As the implementation of Value Added Tax (VAT) makes the balance sheets of corporates, particularly the small and medium enterprises (SMEs) more transparent, the UAE banking sector stands to benefit, according to Abdul Aziz Al Ghurair, Chairman of the UAE Banks Federation and CEO of Mashreq Bank.
Al Ghurair said that VAT makes it difficult for these companies to inflate their sales and falsify balance sheets when availing loans, allowing banks to get better visibility of the financial position of a company before granting them loans.
Banks which suffered huge loan losses in 2015 and 2016 in their SME portfolios, following business owners skipping the country and defaulting on loan repayments, have recognised and managed these losses, and SME lending is going through some fundamental changes in the country.
“SME loans are going to face some new terms and conditions. In many cases banks will attempt to collateralise these loans. While it improves asset quality of banks, business too will benefit as cost of these loans are expected to be lower,” Al Ghurair said.
Although most banks are currently absorbing VAT on regulated fees on services that is taxable under UAE tax laws, VAT is likely to have a limited impact. A central bank decision is expected this month on the issue whether banks can pass on VAT cost on all regulated services to customers.