Navigating Late Payments in GCC SME's: Looking to the Future

In the dynamic and ever-evolving business landscape of the GCC region, Small and Medium-sized Enterprises (SMEs) play a pivotal role in driving economic growth, fostering innovation, and creating employment opportunities. However, a pressing issue looms impacts the majority of these enterprises: Late payments.

In this article, I delve into the challenges faced by SMEs in the GCC region as a result of late payments and compare this with the European Union’s approach, discuss potential solutions and consider how digital payments could transform the landscape.

Late Payments: The GCC Predicament & Learnings from the European Union?

In the GCC region, SMEs, are the backbone of the economies, driving growth, innovation, and employment. However, these businesses are often on the receiving end of late payments, a problem that severely impacts cash flow and overall financial health.?

Certain sectors in the GCC region are more notorious for late payments such as the construction, often attributed to the lengthy payment chains and contractual disputes common in the sector.?

The situation is complicated by the lack of region-specific legislation to govern and regulate late payments. This absence of rules and guidelines not only allows for delays in payments but also results in a lack of accountability, significantly impacting SMEs.?

In contrast, the European Union (EU) has taken significant steps to address this issue. The Late Payment Directive, introduced in 2011, mandates that public authorities pay for goods and services within 30 or, in exceptional cases, 60 days. Enterprises must pay invoices within 60 days, unless there is a mutual agreement to the contrary, which isn't grossly unfair. This directive provides clear guidelines and strict penalties for late payments, fostering a more conducive environment for SMEs.?

Future of Payments: A McKinsey Investigation

The future may hold some relief for the late payment crisis in the region. A recent report by McKinsey notes that the GCC, despite its high smartphone penetration, is on the cusp of a payments’ revolution. Currently, only about a third of retail transactions are conducted electronically due to factors such as underdeveloped digital-payment infrastructure, underbanked segments, and cultural preference for cash.?

However, new government and regulatory initiatives, along with the entry of local, regional, and global payment providers, are catalysing change. Moreover, the COVID-19 pandemic has accelerated digital adoption and driven a flight from cash. This trend is expected to continue, with 90% of survey respondents in the McKinsey report predicting that at least half of the new digital payment users will stick with it, rather than revert to cash.?

The report also highlights the changing consumer payment preferences, with 60% of practitioners expecting e-wallets to become the most influential digital payment method. Interestingly, this confidence in e-wallets surpasses that in Asia, where the digital-wallet ecosystem is more mature.?

Looking Forward?

The transition to digital payments may not immediately solve the issue of late payments for SMEs in the GCC, but it represents a step in the right direction. Meanwhile, it's crucial for GCC policymakers to look at successful models like the EU's Late Payment Directive and tailor regulations to protect SMEs and ensure a thriving economic environment.?