Bank Audi stands at the forefront of efforts by Lebanese banks to expand their trade finance operations. GTR speaks with head of trade finance Abdul Salam Chebaro about their progress.
GTR: How has Audi’s approach to trade finance evolved over the past few years?
Chebaro: Trade finance as we see it today is not what it was before when it was considered as a back office to sales and credit functions.
We look at it now as a business service-oriented function, where we directly support the sales efforts of commercial and corporate banking arms; we also support the branch network and customers directly when called upon. One form that this has taken is that we act through advisories.
You cannot believe the degree to which advisories are beneficial to our business. You enlighten the customer and he does more business. These services seem to be abstract but we really see them as the driving force for growth. In the big banks in the OECD countries – in the US, Europe, etc – trade finance is a business line with its own sales team. You can sell trade finance products and the related credit independently. But this is generally not the case here in the region. For the time being, what we hope for is to have a middle-office function that provides support to all those who need it.
GTR: Has much changed, though, in terms of the instruments of trade finance? Has the region’s conservative reputation stifled innovation?
Chebaro: Trade finance means different things to different people, of course. The fact is that most of the customers in the Arab world are traditional commercial customers.
If innovation is going to be introduced and implemented then the customer should be as aware of how the instrument functions as well as you are or else there will be trouble. There are certain banks here in Lebanon that just don’t go into many different types of transactions when it comes to trade finance.
That said, it depends on the market segment you are talking about – with small to medium, it usually stays traditional, but when you go into corporate business then it doesn’t stay traditional – you have to go into syndications and provide full business support on various levels, for example.
In all this though we make sure that the transaction reflects the needs and is done in a way that mitigates all of the risks – operational risk, transactional risk, compliance risks. We are very meticulous about counterparty risks, compliance risks and transactional risks – extremely meticulous I would say because any one of these can really hurt us, all the more so now that we are not a small bank anymore. We are a regional bank that really must be concerned with all of these things as we project ourselves further.
GTR: This approach certainly helped in avoiding some of the effects of the financial crisis?
Chebaro: Well, we barely felt any trade finance upheavals here, I can say that – on the contrary and in contrast to others in the West – we have seen growth instead.
In the first quarter there was a slight growth, however in Q2 and Q3 there has been significant growth. Of course, we can’t fall into the fallacy that more trade finance volume means more trade. As the global economy seemed to turn bleaker, trust problems arose. Take a buyer in the Middle East and a seller abroad, whereby the trade transaction was being done on an open account basis. Once the upheaval hit, the seller said ‘no, I am worried now’, and suggested doing a documentary credit for each transaction, or standby to guarantee payments, say on a yearly basis where the standby credit is equal to the peak of the exposure.
But in addition to this dynamic, the majority of trade businesses covered by trade finance in this region are usually for necessities that don’t really change – raw materials, commodities, semi-finished goods and capital equipment. On top of this, we did not really have a credit crunch here. So we were really able to stand outside of all the turmoil. Western banks saw a big impact on their trade finance volumes because liquidity went down substantially. They simply had fewer resources to allocate to trade finance. We benefited in all this because we were able to maintain capital and resources for such transactions.
GTR: Is there a risk now of over-extension or of expectations of continuous double digit growth pushing Lebanese banks too far?
Chebaro: We are going to be as ambitious, in trade finance, as our overall growth strategy. This means, first and foremost, that we are only going to go into a business that we understand and are experienced in. The example of this approach, which I think is instructive for trade finance, was seen in our avoidance of credit derivatives from the US.
Our central bank rejected these things and, crucially, our management culture avoids going into areas where we don’t have control. In our case, we are more traditional, it’s true. But traditional is not a bad word! As for the market, I view trade finance as a business line supporting commercial activity in the Arab world and in Lebanon that is really self-sustaining. There is enough business and there is a lot to do.
GTR: Where do you see more of this kind of steady, “self-sustaining” growth in the region?
Chebaro: We certainly see the growth potential in our regional business more than in Lebanon. Take Egypt for example – it is a huge country, the biggest in the Arab world with a large volume of necessities.
I think it is under banked, given the population alone. Now we have a presence – an established commercial presence in Egypt, also in Syria, Jordan, Qatar, and a related financial company in Saudi Arabia, and of course, customers in many other Arab countries. Of course, it can be a hard region to do business in, but only if you are not well versed here. We did transactions and had an intimate market understanding in Jordan, Syria and Egypt since long before we had actual operations on the ground there. So we were never far away from these markets. As these banking markets matured and put in place favourable regulatory structures we moved in fully.
GTR: So are some of your local competitors apparently, some of which are outwardly more inclined to pursuing more “exotic” trade finance transactions.
Chebaro: There are some transactions that some of our competitors do that we do not do. But we think we are growing at a comfortable rate. When you hear about huge jumps in trade finance activity, the first thing I think is not to compare us to anyone else.
We do what we believe is right for solid growth of the bank. In any case, as our customer base has steadily grown we have found new customers through cross-selling, traditional word of mouth, and the work of our sales force. We make sure to do it right so people will come back. These are perhaps straightforward ideas, but we find that they work very well here.