World Economy

Dubai Banks Brace for Bad Debt as Borrowers Flee

Dubai Banks Brace for Bad Debt as Borrowers FleeDubai Banks Brace for Bad Debt as Borrowers Flee

Dubai’s slowing economy, the rout in commodities and strict debt repayment laws are reviving a phenomenon that symbolized the emirate’s crash in 2009: “skips,” or business owners who quietly leave the country to avoid punishment for defaulting on loans.

A rising number of smaller and medium-sized company owners are abandoning the United Arab Emirates without repaying debt, according to Emirates’ Nation Bank of Dubai, the country’s second-largest bank. People in the SME sector may have left behind five billion dirhams ($1.36 billion) of loans this year, Abdul Aziz Al Ghurair, chief executive officer of Mashreqbank PSC and chairman of the UAE Banks Federation, said in Dubai, Middle East Online reported.

While so far limited in scope–NBD says it’s seeing the phenomenon in areas such as commodities financing–the “skips” recall the 2009 financial crisis when thousands of expatriates fled the country to avoid a local legal system which lacks a bankruptcy law and criminalizes bounced checks. They’re also a sign that the pain of lower oil prices and a slowing economy are being most felt by smaller companies that can’t survive long when lines of credit are restricted and customers stop paying.

“Some banks have been reacting to the fall in commodity prices by pulling bank loans and tightening credit standards, and that has added to the stress,” said Shabbir Malik, a bank analyst at EFG-Hermes Holding SAE. “Over the next two to three quarters we will see provisioning at the banks rise as a result of these skips and problems in the SME sector.”

Banks in the UAE had focused on boosting loans to SMEs as they could typically charge higher interest rates than lending to large corporations. That shift also followed government measures to boost small business as a way to create jobs and diversify the economy. The UAE last year stipulated that government agencies give at least 10% of their contracts to local smaller businesses, according to the economy ministry.

Shuaa Capital PSC, a local investment bank which recently made a push into SME lending, said Sunday it swung to a third quarter loss because of higher provisions for small and medium-sized customers.

Checks are still a common form of payment in the UAE as banks often hold them as a security deposit against personal and business loans since the punishment for failing to having enough funds to cover them can be imprisonment.

There’s also no bankruptcy law to protect debtors from creditors. A draft law on financial regulation and bankruptcy was approved by the cabinet earlier this year, but requires several steps before being passed.