For most banks that have lent..on the basis of the family name... banks have had to lend on the basis of the track record of the families and, more gravely, "a wink and a nod" as one commentator put it.
That means when the going was good. Now it unwinds as it should...
business24-7.ae
Scrutiny turns to family firms
By Vicky Kapur on Friday, July 17, 2009
What's in a name? Plenty, it would seem, if you were a banker in the Gulf seeking to advance loans to businesses in the region. For most banks that have lent to businesses in the GCC did so, with varying extents, on the basis of the family name.
Family, after all, is the fabric that drapes business in the Middle East. Here in the Gulf, whether you need to buy a car, go grocery shopping, watch a movie in one of the numerous multiplexes in one of the innumerable malls, or even send your kid to school, you would be dealing with a family-owned enterprise one way or another.
With more than 90 per cent of businesses in the GCC being family-owned, banks and other lending institutions have made ample hay while the sun – economic growth, if you may – was shining.
But a lack of transparency as far as operations and even the balance sheets of the family businesses are concerned meant banks have had to lend on the basis of the track record of the families and, more gravely, "a wink and a nod" as one commentator put it.
Since the advent of the credit crisis, however, the economic weather has changed for the worse. A freeze in global liquidity has sent chills across the local and regional economies and, with that, businesses across the region have shown symptoms of financial flu that has afflicted their global counterparts ever since the demise of Lehman Brothers in September last year.
The first of the big defaults has already happened. Related problems plaguing Saudi Arabia's two conglomerates, the Algosaibi and Saad groups, have not only resulted in a bank default in Bahrain (Algosaibi family-owned The International Banking Corporation) but, more importantly, are threatening to bring down a number of others across the length and breadth of the region.
Once bitten and now extremely risk-averse, banks in the region are not loosening their purse strings anymore when it comes to lending to family-owned businesses. "The problems of some Saudi family businesses have led to heightened awareness among Gulf banks about the risks of name lending and lack of transparency at some privately-held companies," Dr Eckart Woertz, Programme Manager – Economics, Gulf Research Centre, said.
"Central Bank statistics clearly indicate a decline in outstanding loans in Saudi Arabia from SAR754.6 billion (Dh739.2bn) at the end of November 2008 to SAR738bn at the end of May," said Giyas Gokkent, Chief Economist, National Bank of Abu Dhabi.
"Relatively flat or contracting loan books also exist in other banking sectors across the GCC. There may obviously be a number of factors at play, but the numbers speak for themselves; lending sentiment is down," he said. "Preliminary data for the UAE indicates that loans have not shrunk here yet. In any case, new lending is likely to be directed only towards the most creditworthy entities," he says, suggesting that family-owned business might have to work extra hard to prove their credentials.
These comments highlight the core of the challenges facing banks in the region today. Damocles' sword or Achilles' heel, call them what you want to, but corporate debt defaults are something that are bound to change the regional banking landscape sooner rather than later.
Banks across the region and in the UAE and Saudi Arabia are expected to be the hardest hit due to their exposure to the shaky real estate sector and the troubled Saudi groups.
Off-the-record conversations with bankers put the combined exposure of the UAE's banks to the two troubled family groups at $5bn or thereabouts. But neither the country's Central Bank nor the two business houses will confirm that.
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi, however, proclaimed this week that "there will be total disclosure" and that "the banks will definitely have to reflect this [the exposure] in their year-end results." As Emirates Business went to press, results of the country's bankers' meeting with the central bank on the exposure issue were yet to be announced.
While it is known that the Ahmad Hamad Algosaibi Group (AHAG) owes at least SAR34.6bn to more than 100 banks around the world, exposure of Saad Group, which has announced that it is restructuring its debt, is unknown.
"We are continuously striving to mitigate the effects of this limited squeeze, and are also planning for an orderly restructuring of the debt of affected companies in cooperation with our counterparties and international advisers," the Saad Group announced through a press release in June, without disclosing the amount of debt or the affected parties.
Such non-transparency, unfortunately, does and has led to rumours, which even the Saad Group acknowledges. "The group believes that many of these rumours stem from the circumstances of a private family issue. Saad is working toward a resolution of this matter, which it hopes can be achieved…," it said in another press note last month, again without giving out much in terms of information or statistics.
"The exposure of big family businesses is among the single most important risks we see on the horizon," adds John Sfakianakis, a veteran Saudi economist. That's a risk that banks in the region will have to, sadly, live with.
Credit crunch redux?
$9.2bn
The amount the Ahmad Hamad Algosaibi Group (AHAG) owes to institutions in the region and internationally
$4bn to $7bn
Exposure of Saudi banks to the Saad and Algosaibi groups, HSBC estimates
SAR738bn
The value of outstanding loans in?Saudi Arabia in riyals in May 2009, a 2.1 per cent drop since November last year
90%
Of businesses in the Gulf are family owned.
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