Liquidity issues show need for cultural change

Since the economic crisis, liquidity has been a particularly thorny issue for Gulf businesses, especially small and medium entities.

Several polls back this up; the ICAEW Global Enterprise Survey 2010, found 51 per cent of businesses feeling that limited access to finance had reduced competitiveness, whilst a January 2011 poll by Zogby International showed around a third of UAE and Saudi executives citing limited access to finance as a major challenge.

If companies in the Gulf are to achieve their growth ambitions, stimulate the economy and create jobs, then these challenges need to be faced head on. Delivering this will require hard work, but it will also require a cultural change in the way businesses and lenders interact.

Banks are exercising caution, perhaps excessively so, but there is money available to those that can demonstrate they are a good risk.

However, for many obtaining credit is expensive. Whilst banks look eager to come back into the market, they need to ensure they have healthy balance sheets. As well as raising the cost of borrowing this is also resulting in onerous repayment terms and an increasing emphasis on conditionality in terms of asset security.

The focus on equity-driven lending against high-value collateral can mean that SMEs, in particular, who may not have suitable assets, feel trapped in a vicious circle. In order to remove the barriers to borrowing — and ensure the business looks as attractive as possible to potential investors — high quality financial reporting will become increasingly important.

Building skills base

Businesses must demonstrate their ability to keep their house in order. Less emphasis has been placed on this area in the past, but in order to boost investor confidence and give credibility to business plans, robust reporting must now form the basis of any applications for loans.

Improving the quality of financial reporting requires more highly skilled finance professionals. We need to strengthen financial management in the Gulf which means we need more finance professionals. This will in turn help boost quality management. Banks want to have confidence that companies, and their investment, will be well managed. This means they will want to see both evidence of a good management track record in the past and sound, realistic plans for future growth. Moreover, building up a larger pool of financial expertise will not only help with the immediate liquidity problems but will also reassure lenders that future growth plans are in good hands. Of course, if the region is going to achieve a more diversified economy in the coming years, developing and maintaining a pool of financial professionals will become increasingly important.

Responsive regulation

Bank loans have traditionally been the main source of outside finance in the region. However, there are activities banks are less likely to lend for, such as major product development or foreign expansion. Other sources of finance may have to be considered.

Many SMEs are reluctant to issue equity against capital as they are concerned about losing control of their business. This is understandable; in return for high risk, equity providers often expect as high a return as 50 per cent.

Equity providers also look to exit the business relationship after a fixed period, usually between three and seven years, and one traditional route is through taking it to an Initial Public Offering (IPO).

Therefore, for family-run businesses, or where control must be retained, it may be the case that bank finance is not available and equity finance not appropriate, leading businesses to explore alternative forms.

Regardless of lender, companies are unlikely to attract investment unless they can demonstrate that they are a ‘safe' debtor. Once again this means that there will be an emphasis on high-quality financial reporting, demonstrating firm control and understanding of the business.

The lack of a culture of restructuring or a clear insolvency framework across the GCC is also affecting the confidence of the investors.

The writer is the regional director of ICAEW Middle East.