June 24, 2021

Law to save the initiators…no one borrowed!


Applicants are counted on the fingers of the hand in most banks, and by dozens in the most polarized ones
The risks of economic closure increase fears of non-payment within the maturity schedule
The conditions stipulated by the law limit the expected borrowing attack
– Some were wishing themselves to obtain compensation, not funds
Not using the financing to pay the existing facilities, reducing the beneficiaries

The initiators violated expectations regarding their feeding of a possible attack on banks, as soon as the law was passed to rescue small and medium-sized enterprises affected by the repercussions of the “Corona” crisis, but with a quick inventory of the past 52 days, it becomes clear to the contrary.

In this regard, Al-Rai learned from responsible banking sources that since the law was published in the Official Gazette on April 18, banks have witnessed a very modest turnout from initiators to request financing in accordance with the established law, and that until yesterday no bank had approved disbursing any financing to any initiator. What makes the list of beneficiaries of this law so far “zero”.

Affected initiators

The sources pointed out that the number of owners of small and medium-sized enterprises applying for financing in accordance with the law is counted on the fingers of one hand in most banks, while it is estimated in dozens, with the best estimate in the most polarizing and willing to finance the initiators affected by the repercussions of the crisis, noting that according to the estimates of the Financial Center Company in a previous report, there are Between 25,000 and 30,000 small and medium enterprises in Kuwait, representing approximately 90 percent of the total number of companies.

absence of leaves

The sources noted that the applicants did not complete all the required papers specified by their financing law, as some of them are working on completing them, while others are unlikely to return again due to the lack of the required papers.

In addition, the question arises about the reasons that led to the weak willingness of the initiators to benefit from a law that was approved with special facilities to support them financially, despite the great momentum that the law enjoyed from various stakeholders when it was legitimate and after its approval, to the extent that some believed that the law would constitute the last rescue collar for the initiators.

The sources said that the low turnout was due to more than one reason, perhaps the most prominent of which are:

1 – It seems that the conditions stipulated by the law do not apply to the largest segment of small business owners, especially with regard to the legislator’s intent of those affected, whom the law described as small and medium customers, including the owners of start-up projects who were operating with operational efficiency, and whose activity was partially or completely damaged as a result of Corona, which resulted in their inability to cover the required basic periodic contractual expenses.

2 – Owners of small and medium enterprises have been facing the repercussions of “Corona” for about 16 months, which means that the segment that succeeded in combating the repercussions according to the standards of the established law is limited, as the bulk of them lost their operational capabilities for a longer period.

Considering that the law argues that it grants special financing to the affected customers, the local bank determines its value based on the results of the study of the affected customer’s credit conditions, and according to an assessment of his actual needs to cover the shortfall in cash flows for periodic contractual obligations, provided that the financing granted to the affected customer does not exceed 250 thousand dinars, Reduce the chances of benefit, on the grounds that the study will result in the majority being severely affected, which increases the financing risk to high degrees.

3 – For the sake of disclosure, many initiators wished themselves to obtain government compensation in the form of non-refundable grants, not funds, meaning that the state would provide them with free money and not loans, even with cheap interest, which reduced the appetite of the initiators.

And if the law sets the state guarantee for 80 percent of the remaining balance of the defaulted financing, the default will entail risks for the initiator himself, not least of which is to be included in financing black lists, preventing him from borrowing in the future, or affecting his classification if he decides to return to the investment market again. .

4 – According to the law, the non-performing customer does not benefit from the financing on December 31, 2019, and the irregularity is determined in accordance with the instructions of the Central Bank of Kuwait, and although it excludes from that the affected customers who have started projects before March 13, 2020, but this allocation brought out a rule Big initiators of the eligible window benefit from the law.

5- The ban imposed by the law on borrowing clients in terms of not using the financing for the purposes of paying installments or the burdens of credit facilities based on the client at the time of the issuance of this law and provided by banks or any other donor, led to the exclusion of an additional segment of initiators on the grounds that there is no Most of the people affected by the “Corona” virus do not face credit obligations and are likely to default on their payment, and need to pay their late installments, or some of them.

6- Also in accordance with the law, in the event that the affected customer fails to pay one of the payments due from him for a period of 90 days, the state’s public treasury will stop bearing any part of the financing cost from the date of non-compliance, and he is also prohibited from making any cash distributions of profits except after full payment Payments due for the previous fiscal year, which reduced the percentage of those wishing to benefit from the law.

7- The obligation of borrowing clients to maintain the national manpower employed by them and existing on December 31, 2019, as well as the obligation to reach the percentage of national labor prescribed for the activity in which he works by the date of December 31, 2021, constituted an additional obstacle to progress, as it is not guaranteed to bet on the Fulfilling the required percentages on the specified dates, especially if the repercussions of the crisis persist and some variables occur, such as the continuation of the economic closure, even if partially, as the cost of this item will be higher than the expected returns from the return of activity can bear.

Figures and facts

Small and medium enterprises in Kuwait are defined on the basis of the number of employees, the size of assets and revenues, and 90% of private companies locally are considered small or medium companies according to the “Markaz”, while enterprises that employ less than 50 Kuwaiti people and have an asset base worth less than half are classified as million dinars, and its revenues do not exceed 1.5 million as small and medium enterprises.

The law defines the small client as the one who has no more than 50 workers in his project, the assets of this project do not exceed 250 thousand dinars, and his revenues do not exceed 750,000 annually.

The average customer is the one who has no less than 51 workers and no more than 150 workers, and the assets of this project do not exceed 500 thousand dinars and its revenues do not exceed 1.5 million annually.

Small and medium enterprises in Kuwait contribute about 3% of the GDP, and the total value added by small and medium enterprises is 1.216 billion dinars (2019).

By way of comparison, the contribution of small and medium-sized enterprises to the GDP is about 40 percent in emerging economies, 50 percent in high-income economies and 53 percent in the UAE.

Forty percent of small and medium-sized enterprises work in the wholesale and retail trade, hotels and restaurants, and 33 percent of them work in the construction and industrial sectors.

Payment period and interest

The financing principal and the return shall be repaid within a period not exceeding 8 years after a grace period of two years from the date of grant, and the local bank estimates the repayment term according to the expected cash flows, provided that it includes the principal and interest or return.

A fixed rate of interest is applied to the financing for conventional banks and the return for Islamic banks throughout the financing period, with a maximum of 1% above the discount rate announced by the Central Bank at the time of grant, and it is calculated on the declining balance of the financing. The financing cost is distributed during the repayment period as follows:

The public treasury bears the benefits and returns resulting from financing the affected clients during the first and second years from the date of granting.

The public treasury bears 90 percent of the interest and returns arising from financing affected clients during the third year from the date of grant.

The public treasury bears 80% of the interests and returns resulting from financing the affected clients during the fourth year from the date of granting.

The customer bears all the interest and returns that were not borne by the public treasury in all the years of payment.

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