Runaway clamp-down

The UAE channel moves to tackle reseller runaways

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Runaway clamp-down In the case of bankruptcies, the laws need to be revisited, says Dr Baghdadi.
By  Aaron Greenwood , Manda Banda Published  August 28, 2011

The recent spate of runaway IT traders in the UAE is one of the most controversial and divisive issues currently impacting the regional channel sector. Channel Middle East brought together some of the industry’s key stakeholders to ask them what they believe can be done to resolve the situation and boost confidence in a troubled sector.

Channel Middle East: How big an issue is credit default in the UAE IT market at present?

Shailendra Rughwani: Credit defaults are nothing new, however their frequency has markedly increased in the last few years. When compared to the market’s total volumes and turnover, the number of runaways is quite small. However, any runaway has a great affect on the market. Some of our members have been left exposed by companies that have exited the market in last few months.

Hesham Tantawi: It is a major issue at the moment. Even if we’re not directly affected there is every chance one of our clients will be left exposed if they have offered credit to these traders.

We would like to see greater involvement from law enforcement as it is becoming too easy to default and just run away.  

Ali Baghdadi: The UAE seems to be the main country in the region affected by this problem. The situation tends to be worse when the market is booming or when it’s in decline. During the boom times, the runaways tend to be fraudsters intent on building up large credits and running away with the goods. When the markets are suffering, runaways tend to be owners whose companies have become bankrupt.

The problem is exasperated by some vendors who tend to push their distributors to give excessive unsecured credit lines in order to meet their market share targets or objectives. The bulk of the runaways tend to be handling products which are relatively small and easy to smuggle out of the UAE, such as components or mobile phones.   

Peter Boberg: This is a big issue both for the channel and the credit insurance industry at this juncture. We did see a recovery in the market last year with fewer runaways but now we are back to the uncertainty the industry faced in 2009, which will no doubt lead to stricter credit underwriting from insurers with less risk appetite. This will most likely hamper sales for the distributors if they are not prepared to manage their own risk.

All of our clients have more or less been affected by the recent spate of runaways.

Stephan Berner: Of course credit default is bound to happen, however if you look at the Middle East the question is always “When do I get my payment?” rather than “Do I get my payment at all” like it is in Africa for example. In saying that, I am familiar with a few cases [of credit defaulters].

CME: What measures do you think can be put in place to stop this from happening?

Peter Boberg: This is a good question. It’s almost impossible to foresee a runaway and to mitigate the risk. Clients dealing directly with buyers need to be more prudent in their own valuation of the buyer and also question irregular buying patterns.

One option is to ask for bank or personal guarantees and use the insurance more for top up cover. A change to the local insolvency legislation could help companies in distress to restructure their debt and trade out of insolvency.   

Ali Baghdadi: In the case of bankruptcies, the laws need to be revisited. Company owners (non-UAE nationals) tend to flee the country in order to escape prison sentences. Audit firms should be certified and regulated. Filing of audited accounts must become compulsory, at least for non-UAE nationals or non-UAE nationals who own more than 20% in a DED company.

Hesham Tantawi: At the moment there is no foolproof measure available to prevent this. However, I do believe there is scope for greater cooperation between companies in sharing information about potential runaways.

Before releasing significant credit lines to any customer – even long-established companies – it would be advantageous to be able to ask other vendors questions to gauge the credibility of that customer: what kind of credit is offered to them? Do they know if the company is selling goods below cost?  These indicators could be quite useful in credit decision making.

Shailendra Rughwani: DCG has committed to aggressively pursue runaway traders to send a strong message to those people who come to Dubai and establish IT companies with the intention of cheating the rest of the industry that they will be caught and they will be brought to justice.

In the last month alone, we have formed committees to pursue each of the runway companies and take action accordingly. If a signatory has exited the market then our committees will explore the possibility of going after them in their home countries.

We need all channel stakeholders in Dubai to cooperate with DCG to get rid of this menace. We are encouraging everyone to share information with us. Any information supplied to us will be thoroughly investigated by our internal team before any action is initiated.

Ali Baghdadi: Transparency is key. There are informal credit circles in the UAE and this helps, but it is not enough.

Stephan Berner: It is all about visibility and transparency. The more information you have from your business partners the better you can evaluate your risks. It is also important to mention that sometimes it is better to say ‘no’ instead of trying to accept each and every order/project coming from the market.

Anil Berry: To limit the exposure on potential runaway buyers we advise our clients not to extend credit beyond the levels we recommend. That way they will be protected in case of a buyer’s payment default. It’s clear from the market that a number of distributors extended credit far beyond the levels we would have recommended for certain buyers.

CME: How much security do you think credit insurers can really provide given the state of the market since the recession?

Peter Boberg: It’s difficult to say. Credit insurers rely on financial information and market intelligence. If we can’t trust this information it will be difficult for the insurance industry to support this sector going forward.

Hesham Tantawi: It will become increasingly difficult for credit insurers to provide credit coverage with the current state of the market. However, if there are proper credit and legal mechanisms in place which can address these problems, we will gain back their full support.

Stephan Berner: Arranging credit insurance is important in theory but in reality some of the resellers/distributors don’t give really care about it. At the moment their priority is to close deals.

CME: Do you think some businesses are more likely to take risks with suspicious traders if they take out credit insurance believing they will be covered in the long-run?

Peter Boberg: Yes. I think some suppliers take advantage of credit insurance to offer larger credit lines than they would normally do without insurance.

Anil Berry: From our perspective, we believe that through credit insurance, trade with ‘suspicious buyers’ will decrease because, based on our business and market intelligence, we are in a position to restrict credit lines to those buyers.

CME: What sort of impact is it having on the credit insurance market ie – are premiums going up as a result of the increase in runaways?

Anil Berry: We collect premiums only on the risks that we cover. So far the risks we underwrite and the sum of the premiums we collect are in line with one another so we’re not looking at premium increases.  

Peter Boberg: In the long run, credit insurers will be more reluctant to write risk in the IT market. Premiums will increase and insurers will look for more risk sharing with their customers.

CME: Do you think rogue traders are too scared to stay in the UAE and honour their debts given the fact they could end up in jail for bouncing a cheque?

Shailendra Rughwani: There are two types of traders who run away from the market. On one hand you have those who set-up a company in Dubai with the intention of cheating. On the other you have businesses who struggle with a temporary cash flow situation and due to legal circumstances, they leave the country to escape the law and possible jail.

In the latter case, we have tried to mediate between the company and debtors to arrive at an amicable settlement. DCG has been successful in some such cases.

Hesham Tantawi: The issue is not just with traders being too scared to stay in the country to honour their commitments. It is also with tricksters who pose like traders, cook up rosy audited financial statements, get good credit lines, show good bank statements and one fine day vanish with everything. This is where we need the help of law enforcement officials to thwart their escape, while giving greater assurance to those traders who have every intention of remaining in the UAE and honouring their commitments.

Anil Berry: We see a number of traders staying in the market to try and resolve issues. However it’s clear that there are some rogue traders who have no intention of honouring their debts.

CME: What sort of impact is the spate of ‘runaways’ (ie bankrupt businesses that flee the market) having on the IT channel in the UAE in general?

Shailendra Rughwani: We have seen that when a bigger company exits the market, some smaller companies doing business with them also get into trouble and in some cases exit the market. We have also seen that whenever there is a big ticket exit, the insurance companies reduce the limits of other companies and this also directly impacts the market.

Ali Baghdadi: The spate of runaways will ultimately reduce inwards investment in the UAE. The fear of rogue traders is not only from their indebtedness, but from their willingness to sell products to UN-embargoed countries.

Peter Boberg: I think trust in the IT market has taken a hit again. Who can you trust? Some companies, despite a long history of trading with strong balance sheets, have still fled the market leaving debts behind.

Hesham Tantawi: The channel takes a big hit with each runaway. Those directly affected suffer an immediate hit to their cashflows. While many may be covered by insurance, typically this will only cover 85% of any claim, leaving 15% to be covered by the company. Given the type of margins we face nowadays, even covering this shortfall can prove challenging. In the case of unsecured credit, matters are often much worse.

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