Changing supply chains and a challenging economic environment may be acting as a drag on trade growth globally, but in the Mena region, banks and corporates are thriving. In this roundtable discussion, hosted in collaboration with Abu Dhabi Commercial Bank (ADCB) on the sidelines of February’s GTR Mena conference in Dubai, influential experts assess how shifting trade flows – as well as progress on digitisation and product innovation – are opening new doors for corporates and banks alike.
Roundtable participants:
- John Basquill, senior reporter, GTR (moderator)
- Ishwar Haswani, chief executive officer, E3 Energy Group
- Abdurrahman Naji, chief executive, Gulf Advanced Polymers
- Elat Niyas, treasury manager, Al Masaood
- Toby Shore, senior director, group treasury, risk and insurance, Emirates Global Aluminium
- Mritunjay Singh, lead, trade product management, ADCB
GTR: Digitisation of trade finance has been a buzzword for several years. How are efforts progressing, for instance in your physical supply chains or your banking relationships, and what barriers still need to be overcome?
Niyas: Initiatives around digitisation have been underway for a long time, but until recently, the implementation was not there. Covid was the disruptor to that. Even in 2019, ADCB would be at our offices suggesting we sign up for fully digital cashflow solutions, digital trade, and we would say ‘we’ll see’. Then, when that disruptor happened, we took a leap of faith and now, the ease of doing business has changed dramatically. Today, we’re thinking about what’s coming next from the banks and what newer solutions are on the way that will support us even more.
Shore: In our view there is quite a clear delineation between the USP of banks and fintechs, and both should focus on their areas of specialisation and then partner together to provide a solution. Banks are very good at what they do, but so are fintechs, and rather than competing they should leverage off of their expertise for a superior, more flexible offering. On the corporate side, the benefits this brings are immense as it combines liquidity, structuring and funding with technology solutions that bring scalability, syndication, multi-bank aggregation and so on. We have an excellent relationship with our banking partners and work well with them to create win-win solutions, often involving fintechs, and the historic barriers of banks looking for customer ‘stickiness’ are slowly being dismantled.
Naji: When it comes to supply chain management, there are two tiers in the market. The corporates are benefiting strongly from digitisation; for example, they may be offered a supply chain ERP system that they can connect to and can source the best container provider, or pick the cheapest or shortest route. But this is only available for those large corporates, and not for SMEs, so at the moment, utilisation is only there among the bigger companies.
GTR: There has been rapid progress around technology to fight fraud, particularly after the scandals we saw in the commodity finance market in 2020 and 2021. How is that developing in the Mena region?
Haswani: It’s true that fraud is still coming onto the market, but you need to remember there are a lot of attempts at fraud that never make it. In our case, as we store oil in our tanks, we give comfort to the banks by way of collateral management agreements – but we also give banks access to cameras and data showing the levels of inventory in place, how much has been released or how much has been financed. Another example is invoices. Now, when an invoice is raised, you can use a platform to check whether it is genuine or not.
Singh: Digitisation of trade is certainly helping banks tackle fraud through automation and data points. Connecting the ecosystem – ie both sides of the trade, obtaining data from multiple sources to cross-reference – is helping create multi-layered checks to help prevent fraud. In the UAE, tackling duplicate invoice financing is one of the controls that has really moved forward. A number of banks are checking trade invoice-related data with the data from a consortium of banks, using blockchain, and where there are true hits, banks reach out to clients and address it. This is already in play. While there are duplicates identified, mere awareness is reducing such instances. One interesting finding is that often, we are not actually seeing fraud, but a client making part payments of the invoices using facilities with different banks. Electronic KYC is another such initiative, and over time this will lead us towards centralised repositories of KYC information, addressing the often repetitive nature of such queries received by clients from all their bankers.
GTR: We’re continuing to see supply chains and commodity flows shifting, particularly in the energy market, since the start of the Russia-Ukraine war. What trends are you seeing around logistics or supply chain disruption?
Naji: Supply chains are easier now and freight charges are getting back to normal. Covid had been a very difficult time in our industry, with lots of containers going to the Far East, and companies having to rely on moving goods locally by truck or using bulk shipment, so it’s good to move past that. However, we are now seeing many countries suffering from other economic challenges, particularly a shortage of US dollars. That means, unfortunately, the old methods are coming back and bartering systems are starting again. An exporter might come here to the UAE and sell goods, but in return, they want to take other goods back. The banks don’t have a solution to this as it takes place outside their systems.
Haswani: Because of the Russia-Ukraine situation, there have been a lot of changes around supply and demand. The flows have completely changed. Take gas – Europe has really struggled for gas, and now there are shipments from companies in the US and Turkey, supplying to Europe. Because of these flow changes, there are going to be big issues around freight, as demand patterns are changing completely, and voyages will be much longer than before.
Singh: War has not only led to a shift in supply chains and commodity flows, but the development of logistics, from pipes to ships, has had its own set of challenges. One issue related to that is vessels can’t always dock where there is demand, as ports too needed to be upgraded and equipped to take shipments of gas and store them where they are needed. That means new supply chains and new infrastructure has to be created.
Niyas: For us supply chain disruption was an advantage. We had been trying before to get into just-in-time inventory, that was the direction of travel, but now we are holding much less inventory. The automotive industry is not back to production at factory capacity levels, the principals are distributing according to the needs of the market, and this sector still has some shortages in demand. This is starting to change again this year, though, and I expect that once that happens we will have to get back into a different model of working capital management, where we keep an average of around three months’ inventory.
Shore: The whole world is looking to push for just-in-time inventory management through on-shoring, near-shoring and friend-shoring. However, this requires economies of scale, and you can only get those through bilateral investment with a particular country or a particular partner as the working capital costs can be quite steep.
GTR: What kinds of financing tools are available to help corporates respond to changing trade flows and supply chain disruption? Is this opening up opportunities for lenders?
Haswani: There are lots of opportunities for the banks here. They can make really good money out of disruption. But on the other hand, banks will only go in where there are no issues of sanctions around Russia. They also need to give their shareholders the return on capital they expect, and if they historically had large Russian exposure, they will now have to go to the Indian subcontinent, or Africa, for example. That comes with different challenges, like forex issues or not immediately having the structures you need.
Shore: There are numerous financing tools available for corporates to help manage trade flows and supply chain disruptions, and the choice will really come down to whether the corporate is looking for an on-balance sheet or off-balance sheet solution. For example, receivables securitisation programmes assist both the seller and purchaser, managing opposite ends of the working capital cycle even through periods of unplanned disruption and change.
GTR: Do tools like inventory, receivables or payables finance have a role to play in the current economic climate?
Haswani: In our business, especially for oil and gas, there have been times when you can make more money by storing and financing cargo than by actually selling it, ie contango opportunities. You can just store it in a tank, take the paper position, the banks are happy to provide financing, and you are making money while not exposed to the market. This possibility is one of the reasons why the last couple of years have been so good for oil companies.
Shore: These tools are playing an increasingly important role in business by potentially freeing up what would otherwise be locked liquidity on the balance sheet. By unlocking this liquidity, funding costs can be reduced and businesses can use this additional source of liquidity to drive greater shareholder value.
Singh: If you take a broader view of supply chain finance, payables is only one angle to it. Most banks have a robust platform for payables. But that’s not really the main challenge in this region; buyers typically want to pay as late as possible, so that offering needs to be broadened by looking at what structures allow for pre-shipment or post-shipment solutions. On the receivables side there are opportunities with large corporates, while factoring as a solution is underdeveloped in UAE markets.
GTR: How important is the sustainability and ESG agenda? Do you think energy security and strategy have started to take priority over the energy transition, or is sustainability still a driving force?
Shore: Both the sustainability and ESG agenda are vitally important to the global economy. However, these need to be congruent with the realities of the modern economy and countries’ economic and political objectives around energy security, as the recent energy crisis in Europe has shown. The upcoming Cop28 in the UAE aims to transform and urgently accelerate climate action and I think this speaks for the seriousness in which the sustainability discussion is being taken at all levels.
Haswani: The underlying fundamentals are that if coal is cheaper compared to LNG, LPG, gasoil and so on, businesses will have to keep focusing on it. That has been one of the impacts of the Russia-Ukraine scenario, and I think that might have put us back a few years. There are steps being taken, initiatives like ethanol plants or biofuels for example, but that needs capex and the smaller organisations just don’t have sufficient funds to invest in that at the moment.
Naji: It will take a lot of work from governments to have infrastructure ready for the kind of change we need. Our business is mostly in Africa, where we see cars that are 40 or 50 years old causing lots of damage to the environment. Clearly it would help those countries to replace those old cars with electric vehicles, and there have been initiatives around waiving customs duties and so on, but the infrastructure is just not ready for that change. It’s also worth talking about plastic, which of course is made out of oil. We know plastic is impacting the environment, and single-use plastic has to be replaced, but plastic is essential to our modern life – it’s in our clothes, our furniture, all around us all the time. We cannot just replace that.
Niyas: It’s not going to be easy, especially in a gas-guzzling country or a country that sells fossil fuel products around the world, and it will take time. But we are seeing a boom in some areas. There is an entire power industry now around selling off-grid solar panels, so you can have electric vehicle charging stations that are solar-based and not connected to the wider infrastructure, and you can plug in, even in remote places. These solutions are coming out, and what would really accelerate it is if the banks become more involved.
Singh: As banks, we are all cognisant of the need to do that. The UAE is moving in the right direction.
We exported Dh2tn of non-oil exports last year; at this rate, what we achieved in non-oil exports in the last 50 years, we’ll double that in the next five. There are some questions for banks though, such as how capital will be recognised when you fund an ESG-compliant project versus otherwise.
GTR: As a closing question, what are your predictions or expectations for the next 12 months? Are you feeling optimistic or pessimistic about trade and trade finance in this region, and do you see any other significant disruptions on the horizon?
Haswani: Banks are understanding and supporting trade very well, but they want to be sure they are financing the right sorts of structures. Taking again the example of stock or inventory financing, if your compliance team or your credit team is actually able to see the stock from their office, they will not run into problems. That makes banks more positive about financing these structures, and personally I’m very optimistic this is the way it will continue to go.
Naji: I’m very optimistic. The Russia-Ukraine war has of course changed the worldwide economic equation, and even if it ends relations between Russia and Europe might not go back to normal. It has been a hugely challenging time. But there are lots of countries that could benefit from this changing picture, including the GCC countries, and as technology continues to improve and support to SMEs grows, that belief and investment will continue to grow.
Niyas: If we look at last year, with rampant inflation, Ukraine issues and infrastructure issues, we can be thankful that we’re in a very secure place. This year, high interest rates are a real challenge; cheap cash is no longer available. We have to reiterate our mantra that cash is king, and to focus on working capital management efficiency. But the banks are showing real appetite to take on this challenge, and we are expecting a robust year ahead.
Singh: The Middle East has seen positive growth over the last few quarters and that is projected to remain so for the next 12 months. I’m very optimistic on the business prospects for the region as it continues to attract capital and talent at a very fast pace.
The regulatory environment is conducive for business and is consistent. ADCB continues to invest in technology supporting our trade finance automation journey, and in the next one to two years, practically all our processes will be digital, allowing the bank to be very competitive in our product offerings and a leader in customer satisfaction through its delivery.
Shore: An interesting question comes from what we’ve seen with ChatGPT. How will we cope with AI? That could have some big ramifications, not just in the trade finance world but right through banking and financial services. We heard a story about someone asking ChatGPT to draw up a term sheet, and in seconds, they had a draft document that you could, theoretically, work with. Obviously, you wouldn’t give that to an actual client, but it’s a small indication that this could turn out to be a huge disruptor, depending on how governments, regulators, corporates and banks adapt to this technology.
