Banks in the United Arab Emirates will suspend legal action against small and medium sized enterprises (SMEs) struggling to repay debt for up to three months to prevent a surge in defaults that may jeopardise the economy.
The initiative, which involves businesses working with lenders to restructure their loans, is intended to give breathing space to SMEs, which contribute around 60 percent of UAE's gross domestic product.
Banks have been hit by a spate of defaults, especially from traders of foodstuffs and oil, as a result of weakness in prices of commodities, as well as a gradual easing of bank liquidity.
"What we have put on the table is a mini insolvency law," said Abdul Aziz al-Ghurair chairman of the UAE Banks Federation, the industry body representing 49 banks. "We will give the customer time and space as long as they're genuine."
The federation was lobbying the government to "expedite" the new insolvency law, said al-Ghurair, also chief executive of Dubai-based lender Mashreq.
Fearing jail for unpaid debt, many cash-strapped expatriates opted to depart, making it hard for banks to recover payment.
The debts left behind by those so-called "skips" had reached around 5 billion dirhams ($1.4 billion), al-Ghurair estimated in November. He said he was unsure what the latest figure was.
The plan will be open to companies that have borrowed 50 million dirhams or more from a number of banks and were showing signs of financial stress, typically leading to an inability to make repayments.
The federation will coordinate requests from companies with the lending banks, resulting in the signing of a standstill agreement ensuring that no lender will take pre-emptive action for a period up to 90 days. Led by the bank with the largest exposure, the lenders will then agree how to manage or restructure the borrower's debt.
The initiative had the backing of the central bank, as well as the unanimous agreement of banks, said al-Ghurair.
SMEs made up about 3 percent of banks' total lending, he said.
"We will lend as long as the economy is in good shape and the customer is in good shape. If the economy slows and the customer slows the bank will also slow its lending," he added.
