Innovative Trade Finance Solutions for SMEs

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Rosamund Sharp
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1 Innovative Trade Finance Solutions for SMEs Murali Subramanian EVP, Transaction Banking Head 20 th April 2011

2 Overview of ADCB Incorporated in 1985 following a merger of 3 banks Owned 64.8% by Government of Abu Dhabi.Traded on Abu Dhabi and Dubai stock exchanges First ever acquisition of an International Bank s (RBS) retail banking franchise in the UAE by a local bank Winner of Best Consumer Internet Bank from Global Finance in 2010; Best Retail Bank in the UAE and GCC from Asian Banker in 2009; Sheikh Khalifa Excellence Award (Silver) and Hawkamah Award for excellence in corporate governance in 2009 Strong Operating Income at AED 5.3bln in 2010 Service 345,000 clients in the UAE with a 59 branch network and employs staff Moody s rating of A1, S&P of A- Strong Transaction Banking Platform - Offer state of the art Corporate Internet Banking channels and - Strategic alliance with Bank of America Merrill Lynch - Leading Trade Bank in the UAE for Corporate, especially SME clients

Global Finance in 2010; Best Retail Bank in the UAE and GCC from Asian Banker in 2009; Sheikh Khalifa Excellence Award (Silver) and Hawkamah Award for excellence in corporate governance in 2009

3 Trade Finance for SMEs : Landscape SMEs are a key driver for the UAE economy Contribute 80% of the UAE Non-Oil GDP 90% of non-oil exports Re-export engine for the economy The UAE is one of the most business-friendly environments in setting up and operating a business. Banking and finance is a different story Almost all banks focus heavily on large Corporates and Public sector as their needs are more complex Most local banks work with SME clients, although the offering is quite generic There are no financing arrangements or start up funds for the entire SME segment, only for parts of it There is a significant role for banks to provide thought leadership and There is a significant role for banks to provide thought leadership and innovation in supporting the SME segment

Banking and finance is a different story Almost all banks focus heavily on large Corporates and Public sector as their needs are more complex Most local banks work with SME clients, although the

4 Trade Finance for SMEs : Landscape The most commonly availed export financing products today are : Product Liquidity Cost Complexity Availability Dox on collection Low High Low High Discounting of accepted draft Medium Medium Medium Medium Negotiation and Payment under LC Medium Medium High Low Preshipment financing High Low High Low Open account financing Medium Medium High Low Factoring High High High Low Invoice Financing High Medium High Low Back to Back LC/financing High Medium High Low In both of the commonly used methods, the entire sale-to-cash cycle is financed by conventional methods, hence higher cost. The remaining methods are not commonly offered by banks to SME clients, this is different with larger corporates.

Medium High Low Factoring High High High Low Invoice Financing High Medium High Low Back to Back LC/financing High Medium High Low In both of the commonly used methods, the entire

5 Bank and Client Views Differ Bank View Portfolio approach Risk and compliance focus Industry outlook Transactional innovation Relationship return Client View Reliable Partner Understand business Consistent approach Advisory outlook Support in growth Business cycles are best endured by SME clients, but it is typical to see banks modify their approach to all segments depending on stage of business cycle S B k i th SME t i t tl d h i t l Some Banks view the SME segment more consistently, and have internal organisational structure changes made to execute

endured by SME clients, but it is typical to see banks modify their approach to all segments depending on stage of business cycle S B k i

6 Challenges As a segment, SMEs have more startups with less publicly available and audited information. Unless banks are capable of understanding this, access is a challenge Banks tend to focus on risk-free process where possible, hence the preference to pay against acceptances or documents against collection While network banks (typically (yp y international) have greater appetite on international LC issuing banks, few deploy this towards SMEs. Risk defeasance structures are relatively less used by local banks. Cost of funds, and deployment of scarce liquidity especially in USD and EUR has been a challenge with Local Banks, but this could be overcome. Trusted advisory services are still nascent for the SME segment

documents against collection While network banks (typically (yp y international) have greater appetite on international LC issuing banks, few deploy this towards SMEs.

7 Areas of Focus and Innovation o While there are several innovations in Trade Finance, we will focus on these for today : 1. Documents Preparation, presentation and processing 2. Back to Back LC structures t 3. Better management of Risk and Liquidity 4. Supply Chain Financing a) Invoice Financing b) Export Credit Financing

Documents Preparation, presentation and processing 2.

8 Document Preparation at Banks prepare documents on behalf of the SME client and work with counterparties to collect third party docs, to produce document sets compliant at the point of creation. Thereafter, this is negotiated. Discrepancies are minimised and turnaround time is reduced Counterparties (Shipping Agent, Surveyor, Lab, Chamber of Commerce, etc) 3 Bank engages with counterparties to prepare 3 rd party docs LC Issuing Bank 4 Bank can then send documents directly to the Issuing Bank / have them sent to Exporter Effort save as manual preparation of documents minimised Banks coordinate with third parties on behalf of the SME Supplier 1 Exporter ships goods Reports and document Bank images are typically Bank engages with 2 Exporter to prepare 1 provided st party docs

Discrepancies are minimised and turnaround time is reduced Counterparties (Shipping Agent, Surveyor, Lab, Chamber of Commerce, etc) 3 Bank engages with counterparties to prepare 3 rd party docs

9 Back to Back LC Structure Seller SME Client End buyer Purchase order US$ 4.7m 1 2 Purchase order US$ 5m Seller bank Letter of credit US$4.7m 4 Letter of credit US$ 5m 3 Buyers bank SME Client s Bank Full set of doc and invoice for US$4.7m Full set of doc and invoice for US$5m

7m 4 Letter of credit US$ 5m 3 Buyers bank SME Client s Bank 5 6 9

10 Better management age e of Risk and Liquidity qudty Risk defeasance on issuing banks using multilateral agencies, e.g. IFC, ADB, ICIEC, ECAs Avalisation where own financing cost is high Partnership with money centre institutions to provide an end to end solution Negotiation and payment invest in operations expertise

11 Supply Chain Financing Invoice ocefinancing SME Client Discounted Proceeds (Day n) 5 SME Client s Bank Risk Participation Agreements Bank A Commercial Contract (Day 0) 1 Shipment and Invoicing/ (Day 0) 2 4 Supplier sends Financing/Payment Request (Day n) Bank B Bank kc Buyer accepts receivables (Day 1) Buyer 3 Invoice Processing Platform Bank D 6 Payment at Maturity Buyer approves the SME client s invoice for payment using existing processes. Once an invoice has been approved for payment, buyer electronically instructs Bank to pay the supplier on the future due date. Buyer is integrated with the Bank for processing of payment instructions The SME client is notified of payment from buyer on a future due date and can see settlement details: Buyer s name, the amount, the due date and associated remittance details. The SME client may discount the underlying receivables to cash without t recourse. rse The client can also chose to collect the full value of the invoice at the maturity date, ensuring full flexibility.

s invoice for payment using existing processes. Once an invoice has been approved for payment, buyer electronically instructs Bank to pay the supplier on the future due date.

12 Supply Chain Financing Export Credit Financing Exporter / Seller Sells / Discounts Receivables Cash advance(risk) Bank / FI Delivers goods or services Generates receivable (invoice/billof of exchange /etc) Policy assignment & Claims payment Importer / Buyer Underwrite Credit Risk (Risk Transfer) Export Credit Agency

Generates receivable (invoice/billof of exchange /etc) Policy assignment &

13 Summary ay& Way Forward ad You have the opportunity to evaluate what you get from banks What is on offer v/s what are you looking for The cost and liquidity impact required Appropriateness given stage in growth and strategy Peer comparison and best in class examples Communication with your Bank is critical Understand your bank s capabilities and process Can they understand your strategy and support it? Primary and other bank relationships More than just financing Seeing is believing For both your bank and you, actual execution is proof Learn and adapt

Communication with your Bank is critical Understand your bank s capabilities and process Can they understand your strategy and support it?

ISO20022 Trade Services Dashboard Description of business processes. ISO20022 - Trade Services Description of Business Processes

ISO20022 Trade Services Dashboard Description of business processes 1 Trade Services Description of Procurement: Sub-Functions Tendering Ordering Delivering Invoicing Process for buyer to contact potential