Dubai SME payment acceleration will bolster business and economy

Dubai SME payment acceleration will bolster business and economy

The government of Dubai has announced plans to shorten payment cycles to small and medium sized enterprises (SMEs) operating in Dubai in a move that experts say will help boost the liquidity and economic activity in the emirate.

According to UAE’s state-run WAM news agency, 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 to the report, this measure will result in approximately Dh1.6 billion ($435 million) of additional liquidity to the companies.

Additionally, another plan is to reduce insurance costs for SMEs from the current rate of 2-5% to between 1-3%, with no impact on their eligibility for government tenders.

Lastly, AED1bn ($272m) worth of projects will be assigned for joint ventures between the public and private sectors of Dubai. The Dubai government will also allocate 5% of its capital projects to SMEs to allow them to get projects worth up to AED400m ($109m).

What will be the impact of these measures on SMEs?

Improved cash flow cycle

Wamda Capital Executive Chairman Fadi Ghandour is all praises for this move and considers it extremely important for SMEs. He believes that maintaining cash flow is crucial in running business for SMEs and this will ease their day-to-day pain of collecting cash.

Also Read: 9 Credit Control Mistakes That Could Hurt Small Businesses in UAE

Improved lending for SMEs

The announcement is also anticipated to ultimately result in improved lending for SMEs on the part of banks which is a long-running issue in Dubai.

In a recent World Government Summit, it was mentioned that SMEs in Dubai attract only 7% of bank loans in spite of the fact that they account for about 90% of companies.

Banking sector credit to SMEs in the UAE has been on a tightening cycle since 2015 after a significant rise in non-performing loans (NPLs). The excessive leverage along with with a

breakdown in payment cycles resulted in majority of small business owners missing their loan payments that led to a big surge in NPLs for banks during the past 3 years.

Due to increasing loan impairments, many banks in Dubai have tightened their credit standards or increased their interest rates significantly in that last 3 years which made it harder for SMEs to access funds from these banks.

Also Read: What steps is the Dubai Chamber taking in order to improve banking for Start-ups in UAE

More Business Development for SMEs

Andrew Morris, a partner at the Dubai-based Banks Legal consultancy says that the measure will certainly put a positive impact on SME’s business operations.

“A substantial reduction in debtor days will assist qualifying SMEs working on government projects to keep on top of their overheads and more easily invest in the development of their businesses,” he said.

Vic Bageria, CEO of Xp and retail and the chairman of the UAE-based Entrepreneurs Organization believes that the improved cash flow will strengthen SME balance sheets, will allow them to do more business with the same capital base which will lead to improved cash flow and profits and lastly, they can also focus more on the day-to-day running of their businesses as the banking pressure with the mismatch of working capital requirements will lower.

Impact on UAE Economy

SMEs constitute the “lifeblood” of the UAE’s economy. According to the UAE Ministry of Economy, more than 94% of the companies operating in the UAE are SMEs and together, they account for more than 86% of the total private sector workforce as well as more than 60% of the UAE’s current GDP, which is estimated to rise up to 70% by 2021.

This move is in line with UAE’s government vision to boost business setup in UAE, to support growth of SMEs and to reduce cost of doing business in Dubai which has recently also included changes to visa policies to bring more tourists and foreign investors.

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