Addressing Non-Performing Loans in the Middle East

Our Middle East specialists, Yaser Dajani, Maire Spillane and Sultan Kiwan take a closer at the issues caused by NPLs and a proven model to recover debt.

A proven model to recover debt

Banks and other financial institutions in the United Arab Emirates (UAE) have one of the largest portfolios of Non-Performing Loans (NPLs) across the Gulf Cooperation Council (GCC). According to the World Bank, the UAE’s NPL portfolio has increased from just 4.2% in 2009 to 7.3% in 2021. A recent valuation of the NPL portfolio in the UAE estimated the value to be USD 24 billion (AED 88 billion). 

The COVID-19 pandemic resulted not only in a public health crisis, but it also caused seismic economic fluctuations globally. The International Monetary Fund (IMF) reported that banks in the Middle East had to absorb US$180 billion in NPLs and defaults in 2020 alone. 

Due to the impact of the pandemic, the UAE banking system experienced an increase in corporate loan defaults and banks will have to contend with this phenomenon for some time to come. By contrast, the NPL portfolio in Saudi Arabia was 3.3% in 2009 and has fallen to just 2.2% in 2020. In recent reporting the NPL Portfolio in Saudi Arabia was valued at approximately USD 8.8 billion, still a significant figure.  

Overcoming the difficulties of NPLs and the way forward

If the problem of NPLs is not addressed proactively and aggressively by the banking sector, NPLs can have a serious impact on banks’ balance sheets, as well as adversely impacting banks’ credit ratings, capital requirements and ultimately, their profitability. If these NPLs are not managed, they will continue to affect the banks’ stability and limit their growth. 

The pursuit of NPLs often appears complex to the point that some may choose to avoid it. However, many of our clients find that with appropriate expert support and the application of specialist knowledge and expertise, it is much less of a challenge than might be anticipated. 

While we have assisted with a wide range of NPL cases, many debtors use offshore structures such as special purpose vehicles (SPVs) to pass the funds through or to hold assets beyond the reach of banks. Often these SPVs are incorporated in offshore jurisdictions. Clients often mistakenly believe that bank ‘secrecy’ and the lack of public information means there are limited options to investigate fraud and recover assets. However, our expertise in financial investigations, white-collar crimes, banking investigations, asset-tracing and asset recovery means that we are able to identify and implement remedies and avenues for successful recovery. 

International remedies

We may propose the use of international legal remedies to determine a successful strategy, such as Norwich Pharmacal, or Bankers Trust Orders, which are widely available in jurisdictions such as the British Virgin Islands, the Cayman Islands, Bermuda, Hong Kong and the Channel Islands. These remedies uncover details of bank accounts and assets from banks, auditors and registered agents, which may be critical in finding key information in the investigatory and asset-recovery process. 
 
We have often proposed the use of insolvency mechanisms where appropriate − a tried and tested method, which is suitable for both insolvent and solvent companies. It can be incredibly cost-effective in investigating cases of fraud or misappropriation of loans. The lender takes aggressive action as a creditor for the return of the funds owed to it, and upon appointment, liquidators are afforded wide-ranging powers. They have the authority of the court to compel directors and third parties to provide critical information which may identify wrongdoing and more importantly assets.

Sources of funding

In certain cases, third party funders have worked with Quantuma to finance legal proceedings and the entirety of the asset recovery process. The funders only recover their fees if recoveries are successful. Third party funding is now a common feature of the domestic and international dispute resolution process and Quantuma maintains a strong network of contacts in the litigation and recovery industry to support our clients. 

For insolvencies, the costs of recovery can be borne out of the liquidation estate – in other words from the very SPV or entity that defrauded a client. This approach ensures that corporations can focus their capital resources on the business itself, maximising profits for shareholders and promoting growth, rather than spending time in unfamiliar legal territory, or mired in potentially costly and lengthy civil proceedings. The outcome is significant capital optimisation.

Support from a highly experienced team with global reach

Many financial institutions witnessed a build-up of NPLs on their books during the pandemic and may now assume these loans are beyond recovery. Whether they have been written-off the balance sheet or not, we have the knowledge, experience, global reach and resources to address our clients’ recovery, restructuring and insolvency needs on a national and international basis. 

We work with clients to design and execute the optimal structure to increase efficiencies and maximise recoveries. We have a deep bench of forensic accountants, asset tracing specialists, licensed insolvency practitioners and liquidators in many jurisdictions and we truly operate as One Firm in a seamless fashion to ensure our clients have access to all of the expertise they need. 

Our subject matter experts advise on the following key areas: 

• Trade finance fraud 
• Diversion of funds
• Asset dissipation
• Asset-tracing and recovery
• Provisional liquidation and receiverships