Growing trade flows between the Middle East and new untapped markets as well as the emergence of alternative sources of liquidity were much-discussed at GTR’s Mena editorial board roundtable held in Dubai.


Roundtable participants:

  • Asif Raza (chair), managing director, head of treasury and securities services, Mena, JP Morgan
  • Louis Robinson, managing director, head of Emea trade and network origination, RBS
  • Maninder Bhandari, managing director, Encore Solutions
  • Dr Abdel-Rahman Taha, chief executive officer, ICIEC
  • Tim Evans, regional head of trade & supply chain, Middle East & North Africa, HSBC
  • Malcolm Wall Morris, chief executive officer, DMCC
  • Kamel Alzarka, chairman, Falcon Trade Corporation
  • Philip Patterson, senior research analyst, ABC International Bank
  • Lakshmanan Sankaran, head of trade sales & services, Commercial Bank of Dubai


Raza: How can we, as the industry leaders, play a role to facilitate the growth of trade? How has the market changed over the last two years?

Bhandari: The Mena trade market, despite the economic outlook, has grown. Previously in the trade sphere there was a focus on some dominant countries in Asia for trade; however the focus of attention is shifting to new countries.

Examples of new countries are Vietnam, Mongolia, Myanmar in Asia and Africa, particularly Nigeria and Angola.

One of the topics of the sessions at the conference [Exporta’s annual Middle East trade & export finance conference in Dubai held the previous day] was the interpretation of the interregional trade between Middle East, Africa and Asia.

Africa still seems to be a very new frontier as far as trade is concerned. We have seen growth in interregional trade between the Middle East and North Africa (Mena) regions and the Asia Pacific regions, but south of there, the financial institutions and the economies are only just getting ready.

Patterson: One thing that is really quite interesting in the current more uncertain regional environment is that we are not seeing much evidence of trade diversion taking place in terms of trade moving away from certain areas to other areas. Rather, we are still witnessing processes of trade creation going on, although at a slower pace than previously. Given the difficulties of 2011, this certainly surprised me when I looked at some of the trade figures for the region.
Robinson: I think this is the case particularly for the Asia and Mena region. I spent a lot of time last year in Asia looking purely at trade flows between Asia and this region.

There are a number of big projects which are ongoing. For example, in South Korea there are a lot of companies forming joint ventures with companies in the Middle East.

What we try to do as a bank is to connect our RBS office in Korea with the RBS offices here in the Middle East in Dubai, Abu Dhabi and Qatar, and try and see if we can support and finance these transactions at both ends. We need to get to know the local companies in Korea or wherever it is, find out what they are doing and try to help them. It is not about banks going in and saying: “We can sell you this. It is about going in and saying ‘how can we help you’.” We are doing that a lot in Korea at the moment for a lot of infrastructure projects.


Raza: From a domestic bank perspective, how did you see your trade business last year?

Sankaran: Last year we ended up at a very good level. 2012 is still expected to be a good year, but then you never know. Our plans on trade are now focused on a few things. One is how we get our costs under control and we are investing in technology to enable this. Another is how we shift our focus from conventional trade products into supply chain finance products. We have stepped away from letters of credit (LCs) and working capital financing which has been the model for this region for the last 20 years or so.

Previously the focus of the trade market was on the buy side, looking at LCs, but now we are looking more on the selling side and looking at export LC-related financing and accounts receivable financing including factoring, among other things.

We are also looking at Islamic financing products. It has been a little slow on the up-take, but it is a learning experience and I think 2012 will be more active.

Alzarka: I would like to make a point on that. When I started out in this business there was a lot of focus on Islamic finance.

However, I found there is a lot of talk about Islamic finance but people are not always willing to pay for it.

People would like their financing to be Islamic, but they need the money at the end of the day. If it can be Islamic at the same price, then that is preferable, but if it is not Islamic, most will still take it.

We decided to have a much more conventional and wider approach, and most of the time price is really the issue.

It is interesting because this crisis has been great for trade finance. I think this crisis made a lot of companies realise that trade finance is a great way of creating funding for companies, so all those product developments we have seen in the last two or three years are an effect of this crisis happening since 2008.
It has been great for trade finance in general, and especially for us being an independent trade finance company. This crisis has been a great opportunity for us. Our profits exceeded US$100mn in the last four years; the crisis was a booster.

Bhandari: I don’t agree that the demand for Islamic trade finance has not been significant. If we see the growth in the UAE, changes in Qatar and Oman – all these point to a latent demand which needs to be met. Further, with the Islamic principles of assisting in the trade finance of tangible goods and services, the synthetic and more problematic assets are kept at bay, keeping the corporates and financial institutions healthy.


Raza: We are getting requests from clients to bring Islamic products to the table. We need to cater to both Islamic and non-Islamic clients.
The general trend is that demand is growing, that is what we are seeing and what we are investing in.

Alzarka: JP Morgan is a huge organisation so it is a must for them to have Islamic products, but it is more like a fist-fight on the ground for a small organisation. As I have a much smaller angle looking at this, it is not always worth it, meaning people are not often willing to pay the price for it.

Raza: Abdel, I would like to hear your views.

Taha: The other part of it is the fact that Islamic banks in this region have a lot of money. If you want to access some of that money, you have to use Islamic finance strategies, and this is why you increasingly find conventional banks like HSBC or Standard Chartered including Islamic facilities in project finance deals.


Raza: One of the biggest challenges we are going to face is how project financing will be done when you have the European banks remodelling their long-term financing strategy. You have lots of liquidity sitting within the Islamic bank sector and we need to access this new source of liquidity. Moving to a different topic – we have seen trade grow and established new trade corridors; the region is doing well. How do you see growth developing in the UAE and the rest of the Middle East?

Wall Morris: 2010 was a record year for DMCC with 725 new companies coming into the JLT Free Zone in Dubai, but then in 2011, which remained difficult globally, we saw that number grow exponentially with almost 1,400 new businesses joining the free zone.

When we studied the type of companies that were registering we were intrigued to discover that in 2010 85% of these companies were new to Dubai. This trend further increased in 2011 with over 90% of the 1,400 companies being new to Dubai.

When we asked the companies that were establishing a presence in Dubai why they were coming and where they were coming from, around 25% said that they were coming from Europe with the consistent view that it was “do or die”.

Expansion out of Europe was essential as that market remains extremely difficult, if not impossible, due to the economic uncertainty. When they studied alternative geographies the first location that had the necessary physical and regulatory infrastructure was Dubai.

In Dubai they are able to establish a bridgehead and tap into the GCC, the sub-continent, Southeast Asia, as well as Africa and the Far East.

Of note is that there has been an increase in the interest of doing business with Africa and in particular with countries such as Angola, Botswana and Zimbabwe.
Evans: If you take Emirates airline as a bellweather of the trade routes which are developing with the region, you will see how they have established flight routes into Latin American as well as Africa with the recent addition of Zambia, Ghana and Nigeria.


Raza: Has there been any pressure from clients who feel that the capacity of financing was restricted during the second half of the year?

Robinson: I think, towards the end last year certainly, there were certain banks, particularly banks based in Western Europe with offices here, that pulled out of this region and this put pressure on banks such as RBS where clients would come to us for liquidity for transactions they have traditionally conducted with other banks.

There were also a lot of opportunities in the secondary market in terms of funded assets.

There are a lot of ways of working better together as banks because what we ended up doing is funding our clients on deals we have always done, and on deals that we have not traditionally done here in this market. We would sometimes work with other banks to provide that financing.

This worked very well, particularly with some of the US banks, but I just think that going forward banks should work together, on the big projects as well. Some of the big ticket stuff we were talking about earlier; it would be very rare for the banks to do everything on their own.

Wall Morris: I believe the story is not just about the end of last year, but in fact goes back three years to when the effects of the global financial crisis were felt in this market at the end of 2008.

Before then it was relatively easy to get finance and it was also cheap. When the impact of the financial crisis was originally felt, access to finance became increasingly difficult and what was available was very expensive.

Traders however don’t stop; their businesses don’t stop. They survive on continuous trade flows and in order to thrive they have to find new ways of doing business.

We have been told that credit lines were and are still available from the traditional financial institutions, however the cost and access to these lines of credit became increasingly difficult and cumbersome, and compliance issues are very high.

Market participants have told us that they have maintained some core vanilla business with the banks, but given the rigidity and time needed to utilise these lines, they have applied either their own capital or alternative financing methods to benefit from the incredible opportunities that have arisen due to the volatility in pricing. The requirement for speed and ability to be nimble is paramount to be able to capitalise on these opportunities.

I believe that there is a huge market that a lot of traditional banks are missing because they are just unable to service this market due to the constraints of their business.

Bhandari: Being a bank client now myself with my own group of nine companies, I can see that the banks are holding back.

Further, as a private equity investor I find that mid-sized companies look to us for assistance more than they did earlier for their growth plans. This is obviously because banks are not forthcoming.

As a result of the banks currently holding back, the search for alternative means of bank finance has made our pipeline for equity/convertible debt/investments (even to assist trade finance) very healthy.

The point I am making is that alternative financing options have grown as a result perhaps of the recent economic situation and these sources have risen to the occasion – I must say to my advantage.

Alzarka: As previously mentioned, the crisis has been a great opportunity for us. Any corporate has only a limited amount of equity, and trading companies have even less, so they have to find alternative sources of money.

The pitch is very easy for me: “Yes I am very expensive but your options are limited if you want to grow your business,” and none these options are cheap.
A lot of the businesses we are talking to get their funding at Libor plus 100 to 200 basis points. We are talking about some very large corporates, not small ones
They are accepting to pay Falcon a much bigger margin for transactions they find difficult to fund through traditional channels.

We are currently working on the issuance of our first bond in 2012 with a very large European institution. Funding again is key so if you can do that it is a great business to be in. We think we can increase our book by 50% in 2012, so we expect our book to be nearly US$1.8bn by the end of this year.

Raza: This kind of development is potentially a concern for global banks. It is essential for the larger banks to not be complacent about those with capacity to do more work. It is great that new and interesting solutions come into the market, but I think the historical big players should be up to speed.

Alzarka: I think there is a gap in the mid-market due to local banks pulling their lines on some very decent corporates. The JP Morgans of this world do not cater for these clients. These companies still have businesses they need to fund, and we are talking about very decent corporates; nothing average.

Taha: Banks are becoming much more careful about what kind of business they are involved in and they are looking for acceptable risks. This trend is reflected in the sudden popularity of ICIEC’s products. Three years ago there was very little interest and now our insurance policies are selling like hot cakes, where we insure the confirming banks against the risk of an issuing bank based in some of the African countries or Asian countries like Pakistan, for example.

This enables banks in Dubai or in Saudi Arabia to be able on the one hand to accept letters of credit coming from countries that normally they do not, or if the country and issuing bank is acceptable, they may have limits they can’t exceed and this insurance policy would help them.

Out of US$3.2bn of insurance we did in 2011, almost US$1bn was under the documentary credit insurance policy.

We have a very big exposure to Sudan; currently our biggest exposure in any country is in Sudan. Again, this is now a country that is becoming very popular with exporters from the Gulf and from outside; from Egypt and Tunisia.

We did a very interesting transaction where a Tunisian-listed company won a contract in one of the central African countries, and the insurance came from the local Tunisian export credit agency (ECA). We brought with us two other multilateral insurers, Arab Investment Guarantee Corporation and the African Trade Insurance Agency (ATI) in Nairobi and this shows the role that the multilaterals and ECAs can play because of the special relationship we have with other countries.

We brought ATI in because we cannot have a banking relationship with so many African countries, ATI has that relationship.

Alzarka: I think the success of ICIEC or IFC or other programmes is due to the problems that European banks are facing. They have capital issues, so they still need to do the trade but would like the capital relief. As an example, the IFC provides an AAA guarantee so this is a huge capital relief for those banks.


Raza: Where do you see pricing sit in the market?

Evans: I would say that pricing in this part of the world has not gone up in line with the increased risk and the effect on liquidity issues on banks.

What we have found is that banks have been jettisoning assets, and the easiest asset to get rid of is trade assets, on the basis that they are short-term assets and there remains a demand for them in the secondary market. As an asset class, it has far less write-offs over the duration of the credit cycle than we have seen in other asset classes, and it is for this reason it is easier for banks to dispose of these assets rather than longer tenored ones.

The reason that trade is being hit hard now is because it has been easier for certain banks in western Europe to get out of those short-term asset classes.
I can honestly say that in our institution, we are very much committed to assisting and helping develop global trade finance.

At present we do not have any limitations on adding quality trade assets to our balance sheet and remain focused on further developing this asset class. We consider trade to be a countercyclical business and it is also a risk-mitigation business whose demand increases during times of uncertainty. You will see more banks with appetite doing more trade, but we just happen to be at that stage where banks are suddenly moving out, especially Western European banks, for regulatory and capital reasons. However, I believe that in the medium term we will see a small amount of liquidity starting to come back to the trade finance market as it is far better for banks to be involved in trade finance as an asset class rather than medium or long-term finance, which are presently more capital intensive.

Alzarka: I think a lot of banks are hanging on to or getting into this business because it is a very safe business. It is countercyclical and they like it because trade finance is a back-to-basics form of financing. On the other side, banks which are having problems are trying to sell some of those assets as they are well performing and they don’t have to sell them at distress price. The proof is the recent sale by BNP Paribas to Wells Fargo that went even at a premium.

Taha: Asif, to go back to your question on whether business has been increasing; ICIEC has experienced a huge increase in business in 2011.

Our insurance business increased by 60% from US$2bn to US$3.2bn. There are many factors in that. The demand has been increasing because, since the financial crisis, there is definitely much greater awareness among exporters and banks of the need to have such security.

Banks in Arab Spring countries that in the past had little need to insure, now want to cover themselves with insurance.

On the supply side, we have been trying to be more responsive to demand and to introduce new products. In addition to the documentary credit insurance policy, we introduced a policy on non-honouring of sovereign obligations last year. This is for banks who are lending to sovereign entities and want security against default.

I will give an example; this is the case of an infrastructure project in a Gulf country. The finance is coming from an international bank in Asia. It has a guarantee from the ministry of finance and it has a 15-year tenor. This policy insures the risk of the ministry of finance of that country not honouring its obligations – it is very straightforward, specific insurance.


Raza: Tim, we talk about supply chain finance. What have you seen in the last 12 months in that space?

Evans: There is more interest from customers as institutions in the region continue to become more sophisticated and start to follow models that are in place in the Europe, or the Far East.

Today there is more difficulty in getting financing so structured lines are more common place.

You can get a price premium by having something structured. They now want to enter into a dialogue whereas before it was, “I have a working capital facility and I do not need to have a structured line”.

In the past, credit was so freely available, no one wanted to get involved in the hassle of structuring a deal. But now people are looking at receivable financing solutions as a means to obtain working capital finance.


Raza: Do you think the banking community should do more to educate the market about supply chain finance?

Sankaran: There is a definite need to educate the customers and raise the awareness levels on supply chain finance, which has many different stages starting
with pre-shipment, where banks could provide financing and risk mitigation.

With open account being 80% of world trade and growing, supply chain finance opportunities are plenty.

Evans: I think that banks have always set out to be the trusted advisor of customers but I think that is very much the case that you have to understand the customer’s business issues and understand the risks that he runs and only in so doing are we able to propose a solution that is in their best interests. Customers like a bank that is a thought leader and recommends solutions to them.

Robinson: If you have people talking to customers and not really understanding the products they are talking about, then you are not going to become a trusted advisor to them. You have to make sure the people you have within the bank understand the product.

We’ve seen a big take up in supply chain finance, particularly supporting Asian/Middle East trade flows. We believe we have been successful because we have the correct experienced staff in place to ensure our clients are fully aware of all the latest developments in this field.


Raza: On the risk distribution side, are you seeing an increase in demand for trade credit insurance?

Alzarka: If you are region-focused, credit insurance will cost you dearly. If you have a very large book that covers a wide spread of industries, corporates and regions it allows you to negotiate much better pricing with your credit insurers.

The wider the spread, the better you can negotiate with your insurer on the larger book. On the issuing side, if you are issuing a bond on the back of this business, it is easier for any investor to look at a wider-spread book.

I think diversity is the key word to keep your pricing at sensible levels.

Sankaran: I think there is a great need to bring in more corporate coverage, especially in the GCC and the wider region. Domestic factoring dominates in UAE and many other countries. As the SME sector matures, we expect more and more companies to be rated and covered by credit insurance.

The credit insurers also need to come out of their post-crisis shock and start providing coverage as normal.

Alzarka: The key issue is not accessing the insurance market; it is rather can you get funding for it? We are working hard with our partners to achieve Basel III-compliant structures; where insurance is no longer just a risk mitigant, but acts as collateral for the bank funding it. That should materialise by a lighter capital allocation and hopefully a better pricing.


Raza: Is it fair to say that trade credit insurance remains limited for taking corporate risk?

Taha: There is still a lot that we have to do. The quality of the credit information in this region is relatively poor. We depend heavily on the experience of the supplier or the policyholder of this particular buyer.


Raza: In our region, government spending is very high. There will be a lot of projects that will be coming up and the need for long-term ECA-related financing transaction in the Mena region will be large. How do you see the outlook of ECA-related transactions in the region?

Robinson: What you see in the press is there are always new projects coming out. I think you will find they are all going to be reaching out to work with the banks for more long-term financings.

Large institutions are going to have to work together with ECAs due to the amount of projects in the pipeline.

Alzarka: Banks are shrinking their balance sheet, but with ECA cover, being AA or even AAA, I see the new business model being banks originating and structuring those deals and then selling those down to institutional investors hungry for good long-dated assets. I see this as a major trend in the future.

Patterson: It is not just the ECAs we should focus on. We have a whole new entrant into this game, which is the European Bank for Reconstruction and Development (EBRD).

This is an institution that has never previously dealt with the Mena region and now suddenly has a remit to provide financing, including trade facilitation programmes, with Egypt and Tunisia and, in all likelihood, Libya at some appropriate future date.