VAT Implementation Makes SME Lending Safer

Dubai: The UAE’s banking sector stands to benefit from the implementation of Value Added Tax (VAT) as the new tax system makes the balance sheets of corporates, particularly the small and medium enterprises (SMEs) more transparent, said Abdul Aziz Al Ghurair CEO of Mashreq Bank and Chairman of the UAE Banks Federation.

“VAT makes it difficult for these companies to inflate their sales and falsify balance sheets when availing loans. This allows banks to get better visibility of the financial position of a company before granting them loans,” said Al Ghurair.

Banks which suffered huge loan losses in 2015 and 2016 in their SME portfolios have recognised these losses and the provisions cycle is expected to end this year. Learning a lesson from the past mistakes, SME lending is going through some fundamental changes in the country.

“SME loans are going to face some new terms and conditions. In many cases banks will attempt to collateralise these loans. While it improves asset quality of banks, business too will benefit as cost of these loans are expected to be lower,” Al Ghurair said.

VAT is expected to have only a limited impact on the profits of banks, although most banks are currently absorbing VAT on regulated fees on services that is taxable under UAE tax laws. A central bank decision is expected this month on the issue whether banks can pass on VAT cost on all regulated services to customers.

New EIBOR mechanism

The UAE’s banking sector will soon follow a new method of calculating Emirates Interbank Offered Rate (EIBOR/interbank rate of interest).

“Older mechanism based on interbank borrowing rates did not reflect the actual interbank rates as most interbank loans/deposits are too short term in nature. The new methodology for calculation of the EIBOR will be based on cost of deposits that will better reflect cost of funds,” said Al Ghurair.

Under the new EIBOR calculation methodology, the interbank rates will be derived from the average of cost of deposits of a panel of 8 banks and the rates will be reset every month.

Innovation

The UAE banking sector, Al Ghurair said, has joined the global trend of technology transformation, digitisation and innovation that is sweeping financial services sectors around the world.

“A number of banks in the country are investing in innovation, digitisation and technology transformation. Customers in the UAE are fast adopting digital banking services. In many cases customers are demanding more digital solutions that brings major cost savings to banks and convenience to customers,” said Al Ghurair.