Experts Talk: GCC Trade Finance Trends and Insights

GCC Trade Finance Trends
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During the recent Gulf Trade Finance Summit in Dubai we had the chance to interact with trading finance industry experts to discuss on disruptions in trade finance and to get to know more on the latest trends, challenges, opportunities, SME lending and the recent change in pledge laws having a significant effect on trade finance in the region.

Latest trends in Trade Finance…

“While trade finance is pivotal to expanding global trade, its inherent structure poses several challenges: a complex ecosystem of multiple stakeholders and manual processes, which requires authentication and validation prior to execution. The advent of digitization in trade finance, which is gradually being adopted by the industry, has created the potential to eliminate frictions and bring greater transparency.”

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“Technologies such as DLT (Distributed Ledger Technology), Robotics, OCR (Optical Character Recognition) and Machine Learning are not only helping banks align their internal processes but also to enhance the client experience with real time transactions and quicker trade cycles. Emirates NBD has an agile and collaborative approach towards digitization and has committed AED 1 billion towards an end-to-end digital transformation. The bank’s new smartTRADE portal, part of the smartBUSINESS channel, has harnessed new technologies to revolutionize trade finance in a hyper-connected world.” – Sumit Aggarwal, Executive Vice President and Head of Transaction Banking, Emirates NBD.

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Excerpts of the interview with Chris Ash, ExWorks Capital:

The challenges faced by GCC trade finance…

Perhaps the biggest challenge is that traders in the region are often multi-banked. This means they are being financed by a variety of financial institutions, which can create instability in the market as money can be borrowed from one lender to pay back another. It is not used to finance goods, which can lead to concerns when issues arise. As a result, funding for trade finance in the GCC region is restricted due to the risk associated with multi-banked borrowers.

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The region is also renowned for a lack of transparency, which again contributes to issues within trade finance. If it is difficult for financiers to ascertain how well businesses are doing, they are obviously more reluctant to lend. Public information in the region is limited and information that is available is typically outdated or irrelevant. Coupled with the fact that trade finance requires in-depth checks of all counterparties – ensuring compliance with regulations such as KYC (know your client) and AML (anti-money laundering) and that they operate in a safe, compliant manner – lending for trade has become a significant challenge for GCC financiers, with many lenders deterred.

GCC economies progress in their pursuit of transformation from oil centered economy to a non-oil-based economy…

In the past five years, the GCC economies have greatly progressed in their pursuit of a non-oil-based economy. Having sponsored the Gulf Trade Finance Summit for two years in a row, we have found that the different business types based in the region have diversified considerably. In particular, the region is emerging as an important centre for metals and agriculture trading and is a major transit hub for these industries globally. What’s more, the increasing population is generating a natural diversification in industries – also helped by the UAE’s tax policies, making the country an attractive place for business relocation.

Again, the main challenge is accessing liquidity – particularly for smaller businesses. Typically, only multi-national corporations (MNCs) have access to funding. This is especially the case when it comes to banks and in this respect, it is large oil companies that have dominated. Progress in this respect is critical: younger businesses and industries must have sufficient access to liquidity in order to fuel growth.

SMEs overlooked in the region…

Banks are especially reluctant to finance SMEs with respect to trade finance. Without the track-record of their larger counterparts – and coupled with increasingly restrictive banking constraints – SMEs are generally overlooked in the region. Alternative financiers such as ExWorks are becoming increasingly prevalent as a result. Building a risk premium into our prices enables us to look at deals that are typically rejected by other lenders and provide more flexible offerings as a result.

Central pledge registry having significant impact on trade finance in the region…

It is worth noting that the recent change in pledge laws has had a significant effect on access to trade finance in the region. The introduction of a central pledge registry has meant that businesses are no longer able to pledge assets on multiple loans, something that previously deterred financiers from operating in this jurisdiction. As a result, a wider variety of lenders – particularly in the alternative finance space – are beginning to finance the region.

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