With Expo2020 approaching, China speeding up investments and local banks launching new technology platforms, there are many exciting changes in store for the Middle East and North Africa. Reporting from the GTR Mena conference in Dubai in February, Sanne Wass looks at some key trends to follow in 2019.
1. China’s Belt and Road Initiative (BRI) looks set to bring new opportunities to Arab businesses.
China’s trillion-dollar initiative to construct infrastructure networks along the old Silk Road route could present the next big opportunity for Mena companies and financial institutions.
“It’s important to watch China, because China is arriving, and how we navigate its arrival into this part of the world is absolutely critical,” Florence Eid-Oakden, CEO and chief economist at Arabia Monitor, told the audience in her keynote presentation.
China is already a hugely important trading partner for Mena, being the biggest importer of Middle East oil. Eid-Oakden expects Sino-Mena to strengthen even further, labelling China’s BRI as “the next big thing for the Mena region”.
“The Middle East and North Africa, and particularly the Gulf, we are smack in the middle of the BRI. And between the two main routes, there are plenty of other little routes. All of these routes constitute trade opportunities and opportunities for financial flows,” she said.
The UAE is an important part of the Chinese megaproject. In July last year, Chinese President Xi Jinping made his first visit to the country, which brought about a raft of deals, including the signing of a framework agreement between the China-UAE Industrial Capacity Co-operation Demonstration Zone and Abu Dhabi Global Market (ADGM), the emirate’s financial free zone. This paved the way for the first Chinese state-owned financial services firm to receive approval to establish itself in the free zone. The Industrial Capacity Co-Operation Financial Group will officially provide “strategic investment and financial support to Chinese enterprises as part of BRI” and is expected to manage US$2bn of investment.
BRI is also expected to benefit other territories in the region. A recent article series in The Diplomat by Nicholas Lyall, an Amman-based researcher, labelled three places as “focal points of BRI ambitions in their own right”: Egypt, Jordan and Syria, and Israel.
In Egypt, he noted, the Suez Canal will be a “critical passage for the maritime road of the BRI”. More than 60% of China’s exports to Europe transits here. In addition, the China-Egypt Suez Economic and Trade Co-operation Zone, which became operational in 2015, is set to be expanded.
The Levant, meanwhile, offers a land-based alternative to the Mediterranean, with “China eyeing Syria in the long term as the key Levantine region to achieve this aim”, Lyall noted. Chinese ties with Jordan have also flourished in the past couple of years, with bilateral trade volumes increasing by 32% in 2017. As such, Jordan will play an important role in the short term while Syria is still considered a high-risk environment.
Finally, there’s Israel, where China is developing a high-speed rail project that is planned to stretch from Eilat on the Red Sea to Tel Aviv on the Mediterranean. This could well provide another, perhaps more stable, transit route by land.
“BRI opportunities are absolutely manifesting themselves for Mena companies,” Eid-Oakden further stated in her keynote speech. “We are seeing a much more dynamic presence for Chinese banks in the Mena region, certainly in the Gulf, but also in places like Morocco. We are seeing quite a lot of joint investment with Chinese companies in infrastructure in the region. And the difference between the past and now is that Chinese companies used to be contractors, and now they come in with their money and we are seeing some of these opportunities start to materialise.
2. A recent boom in merger and acquisition activity among GCC banks is beneficial for the banking sector, and trade finance too.
A recent report by Moody’s Investors Service notes that the brisk merger activity in the GCC over the last 18 to 24 months is improving profitability for banks in the long run.
The report comes as the region awaits a flurry of potential mergers: in the UAE, Abu Dhabi Commercial Bank and Union National Bank are now in preliminary talks about a possible merger, a deal that could also involve Al Hilal Bank. In Saudi Arabia, the Saudi British Bank and AlAwwal Bank are expected to finalise a merger by H1 2019 in what could see the creation of the third-largest bank in Saudi Arabia. There is further activity in Qatar, Oman, Kuwait and Bahrain.
It all follows the union between First Gulf Bank and National Bank of Abu Dhabi early in 2017, creating First Abu Dhabi Bank (FAB), the largest lender in UAE, with an estimated market share of 27% in terms of total assets.
“If executed successfully, bank mergers will improve pricing power and create cost efficiencies by removing duplication in certain functions, benefitting the banks’ overall profitability,” the report reads. “Competition in the GCC’s over-banked markets has forced banks to reduce lending rates, especially for some large corporates and government-related entities. This has in some cases led to risk mispricing and dampening bank profitability. Consolidation in the banking sector should ease competition and reduce pressure on margins.”
Moody’s further notes that mergers would remove duplication in certain operating functions and in real estate investment, as well as the cost of investment in new technology.
This could well be good news for trade finance departments and their clients, explains Anirudha Panse, FAB’s head of trade product management, who, before the merger, was head of trade finance products at National Bank of Abu Dhabi.
He tells GTR that the trade finance business of the bank has seen growing profits since the merger. “That is largely due to the fact that we are now able to tap new markets, do more business with our clients and offer better solutions. With two banks coming together we have been able to use our capital and credit more effectively.”
For example, he says, the merger enabled FAB to expand to markets such as Saudi Arabia last year, and the bank is also growing its presence in Asia and Europe. According to Panse, the trade finance business has now also invested in a more ambitious technology and product roadmap, including the UAE Trade Connect platform (see point 4, further on).
“There is a significant roadmap in terms of developing new products and that is again possible because of the two banks coming together and the technology investments and talent that came with it, making it easier to roll out new products and solutions,” he says.
3. Expo 2020 is benefitting the region’s SMEs and giving them better access to finance.
Expo 2020, the largest event ever staged in the Arab world, is expected to attract 25 million visitors from across the globe between October 2020 and April 2021. But the world fair is already bringing huge opportunities to companies and banks in the UAE and the rest of the region.
“The event lasts for six months or so, but there’s a great opportunity for the whole economy both before and after,” said Reda Ezzat, head of trade and structured finance at Mashreq Bank, speaking on a panel at GTR Mena 2019. “If you look at what is before the event – the infrastructure, the airport and metro construction – and the stimulation of the economy that Expo2020 will bring after the event, companies, banks and the whole economy will be stimulated, all the way through the value chain.”
With just a year and a half until Expo 2020 officially kicks off, the event is now one of the key drivers of development in Dubai, with government having already awarded billions of dollars-worth of contracts to thousands of companies. This is providing new opportunities to smaller businesses in particular: organisers of the event have committed to awarding 20% of the value of all contracts to SMEs.
“60% of UAE GDP is SMEs. So how do you get SMEs to be more active in participating in these mega projects?” asked Birju Sanghrajka, head of trade for Africa and the Middle East at Standard Chartered, speaking on the same panel. “Expo2020 has awarded over half of their 4,500 contracts to SMEs. They then went further and said, ‘if you are an SME you don’t need to submit a bid bond or an advance payment guarantee’. So it’s about creating the space for SMEs to flourish.”
Meanwhile, the event has prompted banks to fund small business that may not previously have been able to access finance at competitive rates, if at all.
“Those SMEs in the end of the supply chain have an opportunity now to receive finance against a purchase order – this is the kind of finance that they wouldn’t normally, if they are high risk, get without having been in that value chain. This is a proposition that we offer to the value chain in a project like Expo 2020,” Mashreq Bank’s Ezzat said.
Last November, Expo 2020 launched its Online Marketplace (OMP), a platform where companies from around the world can apply for business opportunities as part of the event. So far, over 26,000 suppliers from 150 countries have registered, with about 75% of them being SMEs, according to Tina Ghanem, director of OMP.
4. Two locally-bred trade finance platforms are emerging in the UAE, but it remains to be seen if they will compete or collaborate.
GTR Mena 2019 saw the announcement of two independent trade platforms that both seek to gather nationwide traction from the country’s trade finance banks.
One of the platforms is UAE Trade Connect (UTC), which is helping banks address the risks of double financing and fraud. Work on the platform is being led by First Abu Dhabi Bank (FAB), together with telecommunications firm Etisalat and tech company Avanza Innovations.
Leveraging blockchain, artificial intelligence and optical character recognition technology, banks can use UTC to validate whether a trade transaction is genuine and has already been financed through another bank. This will replace the existing manual, and often inefficient, processes that banks use to detect fraud today.
“Every market has its own nuances,” said Manoj Menon, head of global transaction banking at FAB, speaking on a panel to introduce the project. “And one of the nuances in the UAE is around SMEs, where there has been a lot of frauds happening within the banking sector, where duplicate invoices have been financed. The challenge for the banks is to detect this fraud. This has resulted in some of the banks exiting some client segments. SME financing, in particular, has been impacted, and thereby the growth of the UAE economy is being hampered.”
The group behind the solution is now in the process of forming a working group of banks that will conduct pilots and review the solution. GTR has learned that, so far, four other banks have signed up.
Also speaking at GTR Mena 2019, representatives from Abu Dhabi Global Market (ADGM) and Abu Dhabi Commercial Bank (ADCB) announced that they too will soon launch a national trade receivables discounting platform called UAE Trade Receivables Exchange. Having built and tested a prototype together with M1xchange, they are now waiting for the UAE central bank to approve the project.
The M1xchange platform is already deployed in India for the country’s Trade Receivable e-Discounting System (TReDS). “Together with ADGM we have been talking to local banks and international banks that have a presence in the UAE,” said Samer Younes, lead, digital trade implementation and channel management at ADCB. “We have received explicit interest from those institutions. At the moment we are waiting for a body to be formed by the central bank of the UAE so we can go to the next step, which is the live stage.”
Exactly how do the two platforms differ? Both have a fraud check mechanism that assures financiers that invoices are legitimate and have not already been used to obtain financing from another lender. As opposed to UTC, however, the UAE Trade Receivables Exchange works as an exchange where banks can bid to finance invoices. The idea is that this bidding model will enable SMEs to access funds at lower rates than available to them today.
The fact that two independent groups were making announcements around similar-looking platforms did not go unnoticed at the conference, with audience members questioning if there is space for two such solutions in the market. But so far, it seems that bankers remain open to a collaborative approach.
“There is no reason why there should not be several platforms and they can all talk to each other through APIs and interfaces,” said Younes. “The initial phase of the UTC serves a major purpose, which is building the algorithm behind fraudulent invoices and double financing. We look forward to seeing a prototype. If it makes reasonable sense for us, we would like also to be part of it.”
