Reform of insolvency and creditor/debtor regimes in the Middle East and North Africa can improve economic efficiencies and strengthen market resilience in times of crisis, experts suggest in a survey released today covering 11 jurisdictions in the region.
Eighteen months in the making, this first regional benchmarking project on the topic of insolvency and creditor rights reform was undertaken by the Hawkamah Institute for Corporate Governance, the World Bank, the Organisation for Economic Cooperation and Development (OECD) and INSOL International.
The survey is intended to mark the first step in a broader regional dialogue on the subject of insolvency reform, raising awareness among key public and private stakeholders about the importance and likely impact of legal reform in this area. The survey is based on country contributions received from public authorities and private-sector practitioners from the 11 jurisdictions included in the survey.
Noting that legal and regulatory reform has made it easier to start new businesses in the region, the survey seeks to focus the attention of regional policymakers on how current country laws on insolvency compare with international best practice with a view to fostering growth and economic development across the region, and safeguarding the gains made from the negative impact of market disruptions and crises.
Reflecting the concerns evidenced in the survey – which suggests that the region’s laws are amongst the least developed in the world with respect to the re-organisation of troubled companies – Hawkamah and its international partners agreed to establish a regional forum to drive the reform of insolvency and creditor/debtor regimes.
Dr Nasser Saidi, Chief Economist of the DIFC Authority and Executive Director of Hawkamah, noted that the chapter on the DIFC jurisdiction in the “Survey on Insolvency Systems in the Middle East and North Africa”, suggests that the insolvency laws in operation within the Dubai International Financial Centre are amongst the most developed in the region, offering cost-effective, efficient and timely mechanisms for dealing with insolvency and creditor/debtor rights issues.
Not only did DIFC score the highest among regional jurisdictions, it also ranked above the OECD average. The report noted that the centre’s insolvency system is regarded as “cost-effective, efficient and timely, and balances the interests of debtor and creditors”.
Dr Saidi commented, “The strong showing of the DIFC as a common law” jurisdiction reflects the world-class quality of its legal and regulatory environment and serves as an example for other jurisdictions in the region.”.
The survey reports that the efficient design of insolvency laws and the related procedural and administrative steps involved in the insolvency process for businesses can strengthen financial markets, promote investment and credit flows, protect the rights of various stakeholders, and assist MENA countries in adjusting to external and domestic shocks.
“In our region, an appropriate insolvency regime also needs to strengthen the capacity of entrepreneurs and the private sector to be able to take risks, innovate, reduce the stigma of bankruptcy and insolvency, and to make it possible for debtors to restart businesses with a clean slate after a failure,” Dr Saidi added.
The 11 jurisdictions studied in the report are: DIFC, Egypt, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, the United Arab Emirates and Yemen.
The World Bank Doing Business report finds that in the jurisdictions studied, it takes on average 3.5 years to close an insolvent business, compared with 1.7 years in OECD countries; the cost of such actions consumes 14.1% of a company’s value, compared with 8.4% in the OECD; and in MENA, creditors recover just under 30% of their debts, compared with nearly 70% in OECD countries.
According to Dr Saidi, who has written a lead article to introduce the survey, efficient and effectively enforced insolvency systems provide appropriate incentives for debtors, creditors and insolvency trustees to reorganise potentially viable firms, thereby preventing their premature liquidation. This retains economic value in the economy and jobs for workers, which otherwise would be lost.
In addition, he suggests that, MENA countries would likely benefit from increased foreign investment and enhanced credit access – an ingredient of growth in all markets – since such decisions often favour markets with effective legal systems to support recovery and enable creditors to act swiftly to mitigate losses when a debtor defaults.
In his article, further to the survey, Dr Saidi emphasises a number of points to consider as part of the reform dialogue:
- Gulf states have stronger insolvency laws than the rest of the MENA region, but need to improve creditor information systems and how they deal with cross-border issues.
- Across the MENA region, there is room for improvement compared to international standards and practice, in particular, in the area of reorganisation of companies.
- Based on Common Law and the advantage of being “purpose-built,” the DIFC insolvency framework is the most robust and highest rated in the region.
Elaborating on the MENA insolvency forum, Dr Grant Kirkpatrick, Senior Economist at the OECD, said, “The current global economic environment and its impact on the Middle East and North Africa region make the creation of such a forum extremely timely and appropriate.”
The forum will follow the successful model of the OECD Forum on Asian Insolvency Reform, which was founded in 2001 in partnership with the Asia-Pacific Economic Cooperation (APEC) and other actors.
The full report is available for download from the Hawkamah website, www.hawkamah.org.