Businesses in the United Arab Emirates are struggling. Thanks to oil prices that continue to decline, the country’s economy has been growing at a depressingly slow rate since 2014, and small and medium-sized companies in the UAE are having a difficult time paying down their debts and remaining profitable.
The problem is so severe that the United Arab Emirates Banks Federation has implemented some measures to temporarily suspend and restructure debt payments to keep small and medium-sized enterprises in the country. The new lending framework was deemed necessary, in part, because the UAE’s government has yet to introduce a comprehensive insolvency law, which has prompted many debtors to leave the country to avoid criminal prosecution. In response to declining oil prices and weakened investor confidence, the International Monetary Fund dropped its forecast for growth in the United Arab Emirates from 3 to 2.5 percent back in February, according to Bloomberg.
Despite these recent and unfortunate developments, the United Arab Emirates is traditionally thought of as a great location for small companies to establish themselves. The country has introduced many business-friendly policies over the years and features a highly developed shipping sector. In addition, the UAE’s largest city Dubai is known for its modern, cosmopolitan atmosphere, highly developed infrastructure and diverse population. Because 80 percent of its population is made up of expats, the city is an excellent place for connecting with a diverse network of customers and potential business partners.
But thanks to the fracking revolution, global oil prices have plummeted in recent years. Between the end of 2008 and June 2014, American oil production increased from 5 billion barrels per day to 8.5 billion barrels per day. Furthermore, rapid improvements in fracking technology have enabled this decline in oil prices to continue to the present day.
OPEC nations led by Saudi Arabia only encouraged plummeting oil prices by ignoring the accepted wisdom and increasing their oil production in hopes of maintaining their market share. This clever strategy backfired, however. American oil producers proved more resilient to lower oil prices than OPEC anticipated. By cutting costs significantly these firms were able to continue increasing their production up until just a few months ago. Oil analysts are divided over when oil prices will recover. Some say they won’t, and could actually decrease even further. Other experts say prices could rebound but not likely until the end of 2016. Whether oil prices recover or not, it’s clear that oil-producing nations and surrounding economies in the Middle East have felt the effects of this price decline more intensely than the rest of the world.
Combine the fracking revolution with banks who were eager to lend money to start ups and we have a clear explanation for the UAE’s current lending crisis. Significantly, this economic slump has also led to a tightening of liquidity and pushed up borrowing costs in the United Arab Emirates, as once profitable banks begin reporting losses as a result of bad loans to small and medium-sized businesses.
So where does that leave small businesses in the country who need working capital to carry on their daily operations? As the economic landscape in the UAE continues to undulate, alternative lending options are beginning to turn up. Direct lenders who are relatively new on the scene are standing ready to fill the gap left by traditional banks. These lenders offer a variety of services including working capital loans, merchant credit advances and other kinds of small business loans. Unlike bank loans, however, these alternative lending services don’t require assets to be tied up as traditional security. Moreover, they are available to small businesses with negative credit history, which will no doubt make them attractive to struggling firms in the United Arab Emirates.
Given all the complicated economic variables in play, the situation in Dubai is anything but predictable. Governments and oil companies exert a tremendous amount of influence on the global economy and often work at cross purposes, so the downturn in Dubai may be far from over. Nonetheless, it’s often difficult situations such as this one that inspire the financial innovation that can lead to economic recovery. These alternative lending options may be the very beginning of that turnaround.