There is a growing appetite for trade digitalisation in the Middle East. But while early signs show promise, it is also clear that a full transition will take time. Hicham El Khaoudy, managing director, head of global transaction banking (GTB) international at First Abu Dhabi Bank (FAB) and Jose Lopez-Mateos Payno, managing director, head of GTB product sales, Abu Dhabi at FAB assess progress.

 

Q: How would you describe the appetite in the Middle East for adopting digital trade processes? Are there any specific trends you are seeing in the region?

Lopez-Mateos Payno: There is definitely a strong appetite for digitising trade. Both governments and corporates across the Middle East and Africa (MEA) have already adopted a number of digital processes. In the UAE, there is a continued push from all our clients to move to digital. But a simple trade transaction can involve more than 100 entities – from freight forwarders to customs to shipping companies – so it is difficult to discuss trade digitalisation as a single operation.

The Middle East is increasingly matching and even leading global practices in this area. For example, the use of digital signatures has increased massively and the adoption rate in the region is one of the highest in the world. If we start with small things like this, everything else will catch up.

El Khaoudy: I agree about the strong appetite in the region to adopt digital trade processes. This is driven as much by corporate participants as by national leadership who are pushing in this direction.

Other than the UAE – a country that has always been at the forefront of financial services innovation – Saudi Arabia is, in my view, the next furthest ahead in terms of digital trade initiatives. For example, there has been amazing progress in the guarantees issuance and acceptance space. An all-new platform has been introduced that allows all guarantees issued in favour of government entities to be issued and accepted through the same platform. At the same time, trade finance has such large participants involved and such extensive scope (for example, documentary trade, receivables finance, supply chain finance, RFQ, credit, etc) that no country or region in the world covers the entire value chain.

 

Q: Are there any credit challenges specific to MEA clients?

El Khaoudy: Each country is at a different stage in terms of product offerings and market maturity, and from that perspective, each faces different challenges.

Government-related entities are generally good credit risks in the region while corporate banking entities are incredibly diverse and present different credit challenges, some acceptable and others not. This is where digitisation and structured trade become critical to improving the credit profile of clients’ trade finance flows.

Lopez-Mateos Payno: For the average company in the UAE, access to liquidity is certainly no issue. It is an extremely liquid economy; credit is increasing, and liquidity is growing. While not everyone can access liquidity at the same price, it is a very competitive landscape.

 

Q: What impact have electronic trade document legislations had in the region? Does success depend on the legal landscape?

Lopez-Mateos Payno: It depends on the jurisdiction. In the UAE, success is contingent on two or three market players making a move. Once a large corporate makes the decision to digitalise a process, all the smaller companies are left with little choice but to follow. For example, once the law recognised digitally signed documents as valid, and two or three of the top five companies in the country committed, suddenly the whole industry shifted. Generally, all changes triggered by government action to successfully reduce bureaucracy and facilitate financing for SMEs have been successful.

It is clear that nobody wants to deal with paper anymore. If a large corporate takes the decision to store all its information digitally, the company will no longer want to deal with vendors, buyers or customers who still have paper processes. Why would you not want everything to be one click away?

El Khaoudy: The same is true for the industry initiatives being driven by government-related entities in the region. In Saudi, the widely held view is that if we see some of the big players in the space adopting these initiatives, the rest will follow. Large companies are saying: ‘If you are going to deal with me, you have to deal with me in this way.’ It is a top-down movement, as opposed to bottom-up.

 

Q: How do you think the growth of tokenisation and digital currencies will impact global trade processes?

El Khaoudy: Because of their inherent characteristics – such as the programmability of transfers and the underlying smart contracts – tokenisation and digital currencies will definitely and significantly impact global trade. Many global traders are already looking to this space as an alternative to how they operate today (for example, replacing some traditional trade instruments).

Over the past couple of years, we have invested heavily in new technology in this area. We are working on a number of initiatives addressing whether central banks should incorporate digital currencies. Going forward, we strongly believe it will impact both trade processes and the underlying trade instruments of the future.

Lopez-Mateos Payno: The understanding of digital currencies is very high in the UAE. The shift towards digital currencies isn’t just specific to the FAB vision – this is a global trend that is likely to take hold over the next six to 12 months. This is supported by initiatives from different central banks, including the UAE’s.

This space has started to move incredibly quickly for two reasons. First, people have finally started to understand digital currencies and their inherent capabilities. And second, the lines between cash management and trade finance are increasingly blurred, meaning that the use cases and application of digital currencies are also centred around creating credit capacity.

 

Q: How is FAB exploring digital trade solutions to support client needs and improve payment flows and access to finance?

Lopez-Mateos Payno: We always prioritise our clients’ agendas. Solving client problems remains our key priority, as opposed to just pushing products. FAB is a renowned innovator when it comes to delivering transactional banking solutions and we constantly look for new ways in which we can provide clients with larger amounts of liquidity at a competitive rate.

El Khaoudy: We very much prioritise access to liquidity. While we do look to initiatives within the region – such as Etihad Credit Insurance’s work with its Trade Finance Gateway platform – we also look outside the region to help improve client payment flows and access to finance. We are very active in using these platforms to both originate and serve our clients.

 

Q: What are the biggest challenges the industry faces when it comes to implementing the transition to digital? How can they be addressed?

El Khaoudy: Widespread adoption will take time because there are so many stakeholders involved in the lifespan of a trade transaction. But we will get there – and the only way to do it is piece by piece. A ‘big bang’ approach, unfortunately, does not work for trade finance digitisation.

 

Q: How much of a focus is sustainable trade finance, sustainable supply chains and reporting in the region? How are you supporting clients to adapt to the changing requirements?

Lopez-Mateos Payno: At FAB, we have a big focus on ESG. Our overall target is to be able to provide over AED500bn (US$135bn) in sustainable and transition financing transactions by 2030. It is also one of our primary aims to help bridge the trade finance gap, delivering solutions for the overall market and not just our clients.

As proof of this commitment, during the Covid-19 pandemic we provided specific support for the healthcare industry, structuring treasury solutions for over 3,000 entities from large hospitals to small pharmacies. Providing solutions to help bridge the trade finance gap is part of who we are as a bank.

El Khaoudy: Over the past few years, we have also worked on multiple innovative sustainable transaction banking products. As an example, we work with fintechs to help provide ESG scoring services for our clients that directly impact their cost of funding.

Again, the drive comes from corporate champions in each country. Once they are onboard with ESG transformation, their suppliers and the whole value chain follows. From that perspective, we make sure that most of our transaction banking products have an ESG-compliant version.