Family firms hit by tight bank funding

Family-related companies in the UAE and other Gulf oil producers reeled under a tight funding environment in 2010 as a result of strict bank lending policies triggered by the 2008 global fiscal distress and regional debt defaults.

While some family businessmen look forward to better economic and financial conditions in 2011, others believe the default problems in the region has created what they described as a confidence crisis between banks and family entities.

“It seems there is a confidence crisis between banks and family businesses in the region… this crisis and fears are unjustified because most of the family companies are well known and have a good credit history,” said Hamad al Awadi, board member in the Alawadi Group, a UAE family-related business.

“The strict funding conditions and the change in financing policies by banks from time to time constituted the worst problem to the family companies and the private sector in the country in 2009 and this year.”

In comments published by Emirat Al Youm Arabic language daily, Awadi said many projects under way or planned ventures have been delayed because of the lack of funding despite the “strong government support for banks.”
Banks in the UAE and its Gulf neighbours have tightened their lending purses since they were shaken by the global crisis and the default of the two Saudi business conglomerates Saad and Algosaibi. The stringent credit policy was strengthened by the Dubai World debt as many local banks were exposed.

Family firms and other private sector enterprises in the region were hit hardest by the banks’ tightness and their selective credit policy, which now gives preference to the less risky public sector and other government-sponsored projects.

“Obtaining the necessary credit and ensuring liquidity was the main challenge faced by the private sector and family companies in 2010,” said Amer Abdul Jalil Al Fahim, a member of the federal national council and of the Al Fahim Group, one of the largest family conglomerates in the UAE.

“The banks’ conservative lending policy has blocked the movement of the economic wheel although government support to banks and the domestic economy and massive spending on the infrastructure indicate the country’s economy is still strong and sound…I think a full economic recovery hinges on the resumption of bank lending away from fears and distrust especially that those who deal with the banks have long-standing relations with them.”

He said family business in the UAE and other Gulf nations have generally not suffered losses but added that their profits have been stifled. “I believe there are signs of a let-up and I hope they will materialize next year,” he said.

Another family businessman said lack of bank financing was a key obstacle to growth in the family company and other private sector establishments this year.

“Many economic sectors are attached to the real estate sector, which is no longer attractive to banks…for this reason, it is normal to see a decline in the profits and growth of family companies in particular and the private sector in general,” said Otaiba Saeed Al-Otaiba, a board member of Al-Otaiba group in Abu Dhabi.
“We are now banking on new large government projects, mainly in Abu Dhabi…these projects will hopefully ensure the continuity of our business so things will begin to return to normal.”

In a recent study, a Saudi investment firm said the regional default problem underscored poor transparency and outdated credit practices, mainly by business families, which control the bulk of the Gulf’s private sector.NCB Capital, owned by Saudi Arabia’s largest bank, National Commercial Bank, said the crisis that involved $billions in bad debt was the main factor in dampening investor confidence and obstructing economic recovery.

“Even as the regional corporate sector has generally performed well in the face of the crisis, the scandals have offered evidence of over-extension and poor risk management at some companies…..the impact of the crises has been amplified by poor transparency and the relative lack of well-defined and broadly accepted mechanisms for dealing with situations of distress,” it said.

 “From the regulatory perspective, the crisis has highlighted the risks and limitations of many outdated credit practices but new standards have yet to fully replace them….the poor sentiment in the corporate sector has gone hand in hand with highly restrictive lending practices by regional banks.”

Besides the credit squeeze, the default problems have sparked calls for reforms with within local family businesses, including their management and practices.

According to a study published in the UAE recently, family companies dominate business in the Gulf Cooperation Council (GCC) as they contribute nearly 75-95 per cent of the overall private trade activity in the six members.

The study by the Ras Al Khaimah Chamber of Commerce and Industry showed around 20,000 family companies operate in the GCC, with investments exceeding $500 billion.  Their total global wealth is estimated at over $two trillion and they employ nearly 15 million people.

In Saudi Arabia, by far the largest GCC member, around 300 major local family companies contribute nearly 25 per cent of the GDP. In the UAE, family firms represent more than 90 per cent of the business community.

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