Shorter payment cycle for SMEs expected to boost economic activity

Dubai: The Government of Dubai’s plans to shorten payment cycles to small and medium enterprises (SMEs) will help boost the liquidity and economic activity in the emirate, according to industry representatives and bankers.

Dubai plans to expedite government payments to small and medium-sized companies. The government will pay SMEs within 30 days instead of 90 days, according WAM news agency.

According to the report, this measure is expected to result in Dh1.6 billion ($435 million) of additional liquidity to the companies. “Cash flow shortages, tighter liquidity and difficult credit conditions have been major hurdles for SMEs in recent years. Any efforts to reduce the credit period of government contracts will substantially reduce the cash crunch,” said Shailesh Dash, Founder and Board Member of Al Masah Capital.

Banking sector credit to SMEs in the UAE have been on a tightening cycle from the second half of 2015, following a significant rise in non-performing loans (NPLs). The excessive leverage combined with a breakdown in payment cycles led to a number of small business owners skipping their loan payments resulting in a big surge in NPLs for banks for banks during the past three years.

“In response to rising loan impairments, many banks have tightened their credit standards and or increased the interest rates significantly in recent years, making access to funds difficult for these banks. While many banks were forced to deleverage and restructure their balance sheets, some are still struggling with legacy NPLs from their SME portfolios,” said the SME head of a local bank.