The Dubai government has said it plans to expedite payments to small and medium-sized companies. It has made a commitment to pay SMEs within 30 days instead of 90 days.
This measure is expected to result in about US$435 million of additional liquidity to the companies. SMEs account for more than 90% of the total enterprise population of the UAE.
Also, as part of its initiatives to support SMEs in the emirate, the Dubai government will reduce insurance requirements for SMEs when supplying government agencies, to encourage them to tender for government projects.
It also plans to allocate about US$270 million worth of projects to joint ventures between public and private sectors to attract private-sector investment and reduce the burden on the budget.
The Dubai government will also allocate 5% of its capital projects to SMEs to allow them to get projects worth of up to about US$109 million.
According to Gulf News, banking sector credit to SMEs in the UAE has been tightening, following a significant rise in non-performing loans. 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 non-performing loans for banks during the past three years.
“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,” Shailesh Dash, founder of Al Masah Capital told Gulf News.
Among those who praised the move was Wamda Capital executive chairman Fadi Ghandour, who said it was an “extremely important” step for SMEs.
“SMEs live and die by their cash flow, so that should easy their day-to-day pain of collecting cash and gets them to focus on running their business and taking care of clients,” he told Arabian Business.
Dubai, and the UAE as a whole, have been implementing policies to lower the cost of doing business, attract foreign investments, create jobs and boost economic growth. But late payments are still the main cause of small businesses failing in the UAE.
Debt collection continues to be a challenge for companies operating in the UAE, which ranks as one of the most difficult countries for collecting debt, just behind Saudi Arabia, in a recent poll conducted by international credit insurance company Euler Hermes.
Euler Hermes stated that payment terms in the UAE have long been 30 days, though they increasingly tend to extend up to 60 days. The average Days Sales Outstanding for listed companies is 62 days and varies greatly from one sector to another. Large oil & gas, construction or service entities, in particular, are likely to stretch their payment terms.
We wonder if private companies and major contractors will follow the Dubai government's lead in paying their suppliers on time. Or if a law would be a better enforcer of timely payments in the country?
What do you think of Dubai's government in setting an example? Let us know below, or at our Facebook page.