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Insurers see changing credit landscape for channel

Insurers urge distribution sector to take a firmer approach as a rise in non-payment cases creates nervousness

Leading insurers have urged the distribution sector to take a firmer approach to credit management as a rise in non-payment cases involving second-tier customers continues to create nervousness in the Middle East channel.

The market has witnessed a steep increase in claims from IT distributors during recent months as resellers have defaulted on payments, while the creditworthiness of many companies has deteriorated due to a lack of bank financing and slowdown in business.

Top credit insurers insist the situation has left them with no choice but to hike up premiums — or withdraw cover completely — and have called on the distribution channel to show increased diligence in the current climate.

“Companies are facing a challenging situation; you can no longer sell goods without knowing if you will get paid for them,” said Mahan Bolourchi, head of risk management for the Middle East at Euler Hermes. “Credit management is now being taken more seriously in the business, the sales team can not alone dictate who should be given credit. The finance team has to be involved in the decision and the company has to be prepared for non-payment.”

Competitor Atradius says it is imperative for distributors to collect more financial information on their customers to protect their assets and reduce the likelihood of cover being pulled. It admits the company has recently had to withdraw credit limits based on a lack of supporting data from distributors.

Peter Boberg, country manager for the UAE division of Atradius, believes distributors need to push for greater transparency from customers: “The situation for us is the same as it is for the banks. There needs to be some financial information to carry out an evaluation on credit. As a distributor, it is very important to be certain that the customer has the financial strength to ensure they can meet their obligations.”

He added: “Some distributors are good at asking for this kind of information, but in general the market has been used to an upwards trend — most of the companies have done pretty well which meant it was less relevant to get this information as everybody expected debts to be paid.”

Credit insurance remains a delicate topic for the distribution channel at the moment, with several wholesalers citing a reluctance among insurance companies to extend sufficient coverage in the market and maintain attractive prices.

The situation appears more pronounced in the Dubai channel, which has seen a number of resellers and traders run into financial difficulties, including SM Computers, Green Forest Computer and Micropoint Computers, an HP trader heavily focused on re-export to African markets. At least one major distributor has filed a claim with their insurers over Micropoint, which channel sources allege has trade debts in excess of US$2.5m.

Bolourchi at Euler Hermes, meanwhile, suggests the current pressure on distributors could eventually lead towards improved financial management as companies place more emphasis on payment terms and become less tolerant of long delays.

“In this market, credit was offered based on trading experience, volume of sales and whether the business was established in the market,” he said. “Rarely were financial statements requested or provided. We are being increasingly asked to review and monitor risks on behalf of our clients and having access to financial statements and audited accounts means we are able to offer sound advice on who to offer credit to.”