The Middle East and North Africa (Mena) region is abuzz with digital innovation, writes Birju Sanghrajka, Managing Director, Head of Trade – Africa and Middle East at Standard Chartered Bank.
The Mena region’s young population is among the world’s leading users of smartphones and social media, and research by McKinsey shows that over the past 10 years, the cross-border data ﬂow linking the region to the world has increased by more than 150 times. As local governments and businesses increasingly incorporate digitisation into retail, education and services, its citizens are living ever more digital lives.
However in the region, which is at the historical centre of international commerce routes, this digital revolution has thus far been slow to reach trade. Centuries-old traditional trade instruments that are heavy on paperwork and process remain in use, with procedures for a single cargo by sea estimated to require a staggering 36 original documents, 240 copies and as many as 27 parties, according to Forrester Research.
Digitising trade processes could be a means to boost the growing south-south ﬂows to Africa and Asia as countries such as the UAE position themselves once more as major export hubs for trade with emerging markets. While exports from the Middle East to Africa and vice versa currently make up just 3% of the total, the efﬁciencies gained by modernising processes could contribute to the opening up of as-yet untapped markets.
Governments in both the Middle East and Africa are already exploring the beneﬁts of injecting tech into trade. One such example is Nigeria’s single window portal for trade, an online electronic trade platform which connects public and private sector entities. In Dubai, the Emirate’s customs agency and the Department of Economic Development have launched a “Virtual Corridor” to enable cargo to be moved in under four hours without the need for a client to submit a cash bond or bank guarantee. The next step is for corporates and banks to digitise and integrate with them.
Given the challenges as a result of lower oil prices, tightened dollar liquidity and rising interest rates, the bottom line is top of mind for every company in the region. Just as banks have gone through margin compression, the operating margins on sales are also coming down as businesses look to remain competitive. Reducing the time, cost and room for error in unwieldy trade processes through digitisation means ﬁrms can simplify workﬂows by streamlining documentation, pushing down associated costs through an improvement in efﬁciencies and reducing operational risk. From a bank perspective, digitising trade will help them re-allocate scarce resources currently deployed on low value-added activities to serving clients better.
With belt-tightening the order of the day as a result of the knock-on effect of lower oil prices on the region’s economies, spending on digitisation may not be top of mind for many, but while it is certainly no panacea, the business case for considering it is clear, and those who aren’t already risk being left behind. One process ripe for change is the traditional manual letter of credit (LC) process, which can lock up working capital due to delays and errors. The digital alternative, the Bank Payment Obligation (BPO), provides the certainty similar in nature to that an LC with the ﬂexibility of open account in an automated environment. This enables accelerated cashﬂow, lower transactional costs and reduced staff costs. It also improves access to pre-shipment ﬁnance for exporters who may also be in a position to offer better commercial terms to their customers on the back of reduced costs. First movers in the Middle East have already started to leverage on the BPO to optimise their transaction processing. Al-Sayer, one of the Middle East’s largest automotive dealers, had previously relied on traditional LCs for trade settlement and was seeking more efﬁcient methods to reduce the reliance on paper documentation as well as optimise their transaction processing. In late 2015, it became the ﬁrst in the region’s auto sector to carry out an end-to-end electronic transaction. In a statement made at the time, Mubarak Naser Al Sayer, the company’s CEO, commented that delays in receiving title documents, which affect the timely receipt of goods, had always been a “signiﬁcant challenge”, adding that “we can now enjoy much faster turnaround times by utilising the BPO for trade settlement, and in the process, avoid additional costs such as commission and demurrage charges”.
In shipping, the paper bill of lading is estimated to add a cost of 5 to 10% of the value of goods carried each year, can be forged with ease, and is often not delivered in time, with the consequent letters of indemnity creating an additional administrative burden and cost to the trade. The digital e-bills of lading offer both greater speed and enhanced security versus their paper counterparts. One of Standard Chartered’s clients, a global exporter in metals and mining, took its trade paperless and saved up to US$50,000 per shipment. In addition, it signiﬁcantly reduced its turnaround time by eliminating physical movement of documents, by up to a week in some cases.
From a supply chain perspective, digitisation can have the beneﬁts of lower cost of ﬁnancing for suppliers, better discounts for buyers and reduced stock-outs for distributors. Traditional supply chain ﬁnance (SCF) models were built on banks’ core competencies such as the strength of their corporate banking relationships, credit capacity and geographic reach. Digitisation builds on this to address issues such as ease of on-boarding, offering earlier credit to suppliers and user-friendly platforms for all counterparties in the supply chain. The greatest opportunity for banks is to be able to connect digitally all parties in a client’s ecosystem, essentially building a network of networks.
Digitising trade is more than just a piecemeal approach to pain points along the chain. The potential of digitisation in Mena is to connect trade communities together end-to-end in order to facilitate global trade and international commerce across the Middle East, Africa and Asia. Rather than working within silos, ﬁnancial institutions must work to bring every party together to enable clients to trade with their ecosystem on an open platform designed for digital trade, across all trade ﬁnance products with multi-bank reach. While bank-agnostic models have existed in cash management for years, few banks have started offering these capabilities in the trade space. Standard Chartered’s tie-up with Global Trade Corporation is one such model. It enables clients to manage their guarantee issuance though a single platform that offers multi-bank capability. Additionally, with integrated systems which support electronic bills of lading, Standard Chartered can offer its clients a one-stop shop which provides a fully open platform allowing various modes of connectivity across the entire supply chain.
Throughout the region, growing numbers of corporates recognise the need to digitise, keeping in mind the upside on either revenue or cost efﬁciency. However, there is a view that given the market situation, projects can be de-prioritised or deferred. But while some businesses are not yet ready to take the leap into fully automated processes, they can still take advantage of smaller, incremental changes to speed up transactions, such as barcoded forms which are available for trade clients to input data and send electronically to Standard Chartered, which both improve the turnaround time and the accuracy of the transaction. On the bank’s side, limit approval allocation has also been automated to enable clients to access credit lines quickly without the need for manual intervention.
But banks are not the only players in the changing digital landscape. Fintech also has a role to play, especially in bridging the gaps between bank reach and customer needs. As part of plans to promote the UAE capital as a ﬁnancial technology centre, Abu Dhabi Global Market has recently launched its Regulatory Laboratory (RegLab) initiative, one of the ﬁrst of its type in the Mane region. The aim is to bring in local and international ﬁntech ﬁrms to test their services, and as the latest report from FinTech Week shows that less than 0.1% of global ﬁntech investment originates in the Middle East, there is enormous potential for growth. Banks such as Standard Chartered are investing in setting up ﬁntech incubators, demonstrating a new-found willingness to work with external innovation and turning on its head the image of trade ﬁnance banks as being resistant to change. By connecting players along the chain, Standard Chartered aims to create a one-stop digitised trade environment.
With all of these pieces of the puzzle coming together, trade ﬁnance in the Middle East is on the verge of a digital revolution. Although when compared to the latest smartphone, digital trade documents might not sound like the most exciting of technological landmarks, they will eventually have a far greater impact on our daily lives by speeding up the trade ﬂow of both everyday goods and new gadgets, as well as spurring on economic growth. For clients in the Middle East looking to take advantage of what technology can do for them, the key is to ﬁnd a partner who can enable them to bring the different components of digitisation together to create a single, holistic solution.