All positive on the Middle Eastern front
With the Middle East and Gulf region witnessing a boom in trade and development, GTR decided to ask a few local bankers their views of risks, rewards and opportunities in their markets.
- Haitham Ashour, Trade Services Manager, HSBC Bank Middle East, Kuwait
- Ramesh Rangan, Head of Trade Services, National Bank of Fujairah, Dubai
- Lakshmanan Sankaran, Executive Manager and Head of Trade Finance, Commercial Bank of Dubai, Dubai
- Faisal Hammadi, Vice-President and Head of Distribution, Trade Finance & Forfaiting, Arab Banking Corporation (BSC), Bahrain
- Samir Sahu, Head, Transaction Banking Services, Emirates Bank, Dubai
GTR: What are the most common areas of trade business that you come across for clients
LS: All classic trade finance products like: import LC issuance; import loans (TR); guarantees (financial and non-financial); export LC advising; negotiation collections, both import and export; local LCs; standby LCs.
Also structured trade products like: revolving LCs; transferable LCs; back-to-back LCs; adding confirmation including silent; forfaiting.
FH: Contract bonding; documentary letters of credit (import/export); specialised LCs (transferable/back-to-back); commodity finance; ECA financing (export finance-related); private insurance-backed products; pre-export finance loans; receivables financing; forfaiting.
HA: Import/export letters of credit (LCs) and bills, bills for collection, guarantees, forfaiting, and import/export financing.
RR: LCs and documentary collections covering both import and export transactions; and financing (with and without recourse) all types of trade activities – pre and post-shipment.
SS: The trade and factoring businesses mainly cover the FMCG, Pharmaceuticals, textiles, electronics, furniture/timber, steel and processed food grains amongst others. Large infrastructure development projects have also lead to an increase in trading activities in construction and building related products.
GTR: How is business generally in the region?
FH: Business has been excellent thanks to ever-increasing trade flows, high oil prices and major investments in infrastructure development in the Gulf Cooperation Council (GCC) countries.
HA: It is very evident from corporates” and banks’s results that business in the Middle East has been booming, and this has been a continuing trend since 2003, although the growth rate recently (year-on-year) has been slowing down.
LS: Banks are doing quite well in the UAE and the region, making consistently big profits. High oil prices have really helped. There is a lot of liquidity in the market.
Some of the economies, notably Dubai, have successfully diversified into non-oil sectors. For example, tourism and real estate are the highest growth industries in the UAE. Huge infrastructure projects and property developments have been launched. The growth momentum looks set for the long term.
SS: The region is opening up at a rapid pace and in an economic sense has aligned itself with global practices. The focus is on developing the retail and financial sector and large scale investments in infrastructure, real estate, tourism and entertainment businesses are clearly placing this region as an attractive business hub.
The exponential growth in business transactions both in volume and value terms is a good indicator of the potential of this region.
GTR: What makes you optimistic about Middle East trade at present?
LS: UAE and some of the important countries in the region have historically been trade oriented. Trade has been and would continue to be the mainstay of these economies. This is confirmed by almost all banks very active in trade finance and for many of them, it is their bread and butter.
Dubai is a trading hub next only to Hong Kong and Singapore and there is a huge amount of re-exports flowing through Dubai to the Middle East and Africa.
FH: The continued record revenues due to high oil prices and global companies setting up operations and investing in the financial, trade and industrial sector in the GCC are unmistakable signs that things are looking bright.
SS: The Middle East region has seen phenomenal growth in the last few years. Buoyant oil prices, government investments in infrastructure projects and development of the real estate industry have all contributed significantly to this growth.
The GCC has also been showcased very successfully for foreign investments, which has seen the economy grow at a very rapid pace. This, coupled with large scale infrastructure developments in progress, will lead to further investments in the region.
Overall this will benefit the GCC trade business significantly. Further, the geographic location and the multicultural population in some of the GCC countries has already created an edge over other regions.
HA: Basically, high oil prices are a key for government spending initiatives across the region, even for non-oil countries, as surpluses are usually directed from the rich oil countries toward them seeking investment opportunities.
The real estate sector is still gaining momentum across the Middle East, as it is perceived as the most secured type of investment during times political or economic instability.
RR: The development activities undertaken by regional governments are very promising for a good future ahead for all banks.
GTR: What worries you?
HA: The common concern in the Middle East is political instability. Sudden, but not unexpected, major political events would affect confidence in Middle Eastern economies and put on hold investment and development initiatives.
LS: There is always a sense of insecurity hanging over like an unseen ‘Sword of Damocles’. And the fact that there is little chance of permanent settlement, you are constantly concerned about saving money, planning for retirement and worrying about settling the children who have grown up in Dubai without any roots in the home country.
SS: International attention on UAE and the GCC has been increasing and this is good for the region. I see that things will continue to rapidly improve as more investments are directed to the region.
FH: There are obvious concerns relating to the political situation in Iraq and the UN sanctions with respect to Iran, but the overall economic picture is sound.
GTR: How much is political and violent risk an issue – Is this largely over-played by those outside the region?
HA: As stated above, I don’t believe that the risks are “over-played” by outsiders. The outsiders’s perception is usually inflated due to lack of real understanding of realities on the ground; this extends to any other part of the world as well.
FH: Political and violence risk have existed in the region for the last few decades and there appears to be no immediate sign of abatement of these risks.
However, the continued economic growth in the region has helped to uplift the financially weaker sections of society and this will, in the long-term, help in gradually reducing these risks.
Is this largely over-played by those outside the region. We deal extensively with foreign counterparties and we have not perceived major concerns from their end in this regard.
SS: UAE has maintained a politically stable environment over decades and the prime agenda for the GCC continues to focus on building a sustainable economic future.
RR: This is an import factor which will impact growth potential. If such concern is shared by various Middle East governments then we would not see most of the development activities undertaken or projected by them.
LS: Political and violent risk is definitely a cause for concern. There are historical reasons and events that are not going to be resolved any time soon. I also feel that often worst case scenarios get projected more than ground reality.
GTR: How good are local Middle Eastern banks at trade finance business compared to non-local banks? Do many still have much to learn?
SS: Local banks understand customs and practices in the Middle East and have been at the forefront in setting most of them. They have a good track record in managing trade finance business over the last five decades.
GCC banks are also well capitalised and enjoy good credit ratings leading to a global acceptance of their trade instruments. Combine this with the ability to guide domestic businesses and it creates a competing service proposition. There is enough reason to believe that local banks are competitive in the trade business.
RR: Whilst some regional banks do have an edge over foreign banks due to their size and customer loyalty, non-local banks are preferred by customers who have business across various geographies. All banks have their own share of the market.
Middle Eastern banks in general are not far behind non-local banks in terms of technology or product knowledge as they regularly keep updating themselves.
Many of the Gulf countries employ foreign nationals who work both in Middle Eastern and non-national banks, hence knowledge transfer does happen as a routine.
Of late we have been witnessing a healthy trend of many foreign-based trainers/institutes offering specialised training sessions both on site and web-based online (eg, webinars by IIBLP).
LS: As far as classic trade finance is concerned, local Middle Eastern banks are second to none and there is excellent skilled manpower available. LC specialists from these banks are in the forefront of writing articles, participating in seminars and conferences, UCP, ISBP knowledge, and so on.
A few figured in the UCP 600 Consulting Group also.
However, when it comes to structured trade finance and complicated project finance deals, international banks are operating at a different level and there is much catching up to do. Notable exceptions in UAE could be Emirates Bank International, Gulf International Bank etc.
HA: There is definitely room for improvement. During my previous work as a trade finance trainer with HSBC for the Middle East region, I concluded that quality training programmes in this area are very much needed.
Trade finance is a core business for all major players in Middle Eastern markets, but training of staff still has not gained an equal degree of emphasis.
FH: The understanding of trade finance products in the GCC has improved considerably over the last few years and ABC has played a major role in developing and distributing such products in the GCC.
Do many still have much to learn. There is always room for improvement as we are working in a dynamic business environment.
GTR: What about Middle Eastern trade flows and deals with emerging markets in Africa, Asia and Latin America: what are your experiences of this? Any notable examples to mention?
SS: Business relations between Africa and the UAE are historical; Africa is a continent with enormous physical resources making it a sizeable potential market. From a UAE point of view, Africa has evolved as the market of tomorrow.
It has emerged as one of the fastest growing markets for consumer and capital goods, resulting from its economic liberalisation and free trade policy drives. Geographical proximity and well-established business contacts have helped UAE-based companies establish a niche for themselves in the African market, especially in East and Central Africa.
HA: Trade with emerging markets has been increasing, especially with Asia. To a lesser extent certain centres in the Middle East have been acting as a hub for re-export business to Africa.
As for Latin America, trade flows are focused on commodities, but much fewer transactions are seen compared to any other geography.
RR: Historically the Middle East has been a connector between Africa/Latin America with Asia at large. Many of the traders also act as middlemen to facilitate trade flows between the continents.
LS: There is a huge trade going on with Asia, both ways; China, Japan, Korea, India and the Far East. It is definitely oil on the one side. A large amount of sugar comes from Brazil. In fact, the world’s largest sugar refinery is in Dubai. Timber comes in significant lots from West Africa and Latin America.
FH: ABC’s trade finance and forfaiting activities are carried out through two hubs – London (our global hub, headed by Paul Jennings) and Bahrain (our regional hub, headed by Amr El Ashmawi).
The ABC Group’s principal geographic markets of operation include the EU, US, Latin America, Turkey, GCC countries, Libya, Egypt and other North African countries, including the Levant region.
We have recently seen a rapid increase in trade flows from Europe to the GCC. The Bahrain hub assists in the distribution of trade-related assets to GCC financial institutions.
We have also, through our Singapore office, channelled trade deals from the Far East.
GTR: How much of your trade business is subject to Islamic law?
RR: At present our bank does not offer any specific Islamic trade products, hence very negligible.
LS: In UAE the applicable local law is sharia or Islamic law and so all persons and companies operating in UAE are subject to this law.
FH: The ABC Group’s London and Bahrain hubs provide a wide range of Islamic finance products through ABC’s subsidiaries – ABC International Bank plc in London and ABC Islamic Bank (EC) in Bahrain.
While a substantial portion of LC issuance, confirmation, refinancing and receivables financing (leasing) transactions are structured in a sharia-compliant manner, our forfaiting activities follow conventional structures.
HA: In Kuwait we are not allowed to handle business under Islamic law under the commercial licence.
GTR: What is your outlook for Islamic trade finance within the region? Is it also exportable to non-Islamic countries?
HA: Practically, opening of LCs and subsequent handling under Islamic law does not involve critical differences when compared to conventional banking. In my personal experience I have not seen yet a big demand for specifically trade finance under Islamic law, being directed to a commercial bank.
RR: We are seeing many regional banks changing their strategy to cater to Islamic banking, including Islamic trade products.Acceptability of the product in my opinion does not depend on whether the country is Islamic or not but depends on how the transaction is structured and the specific requirements of the players.
LS: The outlook for Islamic trade finance (or for that matter any form of Islamic finance) is very bright within the region. I believe gradually Islamic finance is going to gain ground and will be the first choice for a significant percentage of the population.
Islamic finance is highly exportable to non-Islamic countries too like India, Turkey, UK, France where there is a large Muslim population. Sooner or later, in these countries Islamic finance will take root and force the banks to sit up, take notice and review their strategy towards Islamic fFinance.
FH: The growth of Islamic trade finance has been greatly assisted by the large number of Islamic banks that have been established in recent years in the GCC. The outlook for Islamic trade finance is very positive as we see more and more clients opting for sharia-compliant structures.
We see no reason why Islamic trade finance cannot be exported to non-Islamic countries. The success of sukuks (Islamic bonds) in the overseas capital markets is a sure sign that Islamic finance has arrived at a global level. Of course, this growth will have to be accompanied by a better understanding of Islamic financing principles and structures.