Retailers, especially those in the booming gold and jewellery industry, are seeking huge loans to expand across the region, the borrowing surge comes even as banks shut up shop and shun lending to other sectors of the economy.
Pure Gold Jewelers, based in Dubai, is the latest retailer to enter into negotiations with lenders to help fund a rapid roll-out of new shops across the Gulf and India.
Firoz Merchant, the chairman and founder of Pure Gold, is looking to invest Dh1 billion (US$272 million) in new stores and factories during the next five years, and the company has entered into talks with a number of Islamic banks to help finance the expansion.
“We are getting Islamic finance, which is already in process with the banks,” he said. “Many banks have approached me in the last many days for financing. Opening 200 stores is about a Dh1bn investment, but I think that is a realistic figure. It’s not too much. It’s acceptable investment for a jeweller.”
Overall, lending by groups of banks is at its weakest level in the region since 2004.
Borrowers in Gulf countries have raised just $2.9bn of syndicated loans so far this year, which is an eight-year low, according to data from Bloomberg. The total compares with $3.89bn raised during the same period last year.
Banks are still wary of possible fallout from the euro-zone crisis and companies have instead been considering tapping the capital markets for finance.
“Despite the issues in other parts of the economy, some retail names are doing very well and banks recognize that,” said Mahin Dissanayake, a banking analyst at Fitch Ratings.
Retailers have enjoyed strong increases in sales in the past year as tourists visited the UAE and new stores and brands were launched. Banks are now considering financing those retailers looking to repeat their success in other parts of the Middle East and Asia.
“There’s 50 odd banks in the market and there’s very few sectors doing well, but obviously [retail] is doing pretty well,” said Mr. Dissanayake. “Banks are still very selective and are on the lookout for good opportunities – companies with good cash flow and a strong demand for products, like the gold segment.”
Last month, the jeweler Joyalukkas raised $100m in a syndicated loan from a consortium of banks to expand its network of stores.
Further underpinning the confidence in the sector, Dubai is looking to raise debt based on the future cash flows of the hugely successful Dubai Duty Free business, Reuters reported this week.
Meanwhile, Majid Al Futtaim, the conglomerate behind numerous malls and Carrefour in the Middle East, is also confident it can raise funds, recently establishing two financing programmes, a $2bn bond and a $1bn sukuk scheme.
“Everything depends on the performance, banks give money considering performance and our balance sheet is very strong,” said Mr. Merchant.
Pure Gold plans to expand in Saudi Arabia, Qatar, Bahrain, Jordan, Kuwait, and Morocco and heavily in India.
The company made Dh750m in revenues last year and Mr. Merchant hopes to increase sales to Dh1bn this year.
“The investment is in a safe place,” he said. “The investment has appreciation – gold and diamond prices are rising. That’s why I have more confidence in my business.”