In a roundtable discussion held virtually in early 2021, GTR gathered senior leaders in trade finance to discuss the myriad factors that are reshaping the future of their business in the Middle East and North Africa (Mena) region.
- Maninder Bhandari, director, Derby Group
- Reda Ezzat, head of trade and structured finance, Mashreq Bank
- Vikas Chandra Jha, head of trade and supply chain finance, Emirates NBD
- Shannon Manders, editorial director, GTR (chair)
- Anjum Noman Mirza, head of trade finance, The National Commercial Bank – AlahliNCB
- Anirudha Panse, managing director and head of trade product management, First Abu Dhabi Bank (FAB)
- Bhupesh Sharma, head of transaction banking, Abu Dhabi Commercial Bank (ADCB)
GTR: Covid-19, business uncertainty, and geopolitical shifts are all affecting the trade landscape. What impact are you seeing on trade flows this year in the Mena region, and how has this changed since the outbreak of the pandemic?
Panse: 2020 was a challenging year for all of us. Global and Mena regional GDP figures were down, as were trade volumes and values. We saw major disruptions to trade, including – closer to home – Expo 2020 being postponed to this year. Nevertheless, while business sentiment was dampened, there were some positives, such as the acceleration of trade digitisation efforts.
We also saw some new financing opportunities opening up, for example in the agribusiness and pharmaceuticals sectors. I think governments have done a fantastic job of coming up with schemes to support SMEs across the region, such as the UAE Central Bank’s Targeted Economic Support Scheme (TESS). Finally, amongst banks, we have seen a flight to quality in terms of clients and financing structures.
Ezzat: There are a few other angles specific to the Mena region, such as oil prices and the pandemic-related reduction in demand of oil – a commodity on which the region is obviously very dependent. This has had negative implications on the regional economies, such as funding deficits and a lower level of government spending.
Another angle within the region has been the impact on the construction sector, given the reliance on real estate development and investment. The lower investment appetite created a chain reaction that impacted the entire sector and extended to the economy.
Although these are some of the areas that suffered the most, I believe they will be the areas where we are likely to see the greatest improvement, and which will be the drivers for recovery. An increased demand and a rebound in crude oil prices will restore funding and stimulate more government spending, which will trigger more infrastructure developments and the revival of the construction sector.
Mirza: Given this chain reaction of events, over the last year a lot of companies have started remodelling their business approach in terms of their logistics and supply chains so as to reduce concentration risk and drive greater certainty. The concept of just-in-time inventory has gone out of the window. Companies have also started looking to change their payment terms.
Jha: We have also seen an evolution of the relationship and consultative process between banks and their customers. As corporates look for solutions, they have been reaching out to their banking partners. There have been a lot of conversations around supply chains, balance sheet financing and structured risk mitigation tools. These conversations have increased with many of our large customers in this part of the world who are looking for solutions where they can support their suppliers.
In terms of trade flows, what we saw at our bank at the end of last year was that volumes had rebalanced, not quite back to 2019 levels, but around 90 to 95% of that. What was interesting was the mix of business had changed – we were getting more business from new and different sectors. I hope that this is a trend that will continue to develop.
Sharma: When looking at the impact on imports, there was a lot of disruption and overall trade flows went down. But there were certain industries which picked up and compensated for that loss. We saw a huge uptick in food, pharmaceuticals and medical supplies – those industries have done exceptionally well when compared
to the previous year. When it comes to exports, and being an oil economy, there was a slowdown, but that was just for a very short period from April to June, when there was a strict lockdown. But subsequent to that, we started seeing oil and petroleum exports pick up.
The data for the start of 2021 has been very encouraging – flows have started to pick back up, and it is much better than 2020. The lingering effect of Covid-19 is still there, but I think we’re on the right track, and once restrictions are further eased around the world, this recovery will go further.
Bhandari: Speaking from an industry perspective, there have been a few different aspects to the pandemic situation. One was certainly the concentration risk, which became apparent in supply chains. All of a sudden, what was cheapest was not necessarily the best; more relevant was the reliability of the supplier in the face of all the disruption. Secondly, costs became a major issue – freight costs suddenly went through the roof. Uncertainty prevailed, not only from an external point of view, but also in the surrounding environment in terms of the reliability of specific companies as well as entire industries. The dynamics of business strategy changed in multiple fields – the buy side, the sell side, and in terms of costs. It’s been a wake-up call for businesses, and everybody’s adapted to that very well with the help of financial institutions.
As far as the current environment is concerned, we’ve seen a huge boost: demand is returning and uncertainty is reducing. The payment cycle is improving, and people are a lot more buoyant, and looking ahead as to what can be expected. The UAE specifically has seen great success with the roll out of the vaccine, which has enhanced the safety factor – and this is propelling businesses forward.
GTR: Much has been made of shifts in supply chains to avoid concentration risk. How much of this have you seen, and is it changing what corporates are asking of banks?
Jha: There have been quite a lot of discussions around supply chains. The demand for supply chain and cash flow financing solutions has certainly gone up quite a bit in the last couple of years. The focus of this financing has shifted. Since the start of the pandemic, corporates have been interested in ensuring supply chain finance programmes cover the whole length of the chain – all the way through to the SMEs in the long tail, who have been impacted the most by the crisis. This is happening to the extent that these large buyers are sometimes even willing to share the cost of making financing available to their suppliers. It’s not always driven by a commercial benefit or cash discounts.
On the sales side, the conversation has changed, and there is a lot more talk about risk mitigation, and companies are asking: ‘How do I get my receivables faster? Can I use a series of tools?’ We have had some very encouraging discussions to try and meet that demand.
Panse: I agree that for corporates in this part of the world, 10 years ago, liquidity was never a concern, and therefore working capital management was never on the top of the agenda. But in the last six or seven years, we’ve seen a huge shift. Because of that, banks have rolled out fully fledged supply chain finance and receivable finance solutions, and that’s a big change from a client’s perspective. But especially in the last year, the further positive direction that has come in the supply chain finance industry is the drive from governments.
Earlier this year, we had the Abu Dhabi department of finance partnering with Daman and FAB on a US$1.6bn supply chain finance facility for the healthcare sector. There are similar success stories across multiple industries in both Abu Dhabi and Dubai being spearheaded by the governments. As Vikas has mentioned, a lot of this is not being done with a commercial objective, but with the wider objective of helping SMEs get paid faster, reducing their cost of funding, and ensuring their liquidity.
In terms of corporates, they have taken the next step and are talking to banks and fintechs about multibank solutions. Not only do they require supply chain financing, but they also want these programmes to be easy to implement. They don’t want to have to go and talk to multiple banks and have duplication of costs, infrastructure and documentation. They are looking for a simple solution, which helps them, their suppliers and the banks as well.
A lot of this has been accelerated because of the pandemic and the need to reduce costs and improve liquidity.
Ezzat: In addition to the increased demand for supply chain financing, we have also seen a move to the more traditional trade payment methods, such as the letter of credit (LC). Despite the significant reduction in trade volumes, we have seen double-digit growth in our LC business, mainly on the import side, but also in terms of exports. I would attribute that unexpected increase to the shift to building new buyer-supplier relationships to overcome supply chain disruption and avoid concentration risk. Corporates are moving to a more secured payment tool to ensure the sustainability of their supply chain, at the same time having the option of monetising sales value. It’s a very healthy trend and hopefully it will encourage more digitisation of documentary credit in trade finance and more adoption by corporates going forward.
Sharma: As clients have looked for more reliability and a more sustainable supply chain, this is where we’ve seen opportunities for new suppliers, and new corridors for trade have opened up. Previously, people were quite happy with the status quo. I think what companies in the Middle East have now realised is that the supply chain is a very important piece of the whole working capital picture.
Initially those liquidity needs were met through the government pandemic support programmes, but companies are now starting to look ahead to the future, when they can no longer rely on that support.
Even in the large corporate space, we’re seeing a lot more inquiries today than before. Supply chain finance is here to stay, it will evolve. It’s still very nascent, but it is picking up.
GTR: Trade digitalisation has been brought into sharp focus by the pandemic, with many in the ecosystem finding themselves forced to use ad-hoc digital solutions as moving paper became impossible. What have been some of the standout successes in the region?
Jha: We have seen an uptick on digitalisation. At Emirates NBD, corporate digital channels have seen a more than 60% increase in client onboarding and usage of digital channels for transactions. We’ve also launched various products, such as smartTRADE and smartCollections, which have seen most of our traditional trade documentation and processing become integrated with a digital platform. We have also launched smartGuarantees, which digitise the entire inward guarantee process, and we have started witnessing good initial successes with that.
Many companies have started investing in digitalisation networks, so a lot of our conversations with them have been around connectivity and interoperability. Most of them want a plug-and-play model, both from a bank and a company perspective.
Sharma: I would say that the biggest intangible change that we’ve seen is the mindset change, which has really driven the digital agenda – and a lot of this has been accelerated by the pandemic. If I look at our channel migration, from manual to digital, this is about 80 to 90% of transactions. This served us well in a lockdown environment because we were still able to serve our clients and process their documents electronically. The ability to do this has really kept trade moving, and helped companies to continue to perform. If it weren’t for the pandemic, it may have taken two, three years for us to reach this level of digitisation. The good news is it’s not stopping – it continues to grow.
Panse: At FAB we’ve also seen a huge increase in our digitisation efforts – more than 80% of our transactions are now coming through the online channels. But it’s important to note that the traditional trade stream remains to a large extent fragmented, and people based. We’re talking now about the whole digitisation experience between clients and banks, but there are multiple other players in the market, which effectively force the dependence on paper and hamper this electronic ecosystem.
Many of us are part of the steering committee of the UAE Trade Connect project, a blockchain-based trade finance platform, which has just gone into commercial production. We’ve had a lot of support from the UAE Central Bank on the project – including one permanent observer from the central bank, who sits on our steering committee. That’s one tangible example of the progress of trade digitisation in the UAE, which has happened in spite of – and often because of – the pandemic, and will help us finance the industry in a better way, and in a more informed way.
GTR: As a closing statement, what else is front of mind for you in the trade space?
Ezzat: We have seen a growing focus on ESG across the region, and corporates and investors are looking up to the banks to lead that initiative through ESG or green finance. It’s a heavy responsibility for us.
For banks to take the lead, however, the principles of ESG finance would have to be discussed, unified, and agreed. Currently, there is no clear-cut definition or measure of success for ESG finance. Is financing a wind farm or solar power plant ESG? Or do banks need to go further down the supply chain and ensure the supplier of the solar panels, or the wind turbines, and other connected parties, have their own ESG credentials? It’s very tricky.
A number of banks have signed up to the UN’s Principles of Responsible Banking, and as a region, we need to be part of that. It needs to be an objective in our business strategy going forward.
The regional governments are taking the ESG matter very seriously, and we have seen a number of initiatives and investments being rolled out in the UAE and Saudi Arabia, for example. Banks would need to take a more active role in building that ecosystem.
Bhandari: It will be very encouraging if financial institutions pass some benefit of any sustainability initiatives to the SMEs to ensure it is something that everyone can benefit from – and not just the larger corporates.
Mirza: I definitely think we’re seeing some positives in the wake of the pandemic. Certainly, one of the major things is the shift in the way corporates do business, and how banks then assess and finance that business. There will be increased appreciation of transactional banking and self-liquidating transactions, as well as an ongoing drive to getting them all digitised on a single, trusted platform.
I also think we’re going to see more action from central banks and regulators to progress the digital transformation journey – because the developments in the market are happening at a more rapid pace than the legislation.
Sharma: I’m very positive for 2021. Trends are now moving in the right direction.
Going forward, the digital agenda will continue to be strong and will remain a focus area for us, as well as for the wider market. Because of that, we will need to find better ways of collaboration, which will be necessary to drive digitisation efforts in trade.