A cursory internet search will reveal a number of sobering stories relating to debt collections in the Middle East, but it’s important to understand that the region is still developing. Insolvency laws are still unclear, court practices are evolving and the payment terms are often incredibly generous.
What might be further delaying progress in the region is the cultural stigma that surrounds debtors.
According to research by Euler Hermes, Saudi Arabia and the UAE are currently the hardest places in the world to collect debt, with Head of Collections, Jennifer Baert, claiming that the primary difficulties are caused by three factors: payment terms, court practices and insolvency regulations.
Baert explains: “In the UAE and Saudi Arabia, payment terms are quite long. In the UAE it is over 60 days and often after 90 in Saudi Arabia. Court proceedings are also long, uncertain, costly and difficult to enforce”.
While there are a number of other factors at play, many of the difficulties affecting payment terms, court practices and insolvency regulations are intrinsically linked to the region’s cultural approach to debt collections. In the fast-growing Islamic banking sector, the issue of debt also remains a matter of controversy, given that religious law underpinning the practice doesn’t allow debt default or bankruptcy.
Below, we’ve put debt collections culture in the Middle East under the microscope, to support organisations working in the region.
Confusion surrounds the debt issue In the UAE, which means banks are vilified and collections is difficult. Locally, and in the Middle East in general, however, there is a growing impulse towards modernising debt collections and insolvency systems.
The situation is complicated. It’s easy to get credit in the UAE, but it’s even easier to run into financial difficulty and once you’re on the hook, the consequences can be severe, with the judicial system criminalising debtors and creating a situation that makes it impossible for them to repay.
The culture surrounding debt in the nation is such that there is a major stigma attached to it and the practice of criminalising debtors is commonplace. So much so, in fact, that it is not out of the ordinary for debtors to serve jail time.
According to Radha Stirling, CEO of legal and human rights organisation Detained in Dubai, UAE bank loans involve a strict repayment schedule. If that schedule is not adhered to, it often results in prosecution. He says that “financial analysts are anticipating higher incidences of default in 2019 than in previous years; and in the UAE, this inevitably becomes a criminal matter”.
Furthermore, any debtors with the idea of leaving the UAE and repaying from abroad might find themselves listed by Interpol, as the country often uses the organisation to help them recoup unclaimed debts from debtors who have left the country.
However, there are certain steps being made to modernise debt collections practices in the country. A new insolvency law was introduced in 2016, which modernised and streamlined UAE bankruptcy procedures, but according to Jennifer Baert, it “hasn’t yet delivered on its promise to make debt collections easier”. In short, modernisation in the UAE is happening, but cultural change is a long and complicated process, especially where religious law is concerned. So, banks will still need to adapt their strategies to suit existing cultural and economic regional traits.
An oil-based economy where the government holds strong control over major economic activities, Saudi Arabia is also a country with Islamic Law sewn into the fabric of its laws – including those regarding debt collections.
Under the law of the Hanbali school (one of the four traditional Sunni Islamic schools of jurisprudence), the principle of “The Contract is the Law of the Parties” is generally adhered to when it comes to debt collections. This essentially means that the parties to a contract are free to agree to the terms of their choosing, provided that these terms are not at odds with established Islamic Law. Interest for late payments is also prohibited, and legal costs relating to enforcement proceedings are not recoverable unless clauses have been carefully drafted to conform to Sharia law.
Late payments are common in Saudi Arabia (as with all GCC states), but local law doesn’t regulate them, which leads to debtors frequently attempting to negotiate discounts in exchange for more expedient payments.
For banks, the problem is that there is very little controlled or systemic about the laws related to debt collections. Legal action is slow and expensive, with weeks or months sometimes separating court hearings. This causes difficulties for collections agents and banks. Indeed, according to Euler Hermes, debt collections is three times more complex in Saudi Arabia than in Sweden.
One trick for collectors should be to maintain a tighter grip on the litigation process via in-house legal expertise and external associates (law firms and bailiffs). The debt collections systems themselves, meanwhile, must be configurable to cater for different legal environments.
Collectors should automate processes wherever possible with expert financial software. This can include everything from generating legal documents, managing payments, handling recovery and tracking assets, to the handling of third-party expenses, fees, invoices, and monitoring critical court dates. They should also be aware that the laws of the land frequently change, so should have an adaptable system in place.
Islamic Banking in the Middle East
Islamic banking practices are on the rise, with 1,407 Islamic financial institutions now recognised globally, from retail to investment banks and asset managers. The 2017 ICD-Reuters report put the Islamic finance industry at $2.2tn of assets in 2016 and forecast that it would grow to $3.8tn of assets by 2022.
Islamic banking abides by Sharia law, which means charging interest and gambling are both forbidden. Sharia law also encourages its practitioners to conduct businesses both morally and ethically: something that might seem initially at odds with conventional finance, which has always had a problem with transparency and fairness.
Islamic banking offers a number of lessons that retail banks could learn from, but when it comes to debt, there are a number of challenges facing debtors and banks alike. In Islam, the fulfilment of one's obligation under all contracts is perceived as a strict religious duty.
The religion also condemns any debtor that delays any payment of their dues without a valid cause. As such, in Muslim-majority countries, there remains a serious cultural stigma attached to debt.
For lenders, this can actually prove encouraging, particularly considering the official Islamic line on creditors. This states that a debtor should not only pay the debt in time but also express gratitude to the creditor while repaying the borrowed amount. If the debtor refuses to pay even though he has the means, he would be a perpetrator of injustice who exposes himself to possible punishment.
In fact, in Sharia, if a debtor defaults wilfully, he can be arrested, punished and dealt with harshly. This should, of course, mean debtors are more inclined to pay, but NPLs in the region are on the rise - creeping up from 3.9% in 2014 to 4.5% in 2016 according to Deloitte. This proves that, perhaps, a different approach is required.
According to Latham & Watkins (L&W) the Middle East is in a state of flux when it comes to debt collections. They explain: “There is a pressing need to address the cultural stigma and criminal implications associated with bankruptcy, to distinguish between debtors capable of being rehabilitated and those in need of efficient liquidation, to modernise laws in line with the evolving business landscape, and to improve the function and efficiency of courts and insolvency professionals”.
L&W use the evolution of the DIFC Courts, Decree 57 and its draft federal bankruptcy law (which draws heavily from the insolvency laws of the UK and the US) as a perfect example of how policy makers in the UAE have set an example for the rest of the Middle East and laid down the beginnings of a roadmap for regional reform.
Egypt is another country in the region making some serious positive changes towards the handling of debt collections. The Egyptian government has instigated a public debt reduction strategy that aims to achieve a growth rate exceeding 6% over the next 4 years. According to Planning Minister Hala el Saeed, “The strategy aims to reach 30% of the external debt of GDP in 2022”.
According to Egyptian Minister of Finance, Mohamed Moeit, in regards to debt instruments, Egypt is facing a number of challenges, chief amongst them high interest rates. He adds that “local debt instruments – including T-bonds – auctions will be cancelled as long as interest rates remain high, stressing that Egypt has other alternatives to get liquidity”.
In order to reduce public debt to 70% within the next 4 years, serious amendments are being made to the current income tax law. A new real estate tax law is also being prepared to eliminate the differences in the value of the tax and reduce the real estate tax burden on the manufacturing sector.
This is a country taking debt seriously, which could have far-reaching implications for the region as a whole. Egypt has, historically, fostered a culture when shame surrounding debt isn’t as pronounced as elsewhere in the Middle East. But there are still lessons to be learned.
Whilst the culture might weigh heavily against it, loan appetites in the Middle East remain large and banks must deal with the fallout that inevitably ensues.
Ultimately, the answer might not be how to get debtors to pay, but how to make it easier for them to do so. In a culture where debt is such a source of shame and such a complicated issue, making debt repayment more simple and more anonymous surely makes sense. In this case, more customer-centric applications such as self-service and general digital transformation could really help. This is also an approach that spares valuable time and resources.
The region should be learning from the examples set by Egypt and the UAE - subtle reformation and modernisation that doesn’t upset the culture and evolves in line with the local and regional business landscape.