Zak Hydari, Chief Executive of Rasmala, examines how financial institutions beyond the banking sector can help recovery in a post-COVID-19 world.
Supporting SMEs which contribute around 60 per cent of non-oil economic output and employ around 90 per cent of the private workforce is critical
Covid-19 is the most serious public health and economic emergency the world has faced in modern times.
The impact on the global economy will be severe and long-lasting. The eventual outcome depends on actions taken now by various political and economic participants and stakeholders.
In the UAE, the government has acted quickly to protect its population from the virus and has taken steps to mitigate and contain the threat to public health. It is also ramping up its health system to ensure that the country is adequately prepared to treat patients and manage the crisis.
The government has also announced an emergency stimulus plan to support the economy and mitigate the impact of the Covid-19 shock by supporting lenders and UAE based businesses.
Fiscal policy is key to shoring up the country’s economy. The UAE has introduced measures to defer government fees, defer loan payments and increase financing for small and medium-sized enterprises (SMEs), which contribute around 60 per cent of non-oil economic output and employ around 90 per cent of the private workforce.
As elsewhere around the world many SMEs are facing a sudden and significant drop in sales, supply chain disruption and cashflow constraints. They are also facing the impact of large corporates delaying supplier payments to conserve cash.
Over the last 10 years the UAE government has taken significant steps to boost the SME sector and increase its contribution to the economy. Access to finance and broader government support will help cushion the impact on SMEs.
The challenge now is how best to deliver this support.
Banks need to play a leading role in transmitting the government’s fiscal stimulus to the economy. Although more than 90 per cent of businesses, by number, in the UAE are SMEs, they account for only some 5 per cent of total bank lending.
In this situation, the non-banking financial sector – and institutions within it – can play an important and supportive role in acting as transmission entities to those companies, particularly SMEs, that need access to finance quickly.
As well as providing capital quickly and efficiently, non-banking financial institutions are ideally positioned to provide non-financial support including governance, talent management, mentorship and strategic advice.
There is a well-developed community of non-banking financial institutions in the UAE, including alternative asset managers, private equity firms and other independent investment firms. They tend to have specialist investment capabilities and are well placed to work closely with the government, to increase the rate of transmission.
The priority must be to make sure that every eligible business can access financing quickly and survive through the crisis.
It is equally important to increase access to capital in the form of subordinated loans and equity-like instruments.
This can be achieved by establishing a national strategic investment fund with local sovereign wealth funds (SWFs) acting as anchor investors and guarantors to other equity investors and lenders to the fund. A guarantee would make it easier and quicker for banks to lend to SMEs through the fund.
Though the government might become a bigger shareholder in the wider economy and the SME sector more specifically, the benefits would be twofold.
In the first instance, swift support will protect the economy by maintaining the highest level of employment possible in the absence of an income tax or social security system.
Second, if capital is made widely accessible, in a timely manner and is structured to avoid the burden of additional debt, good companies will be in the best position to bounce back, expanding their operations and driving the growth that will repair the economic damage wrought by Covid-19.
If we can deploy capital by involving the broader financial community, this will amplify the economic impact and strengthen the UAE as a leading financial centre. In seeking to mitigate the social and economic impact of the virus, the UAE has an opportunity to maintain its world class environment – retaining the best of human capital, technology, entrepreneurship, resources and business ideas.
Zak Hydari is the chief executive of Rasmala