As international banks retreat from the Mena region, so local Arab banks are increasing their presence, performing strongly and using more sophisticated trade finance techniques, including an emphasis on Islamic trade finance products. Nick Lord reports.


In years past, international trade finance in the Mena region took place through the networks of international banks, and was largely instigated by international exporters looking to finance their trade with the region. Local companies and local banks were conservative both in their attitude to risk, business expansion and also in their use of sophisticated financing techniques.

But as a result of the political turmoil affecting the region and the financial turmoil affecting the world, a number of trends are emerging that are changing the situation. New capital requirements are forcing international banks to concentrate their resources in their home markets, and many are withdrawing from the region, taking liquidity with them. Regional Mena banks are stepping into this breach. There are only a handful of banks in the region that can be counted as truly regional, but those that can, see strength in being able to offer their clients a regional footprint, both from a liquidity point of view and in terms of their ability to assess the risks of local markets.

Clients are taking note of this development and are increasingly willing to use the regional banks for their international trade finance activities. “In the last years in Turkey, the Middle East and certain regions of Africa such as Morocco and Tunisia, local and regional banks have become more aggressive from a pricing standpoint, increasing the level of competition,” says Sinan Ozcan, trade finance manager, construction equipment operations, Africa, Middle East and Turkey at CNH International in Istanbul.

“These regionally specialised banks, which also have subsidiaries and branches in European countries, are offering good services. Since their headquarters are located in the region and are managed by the people belonging to the same culture and environment of our customers, they can have easier access than us to our customers. They know more about our customers’ financial soundness and local needs. As a result they can give us more accurate advice on how to cooperate with these customers. Along with this, we are working more and more directly with these banks,” Ozcan adds.

CNH is a perfect example of an international company that is expanding in the Mena region even though the risks of doing so have increased in recent years. The company is the agricultural and construction machinery division of Italian conglomerate Fiat. It focuses on the Middle East and Africa through the Istanbul hub of CNH International. CNH also has a manufacturing joint venture in Turkey with Koç Holding, the largest conglomerate in Turkey. As such, it is not only exporting products into the region but also out of the region. According to Ozcan, the company has 126 importers in Africa and the Middle East. “Our business model is mainly based on dealer (distributor) partnerships,” he says. “However from time to time we are also involved in direct business with authorities, institutions and key accounts.”

Business models such as this have been clearly affected by the uprisings of the Arab Spring as local importers come under pressure, be it from the closure of banks, or even the physical closure of their offices due to threats of violence.

Nevertheless, away from the political problems, the underlying business is sound. After all, the region still has positive growth credentials due to a very young demography, a push by governments to invest in local infrastructure and development, and a high oil price which supports much of the financial activity in the region. This all leads to a situation where trade finance can blossom.

“We deal with various countries and as a result we are exposed to different kinds of risks, mainly commercial and political. But with our structure, knowledge and experience we try every day to contain this exposure and mitigate our risk,” says Ozcan. “When there’s a commercial risk, we can intervene and support our network, but in the case of political instability our action is, of course, more limited. In this latter case, often the most penalised are our dealers/distributors, which may face operational or financial difficulties due to the country’s situation, as recently occurred in some North African countries.”


Financing tools

Within this situation, the use by local banks of trade finance techniques is increasing, as the overall growth of trade within the Mena region looks to top US$4tn, as estimated by the Organisation of Islamic Countries (OIC).

“[Regional] banks and our customers are very keen to adapt to new techniques. As a result, our customers get more used to various financial tools like supplier’s credit, corporate risk discount facility, and a bill of exchange discount facility,” says Ozcan. “We are also planning to introduce more sophisticated financial solutions such as structured finance. The intention is to assist our customers with longer credit terms in order to help them with their cash flow capabilities.”
As the regional banks become more adept at offering sophisticated trade finance solutions to their clients, they are tapping into their knowledge of Islamic finance to build a lead in Islamic trade finance skills.

In October 2011, Aktif Bank in Turkey signed a US$40mn structured trade finance deal for Turkish grain trading company Tiryaki Agro that was covered by the International Islamic Trade Finance Corporation (ITFC), the trade finance arm of the Islamic Development Bank.

“ITFC has successfully implemented structured trade financing in many countries, and now, through Aktif Bank, Turkish companies will start benefiting for the first time from the new financing model, especially in the food, petrochemical, steel and fertiliser sectors,” says Önder Halisdemir CEO of Aktif Bank in Istanbul.
While international firms such as CNH and local firms such as Tiryaki Agro will continue to use regular international trade finance techniques such as cash in advance, LCs and documentary collections, they are also looking to support their activities in the region by using Islamic trade finance. “We believe that trade finance tools have improved in recent years all over the world,” says Ozcan. “Banks in the Middle East have developed and adapted the financing tools to their culture; Islamic finance is now used not only in the Middle East, but also in most populated Muslim countries such as Indonesia and Malaysia. This trend is expanding all around the world.”

The Islamic arms of international banks – such as HSBC Amanah – have long dominated this niche. But even they are not fully regional, preferring to operate out of designated markets. HSBC Amanah offers Islamic trade and supply chain finance from offices in Bahrain, Saudi Arabia and the UAE (as well as Bangladesh and Malaysia outside the region). Standard Chartered’s Saadiq Islamic bank offers trade finance in just the UAE and Bahrain.


Regional banks reign

But compared with a bank like National Bank of Kuwait (NBK), they have a much smaller regional presence. NBK has offices in Lebanon, Jordan, Iraq, Egypt, Bahrain, Qatar, Saudi Arabia, the UAE and Turkey, as well as its dominant position in Kuwait. Moreover, the bank is thriving, despite the troubles that are besetting the region in which it operates. In 2011 it grew its net operating income over 2010 by 8.4% to US$1.939bn, while increasing its assets by 5.6% and its shareholder equity by 4.5%.

Much of this performance has come from its conservative balance sheet – at least compared to Western banks – and its regional presence.

“NBK’s strong performance despite the weakening operating environment, the ongoing pressures on the global economy as well as the political unrest in the Middle East is testimony to the success of the bank’s conservative strategy and focus on its core banking operations,” says Ibrahim Dabdoub, NBK’s group chief executive officer.

But despite the difficult operating environment, the bank sees room for growth, not only as the international banks leave and create opportunities for the local banks to move in, but also to cement a leadership in Islamic finance that other banks do not have.

“NBK’s regional plans remain generally intact,” says Dabdoub. “We have tightened our levels of control and risk management in light of the ongoing operating challenges in the Arab world. While we remain optimistic about our regional presence in the long run, we continue to focus on leveraging our strong franchise in the GCC and reap the benefits of expanding into Islamic banking as Boubyan Bank’s [47% owned by NBK] performance continues improving. ”


Growth plans

Other banks in Mena also show the benefits of a regional expansion plan. Bank Audi is the leading bank in Lebanon, but it has been expanding out of its home country for years. It is now the fourth largest Arab banking group by assets, with operations in 11 countries. Last year it submitted an application for a new operating license in Turkey, the first such license to be awarded in 10 years. Having such a broad spread of business has helped Bank Audi weather a very difficult time in its home market of Lebanon.

In 2011, Lebanese GDP growth slowed to 1.5% and for the first time in a decade, the country was not able to finance its trade deficit, creating a US$2.7bn hole in the balance of payments for the first 11 months of the year. Overall, Arab countries in the region around Lebanon collectively saw growth contract to below 1%, the lowest level in years. However in GCC countries, growth grew from 5.3% in 2010 to 6.9% in 2011. Regional expansion allows banks to hedge against the risks of their home market contracting.

One bank that is going the opposite way is Abu Dhabi Commercial Bank (ADCB). It has rolled out an Emiratisation strategy that has seen it sell its stake in RHB Capital in Malaysia while acquiring RBS’ UAE retail and SME banking business. The strategy has paid off with an eightfold increase in profits from Dh391mn in 2010 to Dh3bn in 2011.The bank has not given up on international trade finance. In 2011 it struck a deal with Bank of America in which the two banks would partner together in providing trade finance solutions for their respective clients. In essence this would see a UAE client of ADCB being able to seamlessly undertake a trade financing with a client in the US through the internal channel established by ADCB and Bank of America.

Such an arrangement allows the regional bank to concentrate on its client base while Bank of America can keep costs down by not having on-the-ground coverage teams in the UAE.

While the partnership does not include Islamic trade finance per se, ADCB is nevertheless committed to increasing its presence in the Islamic finance market. Indeed at the end of 2011 the bank undertook its inaugural Islamic funding deal, becoming the second conventional bank in the GCC to issue a sukuk.

As the regional conventional banks expand in the region, Islamic trade finance will be one of the products that will support their regionalisation strategy. With international companies such as CNH looking to increase their presence in the region, finding the local finance to support their trade will be vital. The local banks are stepping up to the plate.