This edition’s Market View comes from Lakshmanan Sankaran, head of trade finance centre, Commercial Bank of Dubai (CBD). Despite Dubai’s debt drama, he believes the UAE will emerge stronger than ever.
Watching the rain is a rare and special joy if you have lived long enough in this part of the world. The news on December 14 that Dubai would receive US$10bn from fellow UAE member Abu Dhabi was similarly received by an elated market.
Out of the US$10bn, US$4.1bn is allocated to Nakheel to repay its maturing Islamic bond. The UAE Central Bank has also taken measures to ease concerns about stresses in the financial sector, reaffirming its position that it stands behind UAE banks. Every bit of good news helps in these interesting and challenging times.
Goodbye to 2009
Although China, India and Brazil will inevitably lead the rebound in economic fortunes, UAE and Dubai will also play a key role in reviving the markets.
HSBC has echoed these sentiments, giving a strong endorsement of Dubai immediately following news of its US$10bn deal with Abu Dhabi.
“HSBC has always, and will remain the strongest supporter of Dubai, Abu Dhabi, and the whole of the UAE and believes that the best days are yet to come,” read the official statement from the bank.
I strongly believe that Dubai is still in pole position in the race to be the trade and financial hub of this region. Dubai is a trading hub second only to Hong Kong and Singapore and there is a huge amount of re-exports flowing through Dubai to the Middle East and Africa. UAE and some of the important countries in the region have historically been trade oriented. Trade has been and will continue to be the mainstay of these economies.
For a large number of banks in this region, trade finance is a core offering and often has a share of more than 30% of the bank’s asset book. These specialist trade banks are well-organised, efficient and possess very good expertise. Trade finance is well-understood, easy, visible, short-term, self-liquidating and collateralised. Therefore, going forward, traditional products and structures in trade finance will be in strong focus and demand. For the next 12 months or so, I think it is back to basics, letters of credit, AR/AP financing. You have to learn to live with higher margins and pricing. One can see in the region the demand continues to be strong for building materials, steel, textiles, foodstuff, aluminium products, electrical goods, spare parts, chemicals and household items.
Surviving the crisis
When you are stuck in the midst of a crisis, I think it helps for banks to stand back for a period and take stock of the situation. Perhaps look at their risk management processes and review internal structures. The local banks have very long-term relationships with their customers. This too has been the case in this crisis – in fact relationships have strengthened. It got us closer to our longer-term customers.
At CBD we are working hard to live up to our customers’ expectations by being responsive, knowledgeable, innovative and relationship-focused. We are trying hard to provide our customers with simple and easy-to-use technology combined with quick and efficient service.
CBD is currently piloting an internet front-end offering to our trade finance customers. We are keenly following the developments in the SCF space and new trends and technologies. We have become a member of the TSU from the Gulf region and hope to participate in the new TSU offering that also includes a Bankers’ Payment Obligation (BPO), which could be developed as a simplified alternative to letters of credit over time.