GTR MENA EDITORIAL BOARD ROUNDTABLE

Transcription

1 GTR MENA EDITORIAL BOARD ROUNDTABLE GTR Mena s editorial board gathered in Dubai to discuss how trade in the region is evolving and how banks are tailoring their business to match this. Bhandari: What has the last year been like, and in which way do you think trade in the region is moving? Fairie: From where we sit at the DMCC, we had a very strong We have grown to be the biggest free zone in the UAE. Somewhere in the region of 200-plus companies a month are registering with us and we now have over 8,000 licenced companies in total. Recently we have gone through a rebranding exercise to reflect that in addition to our historic focus on commodities, the free zone is now home to companies from many diverse sectors of trade. Purely on a numbers basis, however, there has been no drop-off in the number of people coming into the country and setting up businesses. Bhandari: Are businesses coming here for crossborder trade? Are they looking at the domestic market? Are they looking only at the GCC? Fairie: We are beginning to see more international companies coming here. At the DMCC, 95% of companies are new to Dubai and looking to benefit from the advanced logistics hub it is and the easy access to the ports and airports. In 2013 we announced that we are expanding the free zone to accommodate more multinationals that have expressed a strong interest in relocating here. Bhandari: Is this growth going to be here to stay? Yu: We have definitely seen a continuous trend of growth. There are two drivers. Firstly, we see very strong growth driven by local demand for the next five to 10 years, mainly from some of the largest countries in this region, for example, infrastructure development, development in the energy and resource sector, and the development of the non-oil economy. This will attract more trade and investment inflows into the region and we will see more MNCs expansion in this region. On the other hand, we will see growth driven by the demand from the other parts of the world which will fuel strong trade and investment outflows from Mena to Asia and the rest of Africa, Europe and America. Bhandari: Are you saying that the inflow is going to be larger than the outflow? I am talking about the import to export ratio. Yu: There are strong drivers on both sides, so there will be a good balance. If you look at the past 18 2 GLOBAL TRADE REVIEW

2 ROUNDTABLE PARTICIPANTS Maninder Bhandari (chair), director, the Derby Group, director, the Encore Group, acting head, Noor Trade 8 Baihas Baghdadi, head of trade and working capital, international, Barclays 7 Thomas Holmes, political risk and trade credit broking specialist, Miller 2 Lloyd Caughey, former head of transaction service origination, MEA, RBS 10 Kamel Alzarka, chairman, Falcon Trade Corporation 1 Andrew Fairie, manager, Tradeflow, DMCC 6 Faraz Haider, trade head, managing director, Middle East, Pakistan & Turkey, Citi 5 Tim Evans, regional head of global trade and receivables finance, Mena, HSBC 3 Hailiang Yu, global head of product management, GTB, NBAD 4 Murali Subramanian, EVP and transaction banking head, ADCB months, the demand in this region is probably one of the strongest in the world. There will definitely be a continuous strong push for inflow. On the other hand, there is also a strong demand for Mena s exports from the rest of the world, especially Asia. There is also a very big re-exporting centre here. So you will see very large outflows from and through here as well. Subramanian: There is a nuance I would like to add. Firstly, free zones have been a success in the UAE unlike many other examples even in the region. Secondly, the UAE especially has been focused on value addition, as opposed to just entrepot trade, which one could find in other centres. That means the emergence of an SME and mid-market segment. The story of this region, especially the UAE, is it has a very vibrant SME and mid-market customer segment. That is underpinning the import and export flows. The supply chains are long; they reach out to every country in the world. There is very little intra-uae trade happening, in comparison to the international trade of the UAE. There is greater intra-gcc trade, but even that pales in comparison to what is going on with China, India, the US, Germany and the UAE. Therefore, it is SME and mid-market, and the question of which way it is going is contingent upon what is happening in terms of their trading patterns. Are they getting enough financing? Are they getting enough supply chain trust from their partners to be able to do open account business with the occasional funding need? Are structures, as in most financing, available? Are insurance covers available for difficult countries? Those questions all have to be answered, and we are seeing mixed answers to them. THE UAE ESPECIALLY HAS BEEN FOCUSED ON VALUE ADDITION, AS OPPOSED TO JUST ENTREPOT TRADE. Murali Subramanian, ADCB Bhandari: You raise a very interesting question when you say the equivalent of: Is enough juice available in the entire chain to supplement the growth that everybody is talking about? We have people with international footprints out here, with an inbound perspective. Are people outside of the UAE or the GCC or the Middle East with a footprint elsewhere Europe, for instance assisting in this cause and providing assistance, or are you very local-centric? Evans: Coming back to the earlier question, which was on exponential growth, I think you are only seeing it for certain countries in the Middle East but not all. It is a story of the haves and have-nots. If you have oil and a budget surplus, you are probably doing relatively well: Saudi Arabia, Qatar, UAE, and Oman, to a lesser degree. If you do not have oil and you do not have a budget surplus Egypt, Jordan and Lebanon plus you have political instability around you, whether it is Libya or Syria, then those markets are genuinely struggling. When we look at the Middle East, it is very difficult to say: The Middle East is doing well. Absolutely GTR MENA SUPPLEMENT

3 the UAE is doing well. The announcement of Expo 2020 is a fortunate shot in the arm that will have a positive impact. We are seeing trade flows very much now being driven by infrastructure and demographic growth. They are the key drivers, and then in the UAE, and especially Dubai, the economy is being propelled by hospitality, retail, trade, transport and tourism. Bhandari: Would you say that is more infrastructure-related or consumption-related? Evans: For Dubai, it is consumption-related, but for Saudi Arabia, Kuwait and Qatar it is more infrastructure-related. We are seeing in Qatar that, as with the announcement of Expo 2020 here in Dubai, project sponsors are appearing to say: Well, maybe we need to hurry up, because there are a lot of projects. If we do not progress them quickly, then maybe all the contractors will be busy in Dubai and less will have the capacity to do work here. You have the knock-on effect from that. Bhandari: Kamel do you find they are willing to take these larger exposures with a time horizon that might be longer than seven to 10 years? Alzarka: To add to what my colleagues said earlier, trade is growing. It has been barely dented globally by the crisis. Yes, there are jeopardising issues in the region, but it reinforces Dubai s place as the hub for the region, and that is not going to change anytime soon. Iran has not yet opened. We are maybe seeing the end of the tunnel. It may happen in the next two or three years, and that is certainly not going to diminish the role of Dubai as a hub. The African market is not going to shrink anytime soon. It is becoming a significant market even for the multinationals, and they are using Dubai as a hub for that. The SME sector is flourishing. That is all creating huge demand for trade finance. There is definitely a lack of capacity worldwide. Multinational banks are shrinking their balance sheets because of regulation, because they want to be smaller, because of capital issues because of all sorts of issues They are shrinking, so obviously all the local banks are stepping in and taking part of that. We are talking about a multi-trillion dollar need here, and everybody major banks, local banks and smaller guys like us is trying to come up with alternative solutions to be able to fill this gap and fund the solution. We are seeing a securitisation programme done on trade finance. All sorts of things are happening. Our success in the past seven or eight years, going from US$300mn to US$2.5bn, is proof there is a need for what we are doing. The SME sector, as you rightly said, is underbanked. If you are a Huawei or a BP or whatever it is, it is very easy to get everything you want. However, that is not the case if you are in a smaller sector, and in this part of the world there are a lot of SMEs. There is a lack of capacity, and there is a huge need for funding. It has to come from somewhere. That is what we are trying to emphasise. WE ARE SEEING TRADE FLOWS VERY MUCH NOW BEING DRIVEN BY INFRASTRUCTURE AND DEMOGRAPHIC GROWTH. Tim Evans, HSBC Haider: Some of the countries are troubled right now, but most of the banks have a presence here. They know the market; they know the businesses. Iraq, Libya or Syria would probably be difficult to do business with, but most of us have well-entrenched businesses in Egypt, Tunisia or Morocco. We understand the market; we understand the size of the market and its growth potential. However, it is expected to remain this way, to our understanding, for some time. Then there are the GCC oil haves and have-nots. We also look at it like that, in terms of where the growth is going to come from. Most of the markets are fairly basic in terms of their financial needs. But things are beginning to change. Clients want to generate more liquidity from their working capital cycles. They know there are tools available in the market and banks are offering them. They are looking at them. For a typical letter of credittype business, first of all you are seeing the strength of letters of credit, but people are moving more towards open account. Whoever is doing business with letters of credit is now trying to find solutions around these to finance those flows. It is a secure flow; everybody gets very comfortable around LCs. And here I am not talking about discounting. Everybody discounts. We have other buyer credit solutions to offer too. As flows are moving away from letters of credit towards open account, avalisation-based options have increased. Developed markets governments have stepped in to support SMEs through supply chain structures by injecting liquidity, giving them cheaper liquidity, and extending the loan payment terms. It is a win-win situation. We are seeing the same trend emerging here as well. 4 GLOBAL TRADE REVIEW

4 Caughey: If you look at the UAE market, we have seen increased competition, especially on the manufacturing side and exports. A couple of these corporates have said they have become price takers, and cost is the most important thing right now. They need to keep their costs down, which has been pushing margins down within the UAE as well. There is growth in the re-export market. From what we have seen of the local market, exports are growing at a healthy rate, but the competition is fierce. Bhandari: What non-traditional products and offerings would help trade finance flows from both the institutional side as well as from the side of the importer or exporter? What would lead to better or cheaper trade flows? As for risk coverage, what do we look for the insurers to assist us with? Baghdadi: I have a very interesting chart in front on me about cross-border international business. This study comes from Factors Chain International. When you look at the growth in the cross-border receivables finance business market, between 2010 and 2012, there was 26% growth in the UK. In the UAE, it was 100%. This is an interesting statistic, and this was done on open terms, which means that, solutions-wise, I believe there will be a trend in the market that will see banks developing more international receivables finance solutions. When it comes to international companies, for us it is clear that we need to have solutions that meet their expectations, and let me just give you a couple of statistics. In the past two decades, the US share of market flows into the GCC countries was 15%, while China s was 2%. If you look at volumes today, that has come down to less than 0.5%, and China s share has risen to 6% or 7%. Countries like India or Japan now have the same market share as the US. To follow up on your question, in September 2012 an agreement was signed between the GCC and the US to improve their trade flows relationship. The Americans have woken up from a long nap, and they have decided to recover their market share in the region. My belief is that this will change the requirements in terms of the global corporates. The American companies are coming back to this region to regain market share, to bring it up from 6% to the 15% or 20%. It will be an interesting move in terms of product requirements. I am sure that cross-border receivables finance is going to be the future focus for all of us as banks and non-bank financial institutions. Believe it or not, that market will impose on us, as financial institutions in the region, to change our mindset. Holmes: The insurance market has grown quite substantially in this region. You have successful multilaterals in the region. You have ICIEC, which is based in Jeddah but has an office here; you have Dhaman, which is based in Kuwait but, again, is quite active. Dhaman was originally inter-arab, as opposed to ICIEC, which is part of the IDB. You have a good spread of multilaterals here. You also have the ECIE, which is the local export credit agency. You have private markets opening up here, as well as access back into probably 30-plus markets in London, should you want it, Paris or Singapore. It is fair to say we are considered to be takers of high risk, but realistically insurance is best when it is an enabler: something that enables you to do more business. The intention is that, if you were to say: I have an appetite for x but really I have the ability to do y, they can come in as non-competitive threat. Syndication can open up your competitors potentially, whereas insurance can sit behind in a more silent form something that you can use to do more. CORPORATES HAVE SAID THEY HAVE BECOME PRICE TAKERS, AND COST IS THE MOST IMPORTANT THING RIGHT NOW. Lloyd Caughey, RBS We obviously have insurers and also people who come to the market who only come for the most high risk things. The reality is that we think we understand those people as well. If I look at the difficult countries, Libya is complicated, but if you bring the right story, insurers will certainly listen to it. Some of them will be closed in some of those countries, but, at the same time, if you have a reason why you are willing to do it, you might find they have a reason to follow you. If I look at Egypt, people are covering letters of credit there; they are insuring those letters of credit. There is less open account at the moment. We have been aware of situations where EGPC has been a little slow in paying. That has an effect on what people are willing to do. However, we also follow other people. To a certain extent, the big commodity traders are not supplying EGPC on open account terms currently. They rowed back to letters of credit. If you really look at it, they will inevitably and eventually get back to open account, assuming that Egypt continues to improve. GTR MENA SUPPLEMENT

5 Caughey: Are you insuring on the dollars on the fact that they will have dollar availability? That is the big issue. Holmes: It depends on what the underlying transaction is. You are looking at the exchange transfer risk the ability to get dollars out. That is an insurable risk, but it does not necessarily mean that people are willing to insure in Egypt. Obviously, they are looking at foreign exchange. In Sudan, it depends on the OFAC restrictions on the insurer themselves, as some of them are governed by OFAC as to whether they can cover that. That has been a covered risk for a multitude of years; however, Sudan is reaching a more difficult phase. For most people, that would be considered extremely high risk, and there are probably a number of banks around this table that simply would not be willing to do Sudan. I think it is becoming even more difficult than before, and it was always difficult. Insurance is there. You have some very good people in the region. You have good people outside the region. It is more a question of your appetite for using ASSUMING SANCTIONS AND LEGALITY PERMIT, WE WOULD BE RIGHT THERE [IN IRAN]. Thomas Holmes, Miller insurance and your comfort with the product. We find that the more you use it, the more you get comfortable with it. Unfortunately or fortunately there are not that many claims, and so the proof of the product does not happen often enough. In a sense, it does not get proved regularly enough. Bhandari: If I put you on the spot for a moment; but if Iran was to open up? Holmes: Assuming sanctions and legality permit, we would be right there. I cannot speak for every insurance company in the world, and some of them will be governed by OFAC, and obviously we have to follow sanctions quite carefully, but pre-ofac coming into play, Iran was a big part of people s risk appetite. Bhandari: In the UAE itself, insurance firms who are insuring receivables and performance risk went into fifth gear and then suddenly into first after taking some hits. They were not extensive hits; it was a limited number, but they happened. However, suddenly it slowed down. Holmes: It is fair to say it would probably be the same if you took a load of hits. The reality is that, if you are losing money, you would probably look to be a bit more careful. All I would say is that each insurance company operates differently. They have to be prudent with what they do. I think that is only sensible, but it is simply not the case that they do not pay a claim, walk away and say: We do not do this insurance business anymore. Basel II and then Basel III enabled the product to become a lot more payable. People have refined the product and used the product more and found it works. Obviously, those who find it works use it more and embed it in their culture. Alzarka: I think those insurance policies are still capital unfriendly. We do not fund our receivable book through the banking system anymore, because it is very inefficient. Holmes: We cannot change the unfunded nature of it, but advanced banks under Basel III are able to substitute the insurance product. They are able to substitute their credit rating against the counterparty s credit rating for the percentage that they insure. That is fact. Haider: By and large, in this case the insurance has remained untested as far as the conventional trade flows are concerned. That can make banks a bit less comfortable. These are documentation-heavy, untested structures and on top of that there is a waiting period, which again adds a bit of more uncertainty. Short-term flows is what we are focusing on here, right? Open it up. For a large part of the flows, the supplier is of SME profile selling to public sector or ministries. Everybody would love to have insurance there, because receivable ministries would always see delays. There is no undertaking or irrevocability from the buyer s side. And mind you there aren t any major credit concerns; it is just how the approval process works and that has to happen before the pay. The 6 GLOBAL TRADE REVIEW

6 commercial contract says 180 days; it can take much longer than that to pay. The mid-market supplier here is suffering. His cashflow has gone out of the window. That is where we would like insurance to help address their delayed receivable issues and these big public sector buyers to come in and improve the situation. At the end of the day, the public sector is a dominant player in this part of the world. Holmes: I do not understand how insurance could improve late payment. Baghdadi: I think you have touched on the right point. The heaviest is the documentation; the more complex is the conversation we would have with our THAT IS PROBABLY WHY THE INTERNATIONAL BANKS ARE RELUCTANT TO USE INSURANCE AS ONE OF THEIR MITIGATIONS: WE HAVE TO GO FOR REALLY BIG DEALS. Baihas Baghdadi, Barclays credit teams internally. We have four international banks around this table. That is probably why the international banks are reluctant to use insurance as one of their mitigations: we have to go for really big deals. Otherwise, the investment will be high in terms of cost by having our teams review the documentation and getting international credit on board. Broadly, the four banks tell me if I am mistaken go in that direction when there is a sizeable deal that justifies the investment in time and the returns on investment are attractive. Subramanian: To Faraz s comment about untested insurance products in this region, this region is 95% SME and MME. The cost an insurance policy incurs for an SME or MME is turnover cost. Depending on the market, it is 1 to 4%. That is a very real ongoing cost. Then there is the waiting period; SMEs and MMEs fund their working cycles at a much higher cost than corporates with large money centre pool access with banks overdraft lines and so on. There is the cost of funding the claim period, and then of course the conditionality of the claim itself. Insurance remains a very niche product. It remains poorly understood. It is not even seen as a trading risk mitigant. Documented credits or guarantees, standby LCs or any other form of bank surrogate risk defeasance are seen as the only acceptable trading risk mitigant. In favour of insurance, however, it has helped banks access difficult markets. To Tom s point earlier, it is an enabler. In Yemen, for instance, there would not be enough aggregate bank limits to do some of the large capex transactions. If you put all the banks together and add up all their Yemen limits, you could not even do three-quarters of large capex transactions. That is typically the place where insurance excels. You cannot do it any other way. Insurance has its niche. It is not yet a popular SME and MME product. I think that should be well understood. Evans: We have talked a lot about the insurance on the SME and MME side of things, but I think it is also an enabler at the top end of the corporate spectrum. We see a significant number of large corporates using credit risk insurance as a way of de-risking their balance sheets. They use it as a without-recourse or limited-recourse structure. Effectively, from an accounting perspective, it is the sale of the receivable to the bank on a limited recourse basis which enables the corporate to effectively convert the receivable to cash on their balance sheet and not be classified as debt, thereby improving the balance sheet structure. We see this as a very big growth area in the region, and is an enabler because it allows these large corporates to potentially sell more while maintaining appropriate risk parameters. When there is a crash-test scenario, I understand you may have to go through a protracted claim process, but there is a recognition from treasurers and CFOs in this region now, that using this from a balance sheet management perspective is as beneficial as using receivables finance purely from a liquidity perspective, Holmes: It is an enhancement. At the same time, it can help you get into countries that you are not as comfortable with. We have other banks that say to us: Great; we have an appetite of x for this, but our customer will really appreciate if we come in with double x, and you can come in and help us on that side. There is an arbitrage as well. It is not as expensive as the margin you charge, because there is conditionality. I think it boils down to being an appetite thing. Does the bank believe in it institutionally, and does it want to have the processes in place to be able to run the fire when there is a fire? Between 12% and 15% of our people are claims specialists. They negotiate with the syndicates. If the number gets very big, everyone, I am afraid, takes a bit of time to pay, be it a bank or an insurance company. We believe in syndication. We spread the risk, assuming that is what the bank wants. Caughey: Turning around what you said earlier about receivables; what would sort this out and needs to be looked at is buyer-centric supply chain finance. That 8 GLOBAL TRADE REVIEW

7 then brings in automation, and allows you to assist that SME taking risk on the company with the cash. In the Middle East, that product needs to start being used more. If we want to see the trade business growing and local business flourish, that will help a lot. Baghdadi: I will be controversial on that. I am thinking about Europe. Do you believe that it would be easier to have any government go into supply chain and buyer-centric financing? When I look at that from the European perspective, where you have a mature market in terms of the supply chain everyone understands it and it is a commonly-used product I do not see the local governments using it. Even if we tried to push hard in that direction in Europe, it would not be successful. Why do you believe we could be more successful here? Caughey: I am convinced it will happen here. It is just a matter of when. The main reason it is going to happen is that the biggest benefit is administrative. You are doing this on a system-wide basis. If you look at the UAE, they tend to like anything that reduces the paperwork. GOVERNMENT ENTITIES IN THE UAE HAVE BEGUN TO LOOK AT SUPPLY CHAIN AS A TOOL. Faraz Haider, Citi Bhandari: Andrew, would you put your skin in the game and say: We will cover part of the risk, not just enhance the flow? Fairie: At DMCC we have focused on providing additional products and services that as you say, enhance the flow. Offering these trade enablers, such as Tradeflow for inventory financing, DMCC Tea Centre and the Dubai Diamond Exchange, allows us to play a part in the overall supply chain, but we do not involve ourselves in the insurance or financing aspects of our member companies. Bhandari: When you tell a company, Come to us; establish here, because we have got the reach. These are the flows. You should be looking at country x, y and z possibly as a business, you are advocating that with some degree of knowledge of what is going on there. You say: Do you know what? Whatever risk you take around those plans, as long as it ticks all the boxes, we will take 10% of. We are not going to finance it, but, as a last resort and not strictly an insurance we will help you. Caughey: The difference is it is automated. As a result, it will be paid accurately. I did not mean I would expect them to start financing their suppliers. It is more a case of formalising the actual arrangement, and then a bank stepping in and helping with that. Haider: I have a quick comment to your point. Government entities in the UAE have begun to look at supply chain by such models as a tool. One is automation and bringing in the efficiencies; the other is to support the SMEs by giving them early liquidity. There has been a lot of bureaucracy, but the fad is catching on. We are talking to a couple of them and taking this forward. Yu: I agree with Faraz and also share the enthusiasm Lloyd has for this market. Compared with North America and Europe, it is probably still a very early stage for certain supply chain finance transactions, such as buyer-led supplier finance. At this stage, the drivers for SCF growth in this market might be different from the mature markets where the participants will particularly benefit from improved funding rates based on credit arbitrage. Here, local market players are also very interested in an end-toend supply chain management solution which benefits them from operational and technology perspectives. So even when both parties of the transaction are large government-related entities (GREs), where no credit arbitrage exists, they might be interested in getting end-to-end supply chain management solutions through SCF transactions. This will increase the demand in local markets and support the future development of this type of transactions. Subramanian: On parastatals and government, especially in this country there is a very big drive towards efficiency. If anything, government here is driving paperless, electronic shared service centre behaviour rather than corporates, which is counterintuitive. However, it should be remembered these are all budget-funded organisations. Very few of them are commercially-funded. They do not go to the market to raise capital. They do not fund their payrolls out of collections. They have an annual budget allocation. That significantly changes the funding oversight that most corporate treasuries have. That is the underpinning that drives financing and financial efficiency. The reduction in decision time is not such a big priority in most governments. Those contract discussions can go on for years. Then they can pay in much longer timeframes. That is not because they are sloppy they have sharp people and processes but because the oversight of their use of budgets is enormous. There is a culture of multiple oversight before payments are released the larger the payment, the more so. However, the risk is a very good one; it is a solid risk in the end. 10 GLOBAL TRADE REVIEW

8 Bhandari: If you look at what is going on outside the VAR being raised here, I concur with Lloyd in terms of the efficiency that they are trying to bring into the entire process. I am not talking about the funding capability or the resultant delay that may happen part of the inefficiency. Are you indicating streamlining and transparency? Caughey: That is one driver. The other driver is purely demand and supply. We know the region is cash rich albeit we realised the SMEs do struggle with funding costs a lot more. It will make it worthwhile to go from large to small, not large to large, on the buyercentric target. Large to smaller is probably the way you would want to go. Bhandari: Going back to trade finance, Tim, are you seeing anything happening differently in terms of the receivables financing cycle? Evans: On the receivables finance portion, we do not do non-recourse on parastatals or any governmentrelated entities. We also cannot get credit insurance, and we work very closely with a credit insurer. To be honest, that helps with the documentation. We have a dedicated credit risk insurance that we visit customers with. We know each other s documentation; we have been through it a number of times. Negotiation then takes place with the customer. That is a different discussion. Absolutely, in the large corporate space, you find they try to extend terms constantly, because the MME on the other side is trying to tie it down. That is where banks can step in and provide the funding to both, especially when there is a credit disparity between the two. That is still relatively new to the market, and it is an education sale here as much as anything else. Multinational treasurers understand it; it is still relatively new to middle market treasurers. There is an opportunity for banks to step in and provide that liquidity. Firstly, the large corporate can sell more, because he offers extended credit, and the other entity will buy more. The other entity will benefit with the interest rate arbitrage. That is where the bank has to step in and work with both. Bhandari: In 2003 to 2005, factoring was a word that was taken poorly: people did not take very kindly to having receivables assigned. Is it a different story today? Evans: It is definitely a different story today, and I think banks have to help in the educational learning curve. Factoring on a disclosed basis had a negative or pejorative connotation: You are a weak risk. And therefore I need to mitigate that risk. It is now much more acceptable, as people sell more and more on an open account basis because they do not want to deal with all the documentary costs associated with letters of credit, avalised bills or collection documents. I do not think it has quite the same level of market receptivity here as it has in Europe and North America IN THE MIDDLE EAST RECEIVABLES FINANCE BY ITSELF HAS A GOOD CONNOTATION AS LONG AS YOU ARE NOT ASKING TO BE DISCLOSED TO THE BUYER. Baihas Baghdadi, Barclays yet, but we are getting there I think having rebranded that proposition as receivables finance sounds much softer than factoring. Baghdadi: There is an angle here. In this part of the world, they started using factoring as a general product terminology, while factoring in Europe is about selling the entire portfolio. When I started covering the Middle East, people started talking to me about factoring. In my mind, in Europe factoring means selling all debtors to the bank to manage all the receivables cycle. We had to rebrand it as receivables finance because we wanted to make a clear distinction between them. In the Middle East receivables finance by itself has a good connotation as long as you are not asking to be disclosed to the buyer. The moment you start asking about disclosure, the seller might say: Hey, wait a minute; I do not want to disclose that I am selling my debts onto my client. There is a learning curve. We need to help both buyers and sellers to get comfortable with it. There is nothing bad about selling your portfolio, or on a selective basis, because ultimately a lack of working capital might make a strong, liquid company fail in their attempt to grow. Bhandari: From an institutional perspective, what would the financial institutions here do differently to make it one of the primary leaders in terms of working capital finance? It is already an acceptable product, but it is not really there. Baghdadi: I would say the job of creating that environment is one for the international banks. We have a unique selling point in being able to tell the stories of very big European companies selling on their receivables. 12 GLOBAL TRADE REVIEW

9 Evans: Apart from education, we, as banks, have an obligation to make the process simple. If you are a corporate, it is much easier to have a revolving credit facility or an overdraft. Now we are suddenly saying we are going to go through your receivables book and do all this analysis and then get the insurance company involved. We have to streamline this process. Companies say: Yes, absolutely, sounds great. We say: Right; this can take up to two months of due diligence, and they say: What? They also expect a cost of funding benefit over what they pay for their more simple revolving credit. That is not always the case, because right now the bank s balance sheet treatment does not sufficiently differentiate between the two forms of lending unstructured versus structured. However, this is an area where we, as banks, have to make it: we have to educate the customer and also make the process a little simpler. Haider: In the process, we can give them some pricing GOVERNMENT HERE IS DRIVING PAPERLESS, ELECTRONIC SHARED SERVICE CENTRE BEHAVIOUR RATHER THAN CORPORATES. Murali Subramanian, ADCB benefits as well. Once we start moving from Basel II to Basel III, those pricing benefits will become more prominent and ways can be looked into to share them around a bit. We have not gone to that extent in this part of the world in terms of predictability, but cashflow is an imminent need here, especially given that bank lending tenors are getting stretched. In certain sectors, receivables now date beyond a year, and they are trading. Certain banks do not deal with anything beyond one year by definition, but these are industries that we have been supporting and 180-day kind of tenors. But now they are going into two years and three years. They are going into difficult markets. The suppliers are becoming very aggressive, and they want these receivables financed and associated risks mitigated. It is a challenge. That is where this part of the world is moving. Yu: For receivables finance, we are seeing two main challenges. One is the education efforts we need to put in the local market as mentioned by my colleagues earlier. The other challenge is the limited options of receivable finance for transactions conducted under GCC laws. For example, to avoid potential legal risks, there might be requirements on the notification and acknowledgement of an assignment. This will restrict banks capability to provide receivable finance on an undisclosed basis and without recourse to the buyer. The demand in different market segments will vary. First we will start to see some increasing demand for receivable finance from the MNCs who have been doing similar types of transactions in their international operations. And for those large local corporates who have international operations and the appetite to conduct transactions under English law I think the demand for receivable finance will start to ramp up as well, as it will be easier for banks to provide receivable finance on an undisclosed or non-resource basis. However, for the local corporates, whose transactions are mainly under GCC laws, banks will have to work out more innovative solutions to be able to offer receivable finance and will certainly require some risk appetite and leverage some risk mitigation solutions. There is a long way to go, and you will see a lot of differentiation in this market. Bhandari: Kamel, you are on both sides of this whole equation. Do you guys understand it better, or is it higher risk that is coming to you? Alzarka: Some of the companies that are coming to us are publicly-listed with a US$1bn market cap, and obviously some are SMEs as well. We have an appetite for SMEs, and we are trying to make it simple for them. Dealing with insurance and receivables and funding becomes quite complicated. The large banks do not necessarily have the appetite to do that for them, because they are maybe focusing on MNCs, and they have their own issues as well with regulation, Basel, etc. Some other people were not getting it; Mubadala GE, as you know, just closed shop here recently. They were a major competitor and we are taking over a lot of their clients. There are other issues as well where large corporates want to sell their receivables and want to have 100% financing for it because there is, I agree with you, very good risk, and there are very good returns with it, and because they have an accounting issue with GAAP in the US and they want to have full recognition of the sale, and even 95% financing is not going to do it for them; they want predictability. There are always small things like that where we try to differentiate ourselves to make it worthwhile even for the big guys. For all those big guys we are dealing with, people have the perception that we are going down the ladder on the risk scale. Actually, we are going up the ladder on risk, 14 GLOBAL TRADE REVIEW

10 but we are trying to differentiate ourselves by doing those kinds of things. All the big bad guys are dealing with Citi and HSBC and so on for 95% of their needs, but there are always small offerings that they are not 100% engaged for, and we try to differentiate ourselves and do this for them. Bhandari: What does 2014 hold and what issues should the institutions, your own company or the market, be looking to take care of or negotiate? Fairie: Trade will continue to grow. As mentioned earlier, DMCC has announced plans to expand the free zone in order to accommodate the numbers of new companies that are registering with us. Also, we have heard much today on SMEs and how they are the backbone of the economy, especially here in Dubai. At DMCC we see that first-hand and are continuing DMCC PLANS TO EXPAND THE FREE ZONE IN ORDER TO ACCOMMODATE THE NEW COMPANIES THAT ARE REGISTERING WITH US. Andrew Fairie, DMCC to look at ways in which we can help our members succeed and in doing so contribute to Dubai s GDP. For our members that have commodities stored in the UAE we will be looking to the local and international banks this coming year to further utilise our DMCC Tradeflow platform to provide collateralised inventory finance structures. Subramanian: Of course, from the banking point of view on SMEs, I would not call successful SME banking anything near exotic; it is very predictable. The most predictable aspect of it is that newly set-up ventures with no credit history are not bankable at commercial banks. SMEs as a subject are always in discussion, but we are saying that we need a different category of investors: angel investors, venture capital funds, development institutions the Sheikh Khalifa Fund, for instance. They are present in several developed markets. We need more of those to support less-than-bankable companies to reach that stage. What you find when they reach that stage is somewhat counterintuitive. There is often a cash surplus, because they are run by very sharp entrepreneurs. They do not look at borrowing large amounts of money from banks at expensive costs. Most SMEs that are doing well do not borrow much. They optimise their working capital very well. They mostly rely on unfunded trade, so the SME gap that everyone talks about is in that start-up stage, which is not a commercial banking space in the first place. Evans: We perceive that trade will continue to grow. All the indications are that in a normalised economic environment trade tends to grow more quickly than GDP. It also fundamental that banks are now getting back to financing real products being sold to real people, impacting the real economy as opposed to some of the mortgage lending that took place six years ago. It is very good that many banks have gone back to basics. Supporting trade is of genuine and real benefit to the real economy. I also think the word trade is a bit of a misnomer. We have talked about receivables finance, we have talked about commodity finance, insurance etc. I like the description on one of the name cards here which says trade and working capital, which resonates much more with what customers look at. We as bankers tend to say trade when we mean the entire working capital cycle, whereas corporates associate this with purely import and export LCs. We as banks have an obligation to finance the whole working capital cycle the cash conversion cycle. We have to provide the products throughout the cash conversion cycle that companies need from a risk mitigation, liquidity and balance sheet management perspective, because ultimately global trade will help pull the world out of this current economic malaise. All of us have a job to help fund this process. Yu: One key highlight in the Mena market is the continuously growing flows between the region and its Asian trade partners, especially India and China. I have seen a huge potential for further growth of its flows with these top two partners, but it will take a lot of efforts from all parties to realise it. For example, if we look at the trade flows between UAE and China, so far the rapid growth is mainly driven by transactions outside the energy and resource sectors. There are currently not enough energy-led trade flows which could bring the growth to the next level. Also, the two-way investments between them haven t taken off, which could also enormously fuel the trade growth. These are dependent on various market, economic and currency factors and will also require continuous efforts from relevant governments and also from banks and commercial entities operating in the corridor. Haider: From a trade perspective, 2014 looks promising right now, but we cannot forget the volatility around this region. Anything can go wrong very quickly here. That is a risk this region still runs. Secondly, a lot of the growth here is related to the cheap liquidity available. Our view is it should not remain cheap. It will start to price up. How much will the US quantum impact on this region? It remains to be seen. 16 GLOBAL TRADE REVIEW