UAE businesses need to crack payment muddle

Businesses in the UAE have been facing a severe drought, brought on by drastic changes in the economic climate since 2016. This drought has been fairly comprehensive — fall in domestic demand, closure of numerous markets, strife in the Middle East, bank lending tailing off and so on.

However, I allude to one weighty aspect of this drought — the acute paucity of liquidity being faced by UAE businesses.

I have written earlier about the painful right sizing and reinvention of the UAE economy that is now underway — a shakeout of businesses, changing business models, paring of costs and so on. The persistent lack of liquidity is forcing change of a different sort, in terms of dissolute corporate behaviour, sliding ethical norms, the blatant disregard of the written contract and so on.

This will have a severely pernicious effect on the ease of doing business. The insidious effects of poor liquidity are far more dangerous than the inevitable result of closure of weak businesses, because worsening corporate behaviour will come to define the norm. With this being very difficult to change, it will serve as a formidable deterrent to new investment.

Setting off a vicious cycle of delays

This brings us to the issue that is vexing the UAE business community, that of a lack of cash in the system or liquidity in the market, which manifests in the form of delayed payments all around. So why is everyone, including large entities, delaying the settlement of invoices, dues and other financial obligations? Let us look at this through the prism of two time-tested norms of lending — assessing the willingness and ability of debtors and/or borrowers to pay/repay on time.

The willingness of businesses, in general, to settle their obligations on time, has been steadily waning. I dare say that even a decade ago, businesses were far more honourable in their dealings than now. Tough times seem to bring out the worst in people — reneging on contracts, delaying payments, and unethical behaviour have become rampant and conducted with appalling impunity.

The winding path to payment recoveries

So the million-dollar question is, why has this ineluctable slide into contractual anarchy occurred? And why has nobody been able to stem it? The singular reason is the extremely poor enforceability of contracts via the judicial system. Seeking the assistance of courts and lawyers is prohibitively expensive, time consuming and complicated, leaving this avenue as one of last recourse and only for large companies at that.

Legal recourse is certainly off limits to SMEs, which obviously form the largest bloc of businesses and contributors to employment. I have first hand knowledge of this predicament, having had to write off debts of up to Dh300,000 each, on the advice of lawyer friends, resulting in significant losses over the years. Dozens of my clients and friends have been through the same thing.

Turning to the other sacred tenet that underpins payment behaviour — the ability to pay — one sees a severely emasculated business community. Ability stems from the financial standing of the company, which is determined either by the extent of its own capital in the business, and/or its ability to borrow. Borrowing from banks, for SMEs, has become almost impossible.

Feeling the squeeze

Bank lending norms have become so stringent, leaving the majority off limits. The adage of bankers demanding their umbrellas back when it starts to rain springs to mind. This marginalised majority therefore resorts to delaying payments as much as it can, leading to the inevitable conclusion that the bulk of businesses are probably gravely undercapitalised.

Thinly capitalised companies can survive during buoyant times when credit is abundant, but slowly die during tough periods. This is what we are witnessing now.

What must and can be done? Authorities in the UAE have always pursued a free market approach, leaving demand and supply to deal with each other. This has applied to the supply of credit from banks as well. A complete laissez faire approach is fine if the operating ecosystem is robust with protection for the wronged.

However, there are glaring weaknesses that do not make for such an ecosystem. Therefore, there is a pressing need for changes in policies and for active government intervention to ease the flow of credit. Banks do not seem to show any signs of increasing their lending to the SME sector, tarring even credible firms with the same brush of high risk.

Intervention, therefore, is the need of the hour, more so because the continuation of the current situation has far reaching economic and behavioural consequences.

The other serious issue to be addressed is that of the enforceability of contracts. The daunting barriers to going legal against delinquent debtors are far too high. Simpler, faster solutions must be found for small and medium sized businesses to force faster settlement of their dues.

The government needs to take immediate cognisance of this endemic problem. This is a long-standing issue that has only exploded in magnitude in challenging times.

If businesses can collect their dues faster, confidence will rise, as will investments and lending. This is bound to have other ramifications as well. Improved enforceability will also result in weaker businesses closing down, which is both inevitable and desirable; and contribute to reducing systemic, confidence shattering events.

I am not suggesting that these are the only steps required to alleviate the suffering of SMEs, or even large corporates. But these are tough calls for government to urgently make in areas that have not been delved into so far.

Vikram Venkataraman is Managing Director at Vianta Advisors.