Insolvency framework key to GCC diversification push

Bankruptcy laws must balance interests of debtors and creditors, analyst says

Gulf News

Dubai: A solid legal system of managing creditor or debtor obligations will create a new paradigm of more responsible lending and borrowing across the GCC, an Emirates NBD analyst has said.

“Developing and building insolvency laws is a cornerstone for the development of legislative frameworks in the Gulf Cooperation Council [GCC], especially in light of efforts to diversify their economies and attract more private sector investments,” said Shady Shaher Elborno, head of Macro Strategy at Emirates NBD.

He added that said insolvency systems in the region need to take into account the level of economic development in each country, the capacity of its existing institutional infrastructure, and to some extent the social sensitivities surrounding such laws.

Creating more comprehensive insolvency laws in the region is expected to have a positive long-term impact on the development of these economies.

Currently, in the absence of such laws, many economies in the region are not realising the full potential of attracting domestic and international investment, and experience capital flight during periods of stress.

“[The] financial sector and private sector see value destroyed when companies fail without having recourse to restructure properly,” Shaher Elborno said.

“An insolvency framework can mitigate those risks by allowing for more efficient reallocation of resources through proper restructuring, and can encourage private sector development by protecting business owners.”

The Emirates NBD analyst said while it was difficult to create a ‘one-size-fits-all’ insolvency regime for the region, certain elements remained central to all successful regimes — the most important being a fair balance of the interest between debtors and creditors.

Current legislative systems across the region largely favour creditors, and limit entrepreneurial behaviour.

However, the creation of an environment that allows businesses to restart after failing while reducing the stigma of bankruptcy is seen as crucial to boosting entrepreneurial activity and driving the private sector forward.

For economies in the region to reduce the burden of insolvency costs, the need for legislative developments to be fully encompassing has been stressed by experts, with court systems seen playing a crucial role and being at the very heart of an effective insolvency regime.

The judiciary is also required to be independent to create a strong record of high integrity in dealing with cases.

Insolvency legislation also needs to be supplemented by other elements, ranging from frameworks to manage collateral to the availability of accurate financial data on borrowers to allow creditors to better assess risk.

An economy that benefits from a robust insolvency legislation, is likely to see more inclusive growth, as credit growth is not constrained and available at a lower cost, in large part due to the ability of banks to better manage, and price risk.

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