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The SME Advisor Executive Council: Banking and Finance
As part of our ongoing efforts to touch base with the community and understand issues that need to be communicated to SMBs in this region, and vice versa, we have set up, what we would like to call, the SMB Advisor Executive Council. Over the next few months, this think tank will pull together key executives from different industry sectors to discuss and share information that is aimed at serving the needs of small and medium businesses in the region. We brainstorm for your benefit. Ketaki Banga presents the highlights from this exclusive forum
When: 15th October, 2008
Where: The Fairmont Hotel, Dubai, Sheikh Zayed Road
Who: Sameera Shafqat, Team Leader – Assets, Business Banking, RBS
Farid Salem, Head Liability Sales, Business Banking, RBS
Nigel Watson, Sales and Marketing Director, Nexus Insurance Brokers
Zaid Kamhawi, Chief Business Officer, Emcredit
Talal Abdin Nasralla, Business Development Manager, Financial Services Sector, Emcredit
A crisis of confidence
Our think tank jumped straight into the big issues facing their industry and, as a result, SMBs. The biggest concern, of course was the current market volatility. Going up, going down, surviving, struggling ? it?s been one rollercoaster for the world?s economy. Some of the alarm is justified, and at other times it turns into a self-fulfilling prophesy when customers react in panic.
Sameera Shafqat, Team Leader – Assets, Business Banking, RBS, spoke of their daily internal communication feedback from the head offices, where they are instructed to give a very clear picture to clients. ?As a responsible bank, we have to give them the facts, but again, we have to also reassure them that we are here to stay. We have recently got our capital injection from the Central Bank of England. But to spread the news of reassuring developments takes a while in the current scenario,? she explained.
Our council was unanimous about the positive effect of the recent government announcement guaranteeing all banks deposits in the UAE. The federal cabinet ? under the chairmanship of His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai ? decided on a string of measures, including injecting liquidity if needed and facilitating interbank lending, the official news agency WAM said. As part of these measures, the government has guaranteed that no national bank will be exposed to credit dangers. It will guarantee deposits and savings in national banks and provide guarantees on lending, including between banks operating in the country.
Farid Salem, Head Liability Sales, Business Banking, RBS, agreed how this has provided much-needed reassurance to the market. “But it will take a while for the confidence to rebuild,” he added.
Not a time for sales pitches
Sameera stressed on the importance of a proper communication strategy: “This is not the time to make a sales pitch to customers. It’s a time to let them know they are safe with us.”
We asked Nigel Watson, Sales and Marketing Director, Nexus Insurance Brokers, if it has made a difference to business insurance. We are an advisory company, an independent insurance and financial advisory firm. What we have noticed is that more and more customers are seeking advice these days. And I agree, this not necessarily the time to be making sales pitches. A lot of people are looking for reassurance. They are looking for assurance that their investments, their capital is safe, and the institutions they?ve invested with are financially strong and not going to collapse. At the moment, a lot of new customers are approaching us to ask about how they should structure things, how they should invest, whether they should disinvest. I think in the current climate, insuring against losses is something people are seeking, he felt.
Business as usual?
But has Nexus seen a difference in the kinds of insurance options that businesses are approaching them for?
Nigel didn?t think it?s so much as a result of events over the last few months. ?Generally speaking, in the Middle East companies are thinking more and more about how they can offer insurance schemes to attract and retain staff,? he revealed. Nexus has seen an increase in the demand for business products such as group medical, group insurance, liability insurance, gratuity funding schemes and so on.
“It certainly forms a growing part of the business that we do,” said Nigel, and with the recent fires in the UAE, a lot of businesses are becoming more aware of the need to insure warehouses, premises and other assets.
Show me the money
If banks and other financial institutions have been worried about customers losing confidence in them, their SMB customers are equally worried that the feeling is mutual. Ready cash is just not that ready anymore. Large and small businesses have been voicing concerns over the practical crackdown on available funds. It?s a vicious cycle ? banks don?t lend, businesses can?t grow, so businesses don?t have anything to invest back into the banks, who again have even fewer funds for business needs.
So how have banks reacted to this tricky situation? What would their advice be to SMBs? One of our readers, who would prefer not to be named, told us how their company needed an overdraft facility and got rejected by five out of the six banks they approached.
Sameera had an explanation for that: ?I can see why that might have happened, since I deal with that part of the business. When it comes to an overdraft facility in this particular region, it?s a very risky proposition. Banks might give it out, but it will usually be fully collateralised ? by that I mean there is a cash or cash equivalent guarantee or security. The reason is, there is so much new business coming into this market ? even a company which is a couple of years old is a new business, and a lot of companies just wind up and leave. Till recently, there was no central credit bureau where you could check how much a business had borrowed from other banks.?
She felt the most likely reason nobody was willing to extend an overdraft facility to our reader was because they must have required a lot of collateral. She agrees that could put off many companies who might as well shrug and say, ?If we had been able to put up so much collateral, why would we need an overdraft? We might as well have used our own funds to expand the business.?
Are credit bureaus the answer?
It was interesting that Sameera brought up the issue of being able to check a company?s credit history. We had on our council Zaid Kamhawi, Chief Business Officer, Emcredit and Talal Abdin Nasralla, Business Development Manager, Financial Services Sector, Emcredit.
Emcredit is an information services company. It provides a range of solutions such as credit bureau services, cheque-honouring reports, business background reports, data verification, data enrichment, decision support analytics and other tools necessary to improve risk assessment, customer acquisition, servicing, debt collection and portfolio management. Emcredit was incorporated in January 2006 under the directives of His Highness Sheikh Mohammed Bin Rashid Al Maktoum. It is registered as a private entity and is a fully-owned subsidiary of the Department of Economic Development (DED), Government of Dubai.
Zaid spoke of Emcredit?s dual role: ?While we have a federal role ? an obligation to support the growth of the economy ? at the same time we are a private company and we have to open the market. We collect information about companies and individuals from banks, financial institutions, government departments, and so on, and we collate this information and provide it back to help banks and institutions in the assessment process of individuals or companies.?
So how did this concept take off in the UAE? Zaid talked about how the DED (which is the company registrar in Dubai) was approached by many small and medium businesses who complained that they couldn?t get easy access to credit from banks and financial institutions. The DED, in turn, tried to assess why banks were not extending credit. After all, SMBs make up about 60% of the UAE?s GDP, and they needed to be supported. Most banks came back with the answer that they did not have enough information about these businesses or their owners, and the cost of going through a full due diligence for an SMB, compared to the return on a loan of, say, $50,000 was not worthwhile for them. And thus was born the concept of a centralised business database.
Reputation collateral
This concept grew to include information about individuals as well. Empirical evidence has shown (especially in the case of SMBs) that how individuals behave while handling their personal credit is directly related to how they handle their company credit. ?So we started collecting information about individuals and shareholders to create what?s called ?reputation collateral?,? explained Zaid.
Most SMBs here today don?t have reputation collateral; all they have is probably cash in the bank and a few guarantees here and there. How you behave with banks, financial institutions, government departments and other entities in the UAE ? that gives you a business reputation. The underlying theory is: past performance is a good predictor of future performance. So it helps SMBs to start creating this reputation, this collateral, which they use when they seek finance. Zaid mentioned numerous reports by the World Bank and the International Finance Corporation (IFC) which highlighted the fact that when a credit bureau exists in an economy, it becomes cheaper and easier to access credit.
But what does reputation collateral mean for banks? What do they look for when deciding whom to fund? And what message would they like to give SMBs?
Sameera answered: ?Obviously we go through the paperwork and everything, but when it comes to the company name in the market, it does matter. My approach as an individual is, I would like to lend [if everything is in order].?
Sameera elaborated how paperwork and reputation are related: ?A good reputation will be reflected through thorough paperwork as well. That?s because a company?s reputation is developed by its execution of business in the market. It will be reflected in its cash flow and transactions. It?s not just their marketing and branding, it?s also their dealings in the market which give them a name.?
Farid added, “That holds true for large and small businesses. You take any company which has a good reputation ? it will be on the basis of what they have done, how they have performed, their financial results. Your reputation collateral will be reflected through your solid paperwork.? So the agreement all around was: reputation collateral is not some intangible ideal.
What about privacy?
In some countries the submission of information to credit bureaus is voluntary, but Zaid and Talal felt that in certain economies like emerging markets, because the concept is new, there needs to be some government involvement in making it mandatory.
Zaid added, ?Especially now that the government has guaranteed all deposits, in essence they are saying we are buying your risk; so it is only fair that they want to make it mandatory that the right risk processes are in place ? that there is a centralised database that has the history of all your payment behaviour.?
What about issues such as privacy? ?If you?re a company and you?re dealing with the public, then your information is public information,? stressed Zaid. ?No company should be allowed to say ?this is confidential?.? You are a company, not an individual, he highlighted, and because the implications of your actions are in the public domain, your information is public, whether you like it or not.
This is a new concept in the UAE, so Emcredit realises the need to educate the market about a balance between confidentiality and the need to share information. ?Although individuals have the right to privacy, nobody has the right to credit! So if you need credit, you need to disclose information,? emphasised Zaid.
What has the reaction been so far?
So far Emcredit had been focussing on specific data sources such as banks, financial institutions, and government bodies. The DED, for instance, has information about 150,000 companies, which is passed on to Emcredit. It might not be financial information; nevertheless, it is extremely valuable for their purposes. For example, trade license information, the shareholders, percentage shareholding, information on articles such as their tenancy agreement, basic demographic information about the business. ?For banks, obviously, that?s very important because they tend to send out field agents to verify the authenticity of businesses,? stated Talal.
Sameera agreed, “I am on the asset side of the business, I look after the lending and trade side of things, and we really have to dig out the customer?s information about their exposures. Based on that we do our credit analysis.?
What’s insurance’s take on it?
Does a credit bureau interest the insurance sector? We posed this question to Nigel.
“Well we rely on a process of thorough fact finding and needs analysis for all of our customers ? individual or a company. Our advice is based more on protecting company assets, providing a wider range of employee benefits. We really go through a process of sitting down with the companies, understanding them as individuals or businesses, rather than relying on external sources of credit information,” felt Nigel.
But Zaid felt that there is no industry that doesn?t require some sort of a sharing mechanism. ?Even at an insurance level, all insurance companies want to share claims information.?
Appetite for risk
We mentioned how it was easier for businesses to get loans from some banks and not from others. The unanimous explanation was that different banks have different risk appetites, so while one might reject a loan, another might be in a position to extend a loan based on different terms.
Zaid stressed on the need to collect correct information to accurately assess the commercial entity or business or borrower, and then decide on lending terms, or interest rates, or profit rate. ?If it?s a riskier borrower, obviously you want to charge a higher rate. And this is fundamentally what was missing in the UAE. Though we see it more in the retail sector rather than the commercial sector, usually, everybody is charged the same interest rate, regardless of their risk profile!?
So can an SMB increase its chances of getting funding, and at better rates, if a bureau like Emcredit rates it well?
Zaid clarified, ?Actually no. Credit bureaus do not dictate lending terms. That?s the biggest point that always has to be emphasised. They provide banks with factual information, and based on their risk appetite and credit policies, they decide.? He explained how credit bureaus develop what they call scores, which are different from rating. Usually a score is part of a rating, which is something that a service like Moody?s would do. A score is purely an interpretation of the information that the bureau has.
How you behaved in settling your past obligations will give some sort of an indication of how you will behave in the future. The score reflects that. It?s a probability measure. ?To develop an accurate score you need a history. That is what we are doing,? explained Talal.
What does it need to work?
To have a successful credit bureau you need two sets of infrastructure said Zaid ? technical infrastructure that allows information to flow in real time, and legal infrastructure to make sure that the privacy and confidentiality of this information is maintained. Obviously, technology is now widely available.
Coming to the legal infrastructure, Emcredit started with a decree from His Highness Sheikh Mohammed Bin Rashid Al Maktoum, establishing Emcredit and mandating (at a Dubai level) all banks and government departments to give credit-related information to Emcredit. The second step will be to take this decree to a federal level.
Besides that, Zaid and Talal felt that while banks should be willing to share information, at the same time there needs to be awareness amongst businesses; they need to push banks to share information because it will help businesses in the long run.
“The main function of the credit bureau is to help expand and extend credit, rather than just catch crooks, which is the usual connotation attached to us in a lot of markets,? insisted Zaid. ?We do not make it difficult for businesses to get funding. On the contrary, empirical evidence has shown that once a credit bureau is well established, credit expands. Because now financial institutions know who they are lending to, and they can decide on what terms, rather than fall into a situation where they say. I can?t lend to you because I have no information about you. I’d rather err on the safe side.?”
But what’s also very important to know is that credit information does not just lie within the banking community; a company?s telephone bill is a form of credit information, their insurance behaviour, their claims information, all form their reputation.
Emcredit is also trying to tap into business-to-business credit. You might want to deal with another business, perhaps as a supplier who needs to extend credit ? in such cases it helps to know their track record.
“We are now approaching the business community to share their information. When you gave credit terms to a business, how did it behave in meeting those terms? We can start sharing this information between businesses as well, and not just between banks,”enthused Zaid.
To summarise
To wrap up what turned out to be a very interesting couple of hours ? in a market which is currently very unsure about credit availability, the message from banks was about the need to reassure customers. But in return, their recommendation to businesses was that it would help everyone if they worked to plan their borrowing, provide the right information such as financial reports and management continuity plans, all of which would make it more likely for SMBs to get the funding they seek.
From Emcredit, it was about how there is a greater need for transparency and sharing information, and how it would drive growth rather than curtail it. And the importance of reputation collateral as well as the means through which it can be built.
And from Nexus ? it was a message to businesses that they need to structure a clear investment and insurance plan. How can they safeguard their assets? What sort of incentives can they provide to retain their employees? At a time when the market sentiment is far from its cheeriest, considering the number of expats there are in this market, it could be the easiest thing for them to say ?I?m giving up, I?m going home.?
Our exclusive think tank, where key executives from the industry brainstorm for the benefit of regional businesses.
