Information is power

The rising number of defaults in the IT sector has led to renewed calls for greater transparency in the market. One organisation well-placed to pass judgement on how the channel can overcome its financial woes is Emcredit, the UAE’s first credit bureau. Channel Middle East met up with chief business officer, Zaid Kamhawi, and commercial business development manager, Mohamad Jomaa, at the company’s fortress-like Dubai offices to tackle the pertinent issue of credit information and the channel.

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Information is power Mohamad Jomaa and Zaid Kamhawi, Emcredit.
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By  Andrew Seymour Published  September 9, 2009 Channel Middle East Logo

What sort of benefits can a credit bureau offer?

Zaid Kamhawi: Credit bureaus have been proven to reduce obstacles faced by businesses when accessing credit from the banking sector. According to a recent study by Dun and Bradstreet, 55% of SMEs in the UAE reported difficulties in accessing credit and capital. A study by the World Bank estimated that the existence of credit bureaus can reduce these obstacles by more than 25%.

Credit reporting services are useful not only for banks and financial institutions, but also for business-to-business credit decisions. For instance, credit information helps companies assess their potential business partners and view their financial repayment habits. This can help them avoid default losses for inter-company receivables. Likewise, they can strengthen their engagement with those showing credible credit behaviour.

How would IT companies in the UAE benefit from sharing information or using the services of a credit bureau?

Zaid Kamhawi: In the recent past, the IT distribution industry alone has suffered a US$5m fraud. Such incidents could have been detected and prevented if the industry players were collaborating and sharing accounts receivable information.

This type of information sharing network within industry sectors has been offered by credit bureaus in other developed countries for many years, and it has proved that it can protect businesses from credit risk, but more importantly allow businesses to engage with a much larger number of customers with credible credit records. This in turn accelerates business and economic activity, and opens up the associated factoring and credit insurance businesses.

What kind of engagement does Emcredit currently have with companies from the IT channel in the UAE?

Zaid Kamhawi: Since inception, our focus has been on the collection of credit information from banks, financial institutions and government departments in the UAE. However, we understand that credit information does not just lie within the financial services sector and that trade credit is as important an element in supporting business activity as banking credit.

The current financial crisis, in particular, has highlighted the need for companies to manage credit risk and improve cash flow management as much as banks need to manage defaults and liquidity. We are speaking to a number of industry sectors that we find are grappling with frequent payment delinquencies from the market, need to address fraud incidents or need to manage cash flows much better.

You are working on a new initiative for the commercial sector by setting up an information sharing platform for industry players to divulge account receivable data and payment experiences amongst themselves. How difficult is it to get credit information on the IT sector compared to other industry sectors?

Zaid Kamhawi: The success of our new initiative depends on industry players sharing and contributing their accounts receivable information and updating that information on a regular, pre-agreed frequency. Other than having a burning need to access such information for business purposes, the sectors we are inviting should first have good quality receivables information that is accurate, correct and up to date, and should also have the technical capability to transfer such information to Emcredit regularly, securely and automatically.

The invited industries should also have multiple players that have multiple customers and high turnover. We have had discussions with a number of industry sectors. The IT sector has been identified as one of the sectors that fits this criteria and our initial meetings with IT players have shown a great interest in supporting any collaborative effort that can enhance and protect the performance of the sector.

What steps should members of the IT channel take to protect themselves against unnecessary risk exposure?

Mohamad Jomaa: IT distribution is a highly competitive industry that has pushed companies to run on very tight margins and this adds to the severity of credit losses as distributors have to generate enough sales to compensate for any credit losses. Having said that, credit will remain a cornerstone in the channel as it contributes significantly to distributors’ competitiveness and profitability.

This year’s runaway cases remind us of many previous cases that have cost the channel millions of dollars and they highlight an urgent need to develop a scientific approach to credit management. Distributors will have to calculate their risk and this cannot be achieved with the absence of critical and accurate credit information on a reseller’s profile, aggregate exposure and payment behaviour.

Knowing the customer’s total exposure to the channel will protect distributors against companies that intend to take advantage of multiple credit lines extended to them and will also protect distributors from over-extending credit to existing customers.

This level of accuracy can only be achieved if distributors share their credit experiences and access a centralised data pool operated by neutral third party that has the IT and legal infrastructure required to manage information sharing.

Many IT companies in the channel now have credit insurance. Is there any need for these companies to invest in services from credit bureaus as well?

Mohamad Jomaa: Any prudent company with significant credit exposure will have to measure its credit risk, whether it has decided to transfer that risk to an insurance company or not. Distributors that invest in enhancing their credit management policies tend to get greater support from the trade credit insurance market in terms of credit limits and premiums.

Insurance is a protective measure against defaults; distributors will still need to do their own assessments in accordance with their credit risk polices and risk appetite. The benefits obtained from applying advanced credit management practices complement those achieved from credit insurance coverage.

There have been calls for more transparency in the Middle East market for years, but it still remains difficult to source accurate financial data. Will this ever change?

Zaid Kamhawi: Transparency happens as a by-product of cultural change. You need to accept transparency and value its benefits, then you can start practicing it. Practicing transparency, if you look at it from an information sharing point of view, is a complete industry.

It has its policies, procedures, infrastructure and legal requirements. This is what we, as a credit bureau, are trying to put in place. It is about creating awareness, speaking to industry players, banks and policy makers and promoting the concept of information sharing, while putting the infrastructure in place for that transparency to happen.

Some IT traders argue that their own experience and long-term trade dealings with customers are far more reliable factors when making credit decisions than any service that could be offered by a third party. What is your response to that?

Zaid Kamhawi: You can have a lot of information about an existing customer built over a large number of years, but that is limited to the amount of information that you have experienced with it. It is not the complete picture about that company.

There is also information about how it behaves with other industries or other customers in the same industry and the track records of the individual owners.

That is especially important for SMEs because the way an individual owner behaves in managing their own credit has a direct impact on how they will manage their company’s credit.

A lot of distributors and resellers generate a large proportion of their sales from business outside the UAE. Are you still able to help these companies?

Zaid Kamhawi: If a distributor or reseller wants to enquire about a company that exists outside of the UAE and needs information about that company then there are several ways that we can help them. Information can be imported and passed onto them through alliances that we are looking to establish with other credit bureaus and vice versa.

We can look at a relationship with other international information companies and act as a reseller on their behalf. But in general what we are trying to resolve is information gaps that exist within the UAE because there is a lot of trade that happens in the UAE between manufacturers and distributors, and distributors and resellers. That is where the burning issue is at the moment and that is what we are trying to address.

What challenges does the high level of re-export activity in the market present to obtaining accurate credit information?

Zaid Kamhawi: If the information does not sit in the UAE it would not be as easy for us to go and collect that information. We would have to rely on our relationships with other bureaus that actually collect that information.

If a company exists in the UAE then information about that company exists with us, but information about how it behaves with the companies that exist outside — or how those companies outside are paid by the re-exporters here — does not sit completed.

Does that mean there will always be a hole there when it comes to getting the full picture then?

Mohamad Jomaa: The information that we focus on is payment behaviour and credit-related information and this sits in the company’s relationship with its distributors in the UAE. If it re-exports to other countries then how well its customer settles its invoices outside of the UAE is not our focus. Our focus is how that reseller settles its payment to its distributors in the UAE, and that information can be attained through this information sharing initiative.

We have to remember that when the reseller re-exports it is expecting payment from the customer that exists outside the UAE. That information sits with the reseller because it knows how that customer behaves in repaying it. So that information is available and it could be shared among industry players in the UAE, particularly if others are re-exporting to the same entity.

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