Dubai borrowers ‘skip’ their debts by leaving the country

Dubai’s slowing economy, the rout in commodities, and strict debt repayment laws are reviving a phenomenon that symbolised 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 NBD, the country’s second-largest bank.

People in the SME sector may have left behind 5bn dirhams (€1.27bn) of loans this year, according to Abdul Aziz Al Ghurair, chief executive of Mashreqbank and chairman of the UAE Banks Federation.

While so far limited in scope, Emirates NBD says it is seeing the phenomenon in areas such as commodities financing, the ‘skips’ recall the 2009 financial crisis when thousands of ex-pats fled the country to avoid a local legal system which lacks a bankruptcy law and criminalises bounced cheques.

They are 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, an analyst at EFG-Hermes Holding.

“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.

Cheques are still a common form of payment in the UAE.

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 is 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.

Growth in the UAE is moderating but not slumping, with expansion of 3.5% this year.

However, the distress in the commodities universe may be responsible for much of the pain as business owners and traders struggle to absorb losses on everything from the price of bullion to crude oil.