The Department of Economic Development in Abu Dhabi Studies Directorate organized on Monday august the 9th, a round-table discussion under the title Towards Activating Non-conventional Financing Methods in the Emirate of Abu Dhabi…Financial Leasing and Venture Capital . The event was convened at Abu Dhabi Chamber of Commerce and Industry, in participation of a number of local banks and finance companies operating in the Emirate of Abu Dhabi. His Excellency Mohammed Omar Abdullah, Under Secretary of the Department of Economic Development said in a speech he delivered in the round table discussion: The empowerment of financial markets to become the main financiers of projects and economic sectors is one of the seven areas of focus of the economic policy in Abu Dhabi., H.E added that the increased funding for economic sectors and enterprises is one of the main goals of Abu Dhabi Economic Vision 2030. The Undersecretary said that the Department of Economic Development takes the initiative in launching ideas, organizing forums and exchanging opinions about issues related to enhancing the emirate's move towards strengthening its structures, patterns and procedures, in various fields. Innovative financing and operational mechanisms, would boost up development projects and provide more opportunities of finance. His Excellency referred to the importance of this consultative meeting with distinguished elite of officials and professionals in fields of finance in the Emirate of Abu Dhabi and the UAE in general., who gathered today to exchange opinions about activating non-conventional tools of financing, which will support the investment projects in the Emirate of Abu Dhabi, and contribute to the overall development. His Excellency Mohammed Omar Abdullah said in his speech that the search for sources of financing, is one of the important priorities for investment projects, given the role of finance in determining the size of the projects, as well as their potential for expansion and acquisition of modern technology, and hence their effective contribution in the development of the national economy. He said that banking system and the stock market at present are the main sources of finance for projects. However, these projects, differentiation between the available financing alternatives, depending on a set of elements and factors including cost, debt impact and flexibility. H.E Mohammed Omar Abdullah, said that bank credit over the past ten years, have increased by 600% as a direct result of the development boom witnessed by the Emirate of Abu Dhabi in particular and the UAE in general. Bank credit to residents went up from AED 138 billion in 2000 to about AED 959 billion in 2009.He added that the bulk of this credit either had either gone to the non-productive sectors, or had been used in personal loans. The construction and trading activities acquired about 24% of the total credit granted to residents in 2009, while the contribution of the two activities to the GDP of the Emirate of Abu Dhabi, did not exceed 16% during the same year.H.E said that the Abu Dhabi stock market attracted a large proportion of private investment assets in the Middle East and North Africa. However, there is more room for developing primary shares issuance, modernizing the stock market framework and development of internal operations.As we meet today to put forward ideas for new tools and financial solutions, our primary focus is to keep pace with the ongoing transformation and development in the national economy, especially with the increasing need of enterprises for sources of financing that are more flexible and responsive to the requirements of growth and expansion, in addition to reducing the proportion of the non-productive personal loans to the total credit available and change the course of the growing funding directed towards sectors with low productivity. His Excellency Mohammed Omar Abdullah expressed his thanks and appreciation to the attendance at the conclusion of his speech, wishing them success in their efforts, and hoped that the seminar would end with a set of ideas and recommendations to support the development process in the country. Mr. Sabri Emara the Senior Economic Researcher, at the Department of Economic development, gave a presentation on the advantages of leasing, as a method commonly accepted and practiced in the financing of investment projects in many countries, which enjoys many advantages over other types of conventional financing. Mr. Emara pointed out that the major advantage of leasing is that it requires no guarantees, and that the leasing contract has a high degree of flexibility, according to the financial situation of the borrower. Leasing is characterized by its ability to finance 100% of the investment. Sabri added that financing through leasing helps to improve the image of the project budget; where the burdens entailed due to the lease contract, do not show in the liability side of the budget, in other words they do not appear in the form of debt, but they show as cost of production. The leaseholder can negotiate with the lessor to determine the amount of lease depending on market conditions; he can also request the lessor to change the equipment according to the technological changes without incurring more cost. The Researcher said.
As for the financing organization, the researcher said that leasing is a low-risk financing tool. In the case of a conventional loan, for comparison, the financial institution offers the borrower funds to purchase equipments and then transfer the ownership of the equipment to him. If the borrower went bankrupt, or faced financial hardship, this will threaten the financier, which will find difficulty in recovering credit as a whole. It will then resort to the guarantees submitted by the borrower to recover the loan granted.Mr. Sabri explained that in case of financial leasing, the financier maintains a strong guarantee to recover its credit, which is right of ownership, as it retains ownership of the funds leased for the duration of lease, which can be retrieved at any time if there is an emergency threatening credit provided.Sabri Emara reviewed the difficulties faced by financial leasing in the Emirate of Abu Dhabi, and cited, a number of constraints that limit its role as a financing instrument. One of the difficulties, is that the non availability of an industrial mortgage register, places caveats on the leasing of machinery and equipment, as this process is not documented by the register, and thus does not give adequate safeguards for the lessor.Mr. Sabri added that the inadequately guarded machinery and equipment in factories operating within the scope of the Higher Corporation for Specialized Economic Zones, is an issue task that needs to be taken into account, in order to activate the role of financial leasing in the Emirate of Abu Dhabi. Mr. Sabri said that the absence of legislation regulating the activity of financial affects the role of leasing in financing investment projects operating in the emirate of Abu Dhabi. In contrast, the researcher Sabri Emara highlighted the benefits of Venture Capital, which differs from traditional or conventional financing granted by banks. He pointed out that venture capital, accepts a high degree of risk, compared to traditional banks credit. Thus, this funding is usually given to entrepreneurs with and innovative ideas that involve a great deal of risk. This type of capital usually fills the gap between the financing needs of high-risk, innovative projects, and traditional sources of financing. The researcher reported that venture capital does not require collateral from borrowers, so it can effectively contribute in the financing of small enterprises, which have the potential for growth and development, while not having sufficient guarantees for borrowing from the banking system. So banking system in the later stages can enter the field of financing of such projects. According to Sabri Emara, venture capital is characterized as a long-term funding, or at least medium-term finance, compared to the short-term financing offered by banks. The venture capital meets the needs of companies in the various stages of financing. The Senior Economic Researcher, reviewed several advantages of this financing, most importantly is early stage financing which during which the venture capital finances research and development, for new projects; or finances new technologies prior to commercial-scale production. It also finances the construction of new projects (fixed capital - working capital) where the investor does not have adequate financial resources. Sabri Emara said that advantages include the financing of the following stages, where venture capital helps in financing development of existing companies which particularly need special funding requirement, and which show promising growth potential. Financing also include expansion of companies unlisted con the stock exchange, in order to assist them to develop, access new markets, or enter in place of partners who withdraw from the winning firms. Sabri added that what distinguishes the financing through venture capital is the financing of special needs of mature companies which often form part of large companies. This embodies financing the acquisition or purchase of shares in ownership, control over existing companies, in addition to the financing of companies with poor performance that demonstrate potential for improvement.
Mr. Sabri Emara stressed that this type of financing is not difficulties-free, and that there is a set of constraints that limit the role of venture capital to finance investment projects in the Emirate of Abu Dhabi. The constraints include lack of legislation governing this activity, the absence of legal frameworks and definitions relevant to this activity, the lack of legal protection for organizations that operate in venture capital activity and lack of policies to support the operation of those institutions. Mr. Sabri also emphasized the lack of awareness of this activity among the parties that could benefit from it, especially small and medium enterprises that do not like to be controlled by the venture capital provider, not taking into consideration what can be achieved by the venture capital assistance to the project.The Senior Economic Researcher, sabri Emara, concluded his presentation, saying, The basic task of venture capital companies in industrialized countries is to select promising and innovative ideas in fields of advanced technology, and provide financing for it. However, this form of concept does not exist widely now. The UAE, like other Arab countries, is in the state of a recipient of Technology. Most of the ideas presented are not based on scientific capacity or innovative scientific capabilities.
The round table discussion was attended by representatives of the UAE Central Bank, Al Hilal Bank, National Bank of Abu Dhabi, the Finance House, Al Wifaq Finance Company, Securities and Commodities Authority, Khalifa Fund to support and Develop SMEs enterprises, the Emirates Industrial Bank and the Industrialists Union Society.