Central Bank chief warns Basel III capital rules could curb SME growth

Job creation in emerging economies really depends on finding a way outside Basel III restrictions on SME financing, Central Bank governor Sultan Bin Nasser Al Suwaidi said. Fatima Al Marzooqi / The NaShow more

The Central Bank governor yesterday warned that Basel III banking rules could curb the growth of small and medium-sized business worldwide.

“Job creation in emerging economies really depends on finding a way outside Basel III restrictions on SME financing that will not contribute to job creation and will probably contribute to creating problems in many emerging and developing economies,” said Sultan Bin Nasser Al Suwaidi at the Global Financial Markets Forum in Abu Dhabi.

The Basel bank industry regulations, unpopular with many bankers who see them as stifling growth, aim to prevent the kind of financial crash the world witnessed in 2008. The regulations, which will come into place in 2018, are aimed at ensuring financial institutions have enough cash at hand to deal with any losses by reining in how much they can borrow and lend.

“If we create a world where banks don’t take risks, which is where we are heading, we’re not going to have an economy,” said Bob Diamond, the founder and chief executive of Atlas Merchant Capital and the former chief executive of Barclays. “I worry terribly. The fact that the regulators are in essence trying to replace the boards is a very slippery slope.”

Mr Al Suwaidi said that in many emerging markets, which are set to grow at faster paces than developed countries, there are no strong programs to finance and support SMEs.

UAE policy makers have been counting on smaller businesses to play a key role in the development of the Emirates' economy. SMEs account for 86 per cent of the workforce in the private sector, according to the Ministry of Economy. Nearly 300,000 companies can be classified as part of the SME sector, ministry data showed.

With less red tape and strong infrastructure, including its airports and roads, analysts say the UAE could become a powerhouse of SMEs, although the owners of such businesses often complain about the difficulty of obtaining funding.

The squeeze on SME lending amid tightening regulations has already had an effect on local businesses. Last year HSBC said it was reducing its exposure to this type of lending and told many of its SME customers that they would need to find new banks to do business with. It stressed, however, that it would not be winding down its SME activities completely, and in November it started a Dh1 billion international trade fund for SMEs in an effort to reassure entrepreneurs that banks were still keen to extend loans.

Basel III has particularly limited banks' exposure to trade finance, a thriving business in the Arabian Gulf, which straddles the trade corridors of the East and West. This has created opportunities for asset managers to step in and fund such transactions, and National Bank of Abu Dhabi is starting such a fund this year to participate in this form of financing.

Trade finance is a form of intermediation for exporters and importers in which banks or other financial institutions offer guarantees of payment, including letters of credit.

“Basel III is quite constraining on trade and yet over-aggressive on mortgages, and a lot of the SMEs here do a lot of trade finance and trade,” said Alex Thursby, NBAD’s chief executive. “It’s a global issue. It just doesn’t make sense. What I think it will do over the next year or so is that the central banks will relook at trade and say ‘hey, this is self liquidating, this is short term’. The historical losses are low. I think in the long run they will see the light.”

Follow us on Twitter @Ind_Insights