x Abu Dhabi, UAESunday 23 July 2017

Fewer brokerage firms makes sense

The UAE's brokerages are going through trying times.

When you're in a hole, the adage advises, the first thing to do is to stop digging. So it is difficult to understand the recent enthusiasm, by some in the UAE's brokerage industry, for margin trading in shares.

New figures from the UAE Securities and Commodities Authority show that in the second quarter of this year, companies in the industry were having trouble collecting over Dh380 million in customer debt. This sum has declined by only about Dh10 million in the last year.

In light of that, it is fair to ask if the industry is being unduly optimistic in moving into margin trading, as it is doing now. Trading on margin - borrowing money from a broker to invest - was not permitted before this year, but now five firms have already received accreditation to offer such accounts; many others have applied.

To be sure, the UAE's brokerage industry has never recovered from the financial crisis of 2008, and urgently needs to increase trading volume on the country's exchanges, although reckless margin trading is not the answer.

With fewer customers investing less money, the industry is starving: of 103 brokerages two years ago, only 50 survive today, and 18 of them are carrying high levels of hard-to-collect debt. Of the 50, many have needed capital replenishment; some are operating with skeleton staffs.

There are several reasons for the thinness of local markets - the brokerage industry, although not to blame for most of the problems, is paying the price.

But the health of the brokerage industry is not the same as the health of its individual firms. Clients expect sophisticated attention and service, which may not be available from tiny operations.

If, as seems likely, the optimum number of companies today proves to be lower than 50, then the companies and regulators have a responsibility to make sure that mergers - or the closures of more firms - proceed in an orderly and transparent manner. In that spirit, prudent oversight of the new margin trading is essential.

Hard times mean opportunities, stockbrokers like to say. Revival of the UAE's securities industry and markets will demand a lot of changes, and a lot of time. For now, the challenge is to ride out the storm.