SMEs also find it difficult to secure bank funding because some of them tend to have a great exposure to local market conditions as compared to bigger multinational companies. So when the domestic economy goes through a downturn, such SMEs are adversely affected and they are unable to meet their debt repayment schedules.

7. Currently, there is no functional credit bureau in the UAE because of which banks find it extremely difficult to obtain comprehensive information or sufficient market data about the past credit history of their SME clients. Once the Al Etihad Credit Bureau (AECB) becomes operational, this particular lacuna may get eliminated permanently.

How are sukuk different from conventional bonds?

(1) Sukuk (plural of Arabic word sakk meaning certificate) are Islamic bonds, which are asset-based securities. Those who purchase sukuk are rewarded with a share of the profits derived from the asset. They don’t earn interest payments because of the Islamic ban on interest. However, conventional bonds are debt instruments and the investor receives an interest payment or coupon, against their investment.

(2) Sukuk gives the investor or holder an undivided beneficial ownership in the underlying assets on which the Islamic bond is based. This ownership right is directly proportional to the total amount he has invested or the number of sukuk he holds. Conventional bond just represents a contractual debt obligation from the issuer to the bond holder. So conventional bond does not bestow on the investor any ownership rights in the asset, project, business, or joint venture the bond supports.

(3) The assets on which sukuk are based must be sharia-compliant. Sukuk holders are entitled to a share in the revenues generated by the sukuk assets. There are no such class restrictions with regard to the nature of assets when it comes to conventional bonds. The money mobilized through conventional bonds can be used to finance any asset, project, business, or joint venture that complies with the local legislation.

(4) Most individuals invest or buy sukuk because of their religious dispositions. People, who buy or invest in conventional bonds do so solely guided by monetary or profitability considerations.

(5) The face value and issue price of a sukuk is based on the market value of the underlying asset. The issue price and face value of a conventional bond is based on the issuer’s credit worthiness, including the assigned market rating.

(6) Sukuk holders receive a share of profits from the underlying asset and in case of loss, they also have to accept a share of the loss incurred. So, the initial investment isn't guaranteed and the sukuk holder may not get back the entire principal amount. Conventional bond holders receive regularly scheduled and often fixed rate interest payments during the life of the bond till they mature and are redeemed, and their principal is guaranteed to be returned on the bond’s maturity date.

(7) In the case of sukuk, there is a possibility of capital appreciation. So, investors may sometimes get more return on their invested capital or more than the principal amount. As against this, in case of conventional bonds the return is fixed and cannot vary with the performance of bond issuer.

(8) Sukuk holders are affected by costs related to the underlying asset. Higher costs may translate to lower investor profits and vice versa. Bond holders generally aren't affected by costs related to the asset, project, business, or joint venture they support. Hence, the performance of the underlying asset doesn't affect investor returns.

(9) Sukuk are of recent origin and they emerged to fill a gap in the global capital market because of Islamic investors wanting to balance their equity portfolios with bond-like products. Conventional bonds have been in existence for centuries and have been in use as financial instruments across the world irrespective of the regional affiliation or religious disposition of the issuer or subscriber.

(10) Of late, the sukuk market is growing rapidly on the back of significant growth being witnessed by Islamic finance across the world coupled with the fast growth in Muslim population. Conventional bonds are not witnessing that kind of growth or popularity or demand.

Why you should not delay Buying a Residential Unit in Dubai?

Many of the expatriates who have been living in the UAE for the last so many years are likely to have invested in residential properties back in their home countries, while they continue to live in rented apartments or villas in the emirates. While it is always a good decision to invest in realty projects back home, it also makes good economic sense to own at least one residential unit in the country where one is currently employed and is likely to continue residing for at least a few more years.

As such, in case you are an expatriate residing in Dubai with plans to continue here for some more years and still don’t own a house in the UAE, it is high time you reshuffled your priorities, turned your attention to your current location and decided to buy a residential unit in Dubai without further delay because of the following reasons:

1. Though realty prices have been going up since mid-2012, even now there are decent deals available in the market. Therefore it’s as good as any in terms of time for you to buy right now as there are still ample opportunities for good bargains. So don’t believe if someone says it is too late to buy a house now because with Dubai winning the 2020 World Expo bid, realty prices will keep surging over the next few years.

2. Of course, if you had purchased a house between 2010 and 2012 or even last year, you could have got it at a much lower and attractive price. Though housing prices are now on the upswing, there are still many residential projects that are available at very tempting valuations. So it is definitely advisable to buy a house now before the property prices move up any further and gradually become unaffordable.

3. In your individual case, if affordability is an issue and you don’t have ready savings or liquid funds to buy a house outright, then take a mortgage loan and buy the property of your choice. Since most of the banks in the UAE are flush with funds and they are also scouting for more business and more customers, even now home loans are easily available at relatively appealing mortgage rates and terms.

4. Prices of residential units may jump as much as 40% this year, according to Dubai’s Land Department. Furthermore, the UAE economy has recorded a remarkable and rapid improvement since 2012 and is expected to expand by 4.7% this year after recording a growth of 4.9% in 2013, which has been the fastest growth since 2007. So buying a house is the best way to capitalize on the resurgent interest in the Dubai real estate market.

5. Of late, all the sectors of the UAE economy are on a recovery mode. As a result, not only are the real estate prices on the upswing, but rents of apartments and villas are also on their upward trajectory. Because of the soaring rent, it makes more economic sense to buy a house instead of taking one on rent. By doing so, you can use the amount you now pay as rent for repaying the mortgage loan availed to buy your dream house.

6. Even now, real estate in Dubai is relatively cheaper when compared to equivalent global hubs. Furthermore, Dubai enjoys advantages such as (i) proximity to the African markets, (ii) it is a gateway and an oasis of peace in an inherently unstable region, (iii) has a solid and diversified economy that keeps growing at a decent pace, which will invariably keep on attracting more and more investors and expatriates in the coming years.

In view of the above factors, property prices and rents in Dubai will keep rising consistently over the next few years. Therefore, as an expatriate residing in Dubai, you should not delay buying a residential unit anymore because if you wait any longer, it will only become more and more expensive and unaffordable.

How the current Dubai realty boom differs from that of 2003-08

Dubai witnessed a major boom in its real estate sector between 2003 and 2008. After 4-5 years of unprecedented price increases, the realty market saw a devastating crash during the global financial meltdown that started in October 2008. However, since 2013 a new boom has begun in the emirate’s property market and many people seem to wonder if this new boom is sustainable or whether it is a new property bubble waiting to burst.

As such, we at MoneyGulf did a thorough research of the fundamental trends behind these two realty booms. After a detailed study, we have come to the following conclusions.

1. Unlike in 2003-08, the new boom is being triggered by strong demand from families who plan to live in Dubai long term because of the emirate’s political stability and safe haven status in the Middle East. So this time, the price increase in the realty market is fueled more by the end users rather than flippers.

2. In a bid to help sustain and regulate Dubai’s property market, government authorities have introduced a series of regulatory measures over the past few months. As a result, initially there was a cooling in the rate of growth, which in turn has positioned the market towards a more sustainable pace of growth.

3. Speculation was rife in Dubai’s realty market during the 2003-08 boom. However, this time speculators won’t have a free play as authorities have taken concrete steps to curb speculation in the property market. For instance, the emirate has doubled the fee it charges on real-estate sales from 2% to 4%.

4. Currently, all sectors of the UAE economy are in a recovery mode. So, property prices are seeing a more broad-based recovery. Since everything is picking up, they are also impacting the volume of deals recorded in Dubai’s realty market thereby driving sustainable growth and strong demand over the long term.

5. During the earlier boom, the economy of Dubai was increasingly driven by the construction sector, representing nearly 14% of GDP. As the sector saw a major slump after 2008 and started reviving only in 2013, currently the construction industry is relatively subdued with its contribution to GDP standing below 8%.

6. Due to the lower share that construction sector currently represents in the overall GDP, presently the realty sector is not at all overheated. Hence, there is no need to fear a property bubble as Dubai is now witnessing a sound and balanced economic upswing with realty growth not being reminiscent of 2008.

7. A report by Citi says the real estate and construction sectors are much less highly geared now than they were in 2008. This reduces the sector’s vulnerability to exogenous shocks, thereby bringing down the likelihood of a sudden stop in construction activity and its negative impact on the wider economy.

8. To secure banks and financial institutions from bad debts and over exposure, the UAE government has recently set up the Al Etihad Credit Bureau. Once the bureau is fully operational, it will help banks take an informed decision whether to offer credit to potential customers by providing their complete credit history.

9. The Al Etihad Credit Bureau is likely to go live this year. If that happens, there may be a lull in bank lending for some time as loans will be given only to those with good credit history. This means once the Credit Bureau goes live, those having bad credit file and history cannot hope to get a house on mortgage.

10. Though it may be too early to assess whether the regulations unveiled by the government will succeed in curtailing future growth at levels perceived to be more sustainable over the long term, the volume of deals that are being recorded in Dubai’s residential market is still within reasonable limits.

Taking into account the above facts, we can say that unlike the earlier boom, the current real estate boom in Dubai is being monitored closely by the government authorities with the specific aim of averting the scope of a property bubble as had happened in 2008.

12 reasons why Islamic Banking and Finance are Booming Globally

1. The global Muslim population has been growing very fast and has long been underserved in terms of Shariah finance. As such, more and more Islamic banks and financial institutions are setting up shops in Muslim countries under the GCC and MENA region as well as in countries like Malaysia, Oman, Qatar, the UAE, Pakistan, Saudi Arabia and Brunei Darussalam.

2. After the global financial meltdown, more and more people are seeking alternative forms of financing that is more ethical, discourage speculation and are less crisis-prone. Shariah finance meets this demand. So Islamic finance is gaining ground even in non-Muslim countries and the United Kingdom and Germany have started issuing Islamic bonds.

3. Malaysia, which is currently the world's largest marketplace for sukuk, is shifting its focus from local market development towards attracting global issuers. The country is also investing heavily in a bid to develop its human resources to give a fresh impetus to the phenomenal growth of the Islamic financing industry in the coming years.

4. Saudi Arabia is today the world’s largest Islamic banking market, with total assets estimated at US$217 billion. Its current market dynamics are so favorable for Islamic banking that it has become part of the normal retail and corporate banking and its share of the total banking market has doubled in recent years to more than 50%.

5. In a bid to emerge as the global capital of the Islamic economy, Dubai has drawn up regulations to attract sukuk issuance and trading as well as expand the Islamic insurance sector. As the primary trading hub of the MENA region, Dubai’s geographical position makes it the ideal location to serve at the convergence of Islamic finance.

6. As Britain is the European base for Middle East banks and also a major centre for the region’s investors, London is striving to become the capital of Islamic finance in the Western world. Hence, it has put in place sukuk legislation and the LSE has raised more than US$49 billion. Besides, 20 UK banks today offer partial or full Islamic banking products.

7. In some of the Islamic countries, many people do not invest in bank deposits as they believe that whatever they earn on their savings is in fact interest and thus against Shariah. So governments in these countries have started promoting Islamic banking and finance to cater to the banking needs of this segment of the unbanked population.

8. In countries like Pakistan, the federal government and the State Bank of Pakistan (SBP) have drawn up a five-year strategic plan aimed at promoting the Islamic banking and finance sector. As part of this, fresh licenses would not be issued to conventional banks, while a good number of applications for Islamic banks would soon be approved.

9. In a bid to diversify and widen its banking services, Oman announced its decision to license Islamic banking services in 2011. A Royal Decree amending the banking law was then issued and two new local banks were granted approval to operate as Islamic banks. A number of conventional banks have also established windows for Islamic banking.

10. Innovation is also one of the factors driving growth of Islamic finance. A few years back, Islamic bond market was small and sukuks were of five years or less. Lately bonds with longer-term offers, perpetual bonds and hybrid capital issues that allow a mix of debt and equity launched by Islamic banks have started attracting more and more investors.

11. The latest Global Islamic Finance Report (GIFR) says by 2020 the Islamic banking and finance (IBF) sector in at least six nations across the globe will have attained a market share of more than 50% of the total financial sector in these countries. They include Brunei Darussalam, Saudi Arabia, Kuwait, Qatar, Malaysia and the UAE.

12. Because of growing demand for sukuks and takaful, Islamic finance is rapidly becoming an important revenue generator for banks and financial institutions. They also offer more choices to companies and investors and allow issuers to offer products tailored to specific needs. This is also supporting rapid growth of the Islamic finance market globally.

What happens if you don’t Repay Loan or Credit Card dues in UAE?

When you avail a Personal Loan or apply for a Credit Card in the UAE, the concerned bank will make you sign a blank cheque towards security deposit. In many countries around the world, issuance of dud cheques as well as defaulting on a bank loan or Credit Card dues are categorized under civil and commercial offences. Hence, criminal courts are not involved in the matter.

However, the legislative approach to the issue of bounced cheques in the UAE is very different than most other advanced countries. Article 401 of the UAE Penal Code says that an individual who issues a cheque with insufficient balance – causing the same to bounce – can face imprisonment of one month to three years, or a fine of a minimum of AED 1,000.

As such, in accordance with the UAE Penal Code, issuance of a bounced cheque is deemed a punishable criminal act. So, one would be signing his own prison sentence if he knowingly or unknowingly issues a signed cheque, which he cannot honor. Furthermore, he would be nurturing a mistaken notion if he believes that he would be out of prison after serving the jail term for this lapse on his part because until his debt is cleared he may continue to languish in jail.

Though a bounced cheque normally entails a minimum of one month to a maximum of three years in jail as per the UAE laws, the actual reality is far from it because a debtor won’t be set free from his financial liabilities even after he has done his jail term. There are many cases where expatriates who were jailed for issuing dud cheques are still languishing in the local jails even after completing the prescribed prison term, solely because their debts have not been cleared yet.

Here one should remember that a bank collects a signed cheque as security deposit at the time of issuing a Credit Card or a loan purely in a bid to put pressure on the loanee in case he defaults on repayment of loan or Credit Card dues. So, if a customer fails to repay his loan or Credit Card dues in the UAE, the entire process goes roughly as delineated below.

Let us assume that a borrower has defaulted on a loan or Credit Card payment. Then the bank recovery squad will start hounding him and keep on following up with him insisting that he repay the loan immediately. If there is no prompt and positive response from the defaulter, then the recovery team will present the security deposit cheque in the bank for clearance.

If there is insufficient balance in the borrowers account, the cheque will definitely bounce. Based on this development, the bank will initiate a criminal case for the bounced cheque. A person with a criminal case against him in the UAE cannot leave the country, nor can he get his visa cancelled or transferred. If the defaulter somehow manages to abscond or leave the country, the immigration police will issue a notification to arrest him.

Once such an alert is issued, the defaulter won’t be able to enter or leave the UAE or any other GCC country without getting arrested. And if he is arrested, he will get a jail term. Even after completing the jail term, the defaulter won’t be freed from his financial liabilities and he may continue to languish in jail – until the debt is cleared.

This happens due to the lack of a functional insolvency law in the UAE. However, it is learnt that a draft of the much-needed insolvency law is awaiting approval of the Ministry of Justice. Once it is approved by the ministry, the draft legislation will have to get necessary approvals from the council of ministers, the Federal National Council and finally the President’s office, before it is enacted into law.

MENA (Middle East & North Africa) becoming an attractive investment destination for Venture Capital and Private Equity Investments in the online.

Rocket Internet, a company founded in 2007 by the Samwer Brothers in Germany is making news for acquisitions as well as creating businesses in eCommerce, Marketplaces and FinTech space. The company aims to be the largest internet player outside of US and China. The question is if the market outside the US and China is large enough?

If population of the world outside US and China is any indicator, the number is a mindboggling 5.5Billion with a large part coming from the Indian subcontinent. The other major market is MENA (Middle East and North Africa). MENA is the fastest growing smartphone market with high penetration of internet usage. A few of Rocket’s investments in the recent past include Namshi.com, Lamudi, Helping – a home cleaning service, and Easy Taxi. Rocket also recently acquired food take-away platform Talabat.com for US$170 million making it just the 2nd largest deal after Maktoob. MENA is not just attractive for Rocket. Hatcher, a Singapore based VC along with iMENA recently invested in FinTech venture Telr an online payment gateway. Hatcher also helped an investee company ApexPeak to acquire Cashonomix, a UAE based FinTech startup.

MENA based funds are now seen competing with funds based in Europe and Asia Pacific to capture the promising names in MENA. Abraaj announced the US$100million investment in Turkish eCommerce giant Hepsiburada.

The hottest space remains eCommerce followed by marketplace. A number of successful online models in the west are yet to be tested in MENA which makes the market interesting for VC/PE funds. With banking space still nascent in MENA compared to the West and Asia, there are expected to be investments likely in the Financial Technology space. A few recent investments in the FinTech are compareit4me, Cashonomix and Telr.

Of course, companies can be built by bootstrapping or through external funding. Both the decisions have their own merits and demerits. It is a choice made by the founders based on their conviction to decide what option to choose. According to Deepak, Banking Director at MoneyGulf, “we have bootstrapped and focused on our cash-flows from day one of our business. We are fortunate to have the choice of delaying the decision to take external funding as long as we want”. The future would tell us the story of which decision was better but one thing for sure is that we will have a handful of big winners in the next 3-4 years in MENA that will make Maktoob and Talabat deals small. Inshallah!