Policy change

IT distributors made their disdain for credit insurance providers quite clear last year, accusing them of hiking premiums and reducing cover at a time when the economic downturn had left them massively exposed to bad debts. But with concerns over the market liquidity situation finally beginning to cool, relations between both parties appear to be changing for the better.

Tags: Aptec DistributionTech AccessWestcon Group IncorporationeSys Technologies
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Policy change Somkant Mishra, Ezy Infotech.
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By  Piers Ford Published  November 13, 2010

“We lent a hand by improving our credit risk appetite on buyers that we viewed as creditworthy, thereby helping to improve the trading conditions in the IT channel. I suppose that some of our IT customers would have benefited from this. However, we still hold a cautious view for the IT market as we feel it has not fully recovered and we continue to notice delayed payment and defaults.

“We also remain cautious in the UAE IT market, as we feel that the overall size of the market has contracted and consumers are spending less on IT products compared with the boom time. We also feel that this trend will most likely spill over into 2011, unless the overall market in other sectors also witnesses an up-trend.”

Almeida says there has been heightened demand for credit insurance from the IT sector. He attributes this to distributors’ inability to self-insure, chronically low net margins and the scale of risk in the market. And despite his belief that things have improved slightly during 2010, he paints an uneasy picture for the near future. “There is no guarantee in this environment — or even in a favourable market environment — that buyers with strong performances in previous years will not fail,” he comments. “The market has already seen evidence of this time and again. Alternatively, even if a distributor’s credit management team has done an excellent job, their buyers could still go bust.

“Since margins are low in the IT segment, even a single large loss could put a seller into financial difficulties. Some distributors which had signed up for credit insurance have already witnessed the value behind this service and mitigated their credit losses.”
This caution is widely understood by leading distributors, even if they remain somewhat frustrated by the restrictions and limitations that result from it.

“Credit insurers have reacted strongly and swiftly to uncertain trading conditions in the UAE IT market, particularly channel partners,” says Hafeez Khawaja, managing director at Al Yousuf Digital. “There have been quite a few cases of runaways in the channel, some of them medium-sized businesses. This has put pressure on insurers to adopt a more cautious approach when it comes to offering credit coverage to the channel in the IT market.”

Somkant Mishra, regional manager at Ezy Infotech, says that in some cases insurers could be more considerate when it comes to approving a credit line or increasing existing limits. But he also believes that distributors must take their share of responsibility. “Credit insurers have their own way of doing things and follow certain guidelines before they approve any limit on any account,” he says.

“Although they have an important role to play in Middle East distribution, I strongly feel that distributors themselves should do their groundwork to extend credit to the channel. It would be unfair to rely completely on an insurance company to extend credit. Before distributors extend credit to any account, they must look at their business model and the things that give you comfort about a customer’s worth. Giving credit just based on credit insurance and not knowing the channel properly might lead to something unexpected.”

Khan at Tech Access believes that distributors and insurance providers need to work on building strong relationships because credit insurance has transformed into an integral financial services back-up tool for the channel: “It has dealt with the increasing transaction complexity, thereby addressing the need for comprehensive information to make quicker and more profitable credit decisions.”

Steve Lockie, group managing director at Westcon Middle East, says credit insurance is just one method of maintaining a credit portfolio in the market. If credit insurers have supported the distribution market poorly, it is only because they have taken such heavy hits from the trader community — and that will keep them cautious about playing a more significant role in the market.

This is a pity, as Lockie thinks they could be valuable partners, beyond simply endorsing lines of credit. “I think the credit insurers leave a lot of business on the table,” he comments. “Moving into adjacent markets of stock floor planning, leasing and financial services would be a great opportunity for all involved.”

Guy Whitcroft agrees. “I believe there are a number of services that credit insurers could offer distributors,” he says, “from straightforward risk analysis services — they are in the business of risk analysis, after all — to more comprehensive services such as outsourced credit management, which could reduce both cost and risk to distributors.”

Ali Baghdadi at Aptec would take this even further, believing that greater media coverage for credit insurers could help to address the very issues that they are nervous about — and turn them into revenue opportunities that would also benefit the channel. He throws down the gauntlet to credit insurers with the suggestion of a radical policy change.

Greater awareness should help the channel, with improved compliance with payment terms and commitments,” he says. “Insurance companies can then further enhance their offering by providing a debt collection service to their customers.

“In other parts of the world, credit insurers offer a choice to their customers. They can choose to insure the outstanding balance or turnover. In the UAE, insurers only offer policies based on turnover and expect a minimum premium against that turnover at the time of renewal. In terms of managing exposure risk, the outstanding balance method would provide a more accurate picture.”

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