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Funding squeeze lifts ME non-bank lending

DUBAI

Middle East investment companies are ramping up their lending to businesses, providing a lifeline for small and medium-sized firms struggling to secure finance from banks that tightened credit after a suffering rise in bad loans.

Industry participants estimate non-bank lenders in the region could provide around $1 billion over the next three to five years, including secured loans, mezzanine debt, preferred shares and convertible loans and bonds.

That’s a small slice of the global industry; private debt funds, the other name for non-bank lenders, distributed $58 billion in capital worldwide in the first half of 2016, according to financial data firm Preqin.

But a growing number of Middle Eastern borrowers are considering non-bank finance, alongside other “shadow banking” options such as private equity, venture capital funds and peer-to-peer lending.

In the Gulf, “low oil prices have caused lower liquidity in the market, and combined with more onerous capital requirements for banks, this has led to a decline in the financing available to mid-market companies,” said Mirza Beg, MD of private debt at Waha Capital.

“This situation is creating more opportunities for private debt players like us.”

UAE-based asset management firm Waha branched into private debt last year, offering conventional and sharia-compliant finance for healthcare, logistics, consumer and business services firms in the Middle East, Africa and Turkey.

Many banks in the Gulf have tightened their policies on lending in the past two years as low oil prices and sluggish economic growth aggravate non-performing loans.

Some banks have become less able to lend because of pressure on their balance sheets from new regulations, including global Basel III requirements from the Bank of International Settlements and the International Financial Reporting Standards Board’s IFRS 9 accounting rule.

New bankruptcy rules, introduced in the UAE late last year and being planned in Saudi Arabia, may force banks to recognise bad loans more promptly.

“From an investment perspective, these factors excite us the most as they are forcing a fundamental shift in the recognition of bad loans, and a cultural change in the restructuring of troubled companies,” said Ahmad Alanani, chief executive at Sancta Capital Group, an investment firm focusing on the Middle East and Africa.

Reuters