UAE bankruptcy law may benefit SME lending: Fitch

The bankruptcy law issued in the United Arab Emirates on October 24 could encourage banks to increase lending to small and medium enterprises (SMEs) as it sets out a framework for insolvency proceedings and debt restructuring, Fitch Ratings said in a note on Monday.

“We have not reviewed the new law, but based on media reports and legal commentary, we think it will provide alternatives to liquidation and offer broader options for debt restructuring, which should benefit creditors,” the ratings agency said.

The law should help improve prospects for creditor rights and provide a more supportive environment for SMEs as they will be allowed to continue to operate while restructuring plans are being agreed, it added.

According to Fitch’s estimates, SME lending represents around 5 percent of total UAE bank loans, much of which is unsecured.

The existing insolvency laws in the UAE do not provide for the rehabilitation of distressed companies through creditor agreements.

The agency also noted the cases of “skip,” where SME owners have fled the country after failing to repay bank loans because, under domestic personal criminal law, expatriate borrowers can be jailed for a bounced check.

Fitch said formal bankruptcy laws might also help to reduce the practice among UAE banks of rolling over and restructuring impaired loans.

“A high level of restructured loans is not healthy for a banking system, and any steps taken to curb this practice would enhance transparency and make it easier to assess the true quality of lending in the UAE,” the agency said.

UAE banks have restructured AED 7 billion ($2 billion) of loans, representing 0.8 percent of total private-sector lending at August-end, to 1,700 SMEs since operating conditions became tougher starting 2015, Fitch said, citing media reports.

Once passed, the law will apply to all companies established under the UAE's commercial companies' law. Companies established in the country’s free zones are not included because these areas have their own insolvency and bankruptcy laws.