5 minute read
The shape of things to come
from #229 - April 2020
Sandeep Puri, Partner and Head of Banking & Finance (UAE) at Baker McKenzie Habib Al Mulla, on the region’s regulatory landscape in 2020 and broader challenges that arise from volatile operating conditions
Sandeep Puri
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There is no question that the past twelve months have been challenging for the regional financial sector. The economic slowdown and downward pricing pressures have made it harder for banks to grow revenues, and whilst a number of them have managed to lower costs (partly through redundancies) and post growth numbers, it would be fair to say there still remains a fair degree of uncertainty for the coming months.
A LEGAL RECOURSE
Recognising the dynamic economic landscape and the consequential difficulties faced by consumers and corporates alike, the UAE has taken steps to mitigate such pressures by introducing new policies and processes, with two important developments discussed below.
The UAE has developed a new insolvency law applicable to individuals (the Federal Decree-Law No. 19 of 2019 on Insolvency), allowing individual debtors to apply to the civil courts to seek a restructuring of their debts.
The new law also protects distressed debtors against legal prosecution through the court-mandated appointment of an expert who works to establish a settlement that aims to resolve the debtor's financial constraints. Given its infancy, the new personal insolvency law is yet to be put through its paces but is certainly a positive step for the UAE, addressing an issue identified by many as being the driving force behind the number of absconding debtors in the UAE.
Secondly, following consultation with the UAE, in January of this year we saw a declaration issued by the Central Government of India through the Ministry of Law and Justice, whereby the UAE was recognised as a reciprocating territory under Section 44A of the Code of Civil Procedure, 1908. Such recognition allows for a judgement issued by the courts of the UAE to be directly enforceable in India. The effect of this recognition is that UAE court judgements are treated as though they had been issued by the Indian District Court, potentially saving several years of judicial process, with commensurate anticipated cost-savings.
Given the potential exposure of UAE financial institutions to corporate debtors backed by Indian individual sponsors, there has been considerable interest in the Indian Gazette notification, and banks and borrowers alike are waiting with
bated breath to see how successfully UAE judgements will be enforced in India following its publication.
This is likely to have a significant impact on the litigation strategy of banks and financial institutions with defaulters who may have fled the country, affecting both banks which already have UAE judgments against Indian defaulters and those who may be looking to bring a claim (having due regard to limitation periods for such claims).
The expectation is that whilst banks will continue to feel the impact of global and regional economic headwinds, they are ultimately in the business of lending and will continue to do so, with a continuation of balance sheet lending for strong credits and lending to other corporates albeit with a closer scrutiny of credit terms and security packages.
BROADER CHALLENGES
In light of the challenging economic landscape, local governments have continued to play their part in helping stimulate growth. The Government of Dubai, for example, increased its spending by 17 per cent for the 2020 fiscal year budget to AED 66.4 billion ($18 billion), the highest in Dubai's history and which includes significant investment into healthcare, education and infrastructure (including for Expo 2020). The UAE Central Bank has also pre-empted an increase in creditor/debtor discussions and set up the Consumer Protection Department, with the sole aim of protecting consumers of financial services and there is an expectation that further consumer protection regulations will follow.
Looking more broadly at the landscape for financial institutions moving forward, 2020 has already been a tough year for many local and regional financial institutions. We have seen a number of large corporates entering into restructuring discussions at a retail level, major economies heading towards recession and the impact from the COVID19 continuing to unfold globally. What has no doubt helped some banks and financial institutions mitigate the adverse impact of these events are the proactive measures taken earlier to consolidate operations and reassess and streamline cost bases. We have also seen banks continuing to take a more conservative approach in their lending practices this year.
— Sandeep Puri
The expectation is that whilst banks will continue to feel the impact of global and regional economic headwinds, they are ultimately in the business of lending and will continue to do so, with a continuation of balance sheet lending for strong credits and lending to other corporates albeit with closer scrutiny of credit terms and security packages. There is likely to be a continued focus on cost-cutting and streamlining business operations, though for now it appears that the bulk of the UAE banking consolidation has already taken place (most recently with the merger of Dubai Islamic Bank with Noor Bank). There may, however, be space for further consolidation particularly in the wider region.
As we continue to see global and regional economic pressures impact the UAE, we expect discussions between corporates and banks to centre around restructuring of existing financing arrangements or amending and extending trade facilities. As mentioned above, however, we fully expect local governments and central banks to continue to intervene as needed to facilitate banking business and introduce consumer protection measures to ensure consumer confidence is maintained whilst allowing local banks and financial institutions to remain resilient in the face of the constantly changing economic landscape.
