Trade Finance for Small Businesses

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Give your venture a shot in the arm Choosing the right mix of finance options, which range from equity, debt and hybrid solutions, can help small and medium businesses become more efficient

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■■ Suneeti Ahuja-Kohli

rade finance, which is a specialised area of finance dealing with short-term funding of import and export transactions, is growing, and should continue to rise in the coming months as the UAE diversifies its economy and increases the share of its non-oil sectors through trade.

The UAE’s non-oil foreign trade was worth Dh1.75 trillion in 2015, up 10 per cent from 2014, according to a recent report by the Ministry of Economy. The figures are positive indicators for the UAE’s foreign trade, including direct trade.

The volume of the UAE’s non-oil trade (inclusive of free zones trade) was valued at Dh1. 632 trillion in 2014, while its direct trade totalled Dh1.072 trillion, while the value of imports reached Dh696.4 billion — pointing at the rise in the country’s competitiveness as a capital of regional trade. The World Trade Organisation (WTO) figures, on the other hand, show that the UAE’s exports amounted to Dh132.2 and re-exports totalled Dh243.7 billion. The UAE ranked among the top on the world trade map, staying at 16th rung globally in commodity exports and 20th globally in commodity imports. In the area of service trade, the UAE ranked 19th globally as service importer, and 42nd globally in service exports.

The small and medium-size enterprises are expected to make a significant contribution to the diversification plan. The sector has traditionally been the backbone of economies worldwide. In the

UAE too their contribution as an employment generator has been quite significant with more than 70 per cent of the people in private sector earning their bread and butter in this sector.

Through the recently announced National Programme for Small and Medium-size Enterprises and Projects, the government is planning to usher in a new phase of growth and development.

The programme aims to co-ordinate with the federal and local government entities, and the private sector, for the purpose of marketing SME products in the UAE and abroad. It will also coordinate with the concerned authorities for the provision of benefits and incentives for SMEs, as well as collaborate with the relevant regional and international entities to fast-track development of the SME sector.

“In addition to playing a major role in the UAE’s transformation towards a knowledge-based economy, SMEs are a key employment generator and mitigate adverse economic and social effects.

Given its phenomenal potential, the UAE Vision 2021 has set up a national index that the contribution of the SME sector to the nation’s non-oil GDP must reach 70 per cent by 2021. Indicators issued by the Ministry of Economy, as well as reports from the Federal Competitiveness and Statistics Authority, show that nonoil sectors today contribute to more than two thirds of the UAE’s GDP and have become the main stimulator of growth.

Growth of the overall economy is at 4.6 per cent while growth in the non-oil sectors registered 8.1 per cent in 2014,” noted the report.

Small and medium businesses are playing a major role in the UAE’s transformation towards a knowledge-based economy. The sector is a key employment generator and mitigates adverse economic and social effects.

Finance by banks Despite rosy prospects, a number of SMEs are struggling to maintain cash flows. Therefore, striking a balance in the choice of funding is important. “A better understanding of risk and debt markets should lead to a more appropriate loan structure and pricing model… The risk of adopting the wrong capital structure can be severe. On the other hand, optimising the capital structure to match a company’s needs and possible market developments can add significant value. The ideal structure may not only limit the risk

of default but also substantially increase profitability and shareholder return – underlining the vital significance of getting the capital mix right,” writes Ashish Dave, Partner, KPMG, in one of his advisory columns.

Banks on the other hand are offering wider and new choices to companies.

Abu Dhabi Islamic Bank (ADIB), for instance, has recently launched a full merchant solution that consists of bundled products and services catering to the various financial and transactional needs of SMEs in the UAE. The package offers the ADIB Point-of-Sale machine, which

helps businesses to accept card payments in their outlets, an ADIB Business Merchant Account with a waiver on monthly maintenance fees, and access to internet banking with unlimited number of free local and international transfers.

Mashreq and RAK too offer convenient finance options. You can read about the various offers in this special report. With opportunities and options galore, the SME space in the UAE is likely to retain its dynamism and vibrancy in coming years and contribute more to the non-oil economy as planned.

— suneeti@khaleejtimes.com

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Trade Finance Solutions for Small Business

SME growth is a combination of many dynamics bottom line margins are difficult.

Thirdly, the new lender should scale the company’s potentiality to improve the business performances in line with the future industrial outlook and internal resources capacity. In hind side, there should be a decent equilibrium between the financial and non-financial dimensions in judging the small business propositions. Some of these nonfinancial elements include innovation and intellectual capital aspect, physical and human capital, international orientation, positioning

Critical questions about SMEs and its potentialities answered

Gateway to global markets

■■ Suraweera Gayan Gunewardana Banks have a paramount responsibility in supporting the micro-entrepreneurs in order to bring them to the next level. Lenders who operate domestically appear to have embraced the segment eagerly and are already invested heavily towards attracting these clients. A decline or slowdown in the segment would have major impact on the overall lending climate. Consequently, there is a contemporary discussion to strengthen the continuous support to the SMEs in the current testing market conditions. However, even matured lenders are struggling to find worthwhile answers to related core credit questions.

Ras Al Khaimah Free Trade Zone is one of the fastest-growing free zones in the UAE representing more than 50 industry sectors Ras Al Khaimah (RAK) is one of the seven emirates that comprise the UAE, along with Dubai and Abu Dhabi. Less than an hour’s drive from Dubai, Ras Al Khaimah offers a strategic geographical location with easy access to fastgrowing markets across the Middle East, Africa, Europe and South Asia.

RAK has the highest level of industrialisation in the UAE, with manufacturing at 26 per cent of the GDP. This includes RAK Ceramics, the world’s largest maker of ceramic tiles; Julphar Pharmaceuticals, the Middle East’s largest pharmaceuticals manufacturer; Streit Group, the largest armoured car manufacturer in the world; and several other in-

RAK has the highest level of industrialisation in the UAE, with manufacturing at 26 per cent of the GDP.

RAK FTZ comprises four free zone parks tailored to specific company needs, including: ■■ A Business Park for office clients ■■ An Industrial Park for heavy manufacturing ■■ A Technology Park for trading and light manufacturing ■■ The RAK Academic Zone, which caters to a wide variety of educational institutions and service providers dustry-leading companies.

Ras Al Khaimah Free Trade Zone (RAK FTZ) is a cost-effective gateway to global markets, one of the fastest-growing free zones in the UAE, and the investment destination of choice for more than 8,600 companies from over 100 countries, representing more than 50 industry sectors.

Established in 2000 with a mandate to provide custom-made business solutions, RAK FTZ furnishes clients with 100 per cent foreign ownership, a completely tax-free environment, fast-track visas, freedom to source labour and materials globally, and ongoing business support services.

RAK Free Trade Zone Authority — Government of Ras Al Khaimah UAE: Ras Al Khaimah Tel: +971 7 2041111 Dubai Tel: +971 4 7041888 Abu Dhabi Tel: +971 2 6994888 Germany: Cologne Tel: +49 221 5708650 Turkey: Istanbul Tel: +90 216 6884875 India: Mumbai Tel: +91 22 22042223 Toll-free: 800 7111 E-mail: inquiry@rakftz.com Website: www.rakftz.com

Is SME potentiality assessment tough?

The critical questions in credit assessment are largely linked to weigh the potentiality and sustainability. Many direct and indirect dimensions influence the sustainability. The business model, market, management quality, unique competencies, delivery channels, quality and strategy are few of these key components. Most SMEs are either managed by a single owner or operated purely as family concerns. Hence, the owners’ perception and vision are vital for businesses accomplishments.

However, there is no tool available to measure the entrepreneurialmagnitude embedded in these businesses or in simple terms the required level of entrepreneurship.

Henceforth, same aspect represents the major judgmental call from the bank’s side in the credit evaluation process. The formal and casual discussions are massively supportive in this attitude test.

Export originated businesses, despite lacking major physical presence or business infrastructure, still have some advantages.

The strengths in delivery channels play a key role in these ventures.

The main operational weaknesses

Suraweera Gayan Gunewardana Senior Manager/Credit Controller — Business Credit

like inability to attract good human capital, advanced technology, bargain power, internalisation and lack of investment for researches can be tactically mitigated through value chains and synergies with other established players.

The banks rely heavily on formal financial and balance sheets analysis supported by available risk models. Relating to SMEs’ assessment, there are many important financing elements available apart from the annual financial reports.

The bank statement is a usual tool, which justifies the turnover volumes and level of financial discipline. The inward cheque returns due to financial reasons are weak reflection of financial discipline.

The banks can also verify the debtors’ quality and aging. The verification of physical assets and personal net-worth of the owners provide a valuable comfort against the possible absconding risk. The defaultrisk is largely mitigated in the enterprises, which enjoy fair level of physical assets within their longterm assets portfolio.

In brief, an appraising of overall scalability potential is a dire aspect in initial assessment. Here the correct assessments of available resources, capabilities and assets against the actual utilisation (idled assets) are to be firmly verified.

The present cost-structure, in terms of fixed vases variable overheads is an important evaluation.

In case of higher fixed overheads, the possibilities for improving the

How to reduce the skip risk?

The absconding or skip risk is one of the critical challenges. Hence the banks that manage these risks better are obviously more successful than their industrial peers. The familiarity about the business model and its processes are critical to understand the financial stress early and likely to tip into delinquency promptly.

This would help to approach the situations more favorably and define a suitable approach to get the maximum engagement from the possible defaulter. It’s not possible to verify the intentions of the customers, but experienced bankers can recognise some signs beforehand.

Market intelligence system is one of the key elements missing in SME-lenders’ armory. Simply, there is no formal or informal system in getting the sector specific information to many lenders. The banks that received this information promptly have managed to avoid many default situations successfully through early negotiations. SME growth is a combination of many dynamics including savvy, innovation, continues planning and well thought-out strategy and tactics. The banks must be realistic and should review many criteria before tightening the lending criteria. As this would be counter cyclical and further reduce the liquidity levels, lead to increased defaults of nonperforming accounts.

Suraweera Gayan Gunewardana is a Senior Manager/Credit Controller — Business Credit at the National Bank of Fujairah PJSC.

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Trade, Finance & Solutions for Small Business khaleej times | ADVERTISING SUPPLEMENT | SUNDAY, March 6, 2016

Trade Finance Solutions for Small Business » ADIB

Your Partner for Growth ADIB Business is committed to offering the highest standards of financial services and products to SMEs in the UAE. The offering is designed to enable them not just to start and grow, but also to be well prepared to compete in international markets.

Mahdi Kilani, Head of ADIB Business

ADIB is committed to offer the highest standards of financial services and products to SMEs In a constantly changing business environment , financial institutions are required to adapt to the evolving needs of their customers. In the UAE, Small and Medium Enterprises (SMEs) are the fuel and main driver of the economy. They represent 95 per cent of UAE businesses and

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provide around 86 per cent of the total private sector workface.

However, according to recent research, 70 per cent of SMEs struggle to get finance to grow.

“SMEs play a central role in the UAE’s economic growth, and we have built our business banking strategy around them to provide the maximum support to this critical sector,” said Mahdi Kilani, Head of ADIB Business.

ADIB Business is committed to offering the highest standards of financial services and products to SMEs in the UAE. The offering is designed to enable them not just to start and grow, but also to be well prepared to compete in international markets.

As a leading financial institution, ADIB aims to cater to the needs of SMEs by providing trade finance solutions, various account packages, transactional banking and cash management.

The Bank also offers customised financing solutions, businesscovered cards and commercial vehicle finance. To be close to its customers, ADIB is present in free zones across the UAE and has eight business centres to ensure full support to its customers.

ADIB has one of the largest distribution networks in the UAE with 88 branches, eight dedicated business centres and sales offices and more than 760 ATMs, Cash and Cheque Deposit Machines (CCDMs), and offers mobile and online banking to customers. The bank also has a dedicated Business Call Centre on 02 657 8777 for businessrelated inquiries.

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» Mashreq

Nurturing support for SMEs Grow your business with Mashreq Trade Finance Most businesses require an efficient banking partner to drive their growth, particularly those in the international export or global supply chain trade. With the UAE emerging as a trade hub in the Middle East, UAE-based customers require extensive support for their international trading needs. Banks work as a catalyst to broaden the reach of these businesses across the globe and play an important role. Trade finance and services help settle the conflicting needs of the exporter and importer. An exporter needs to mitigate the payment risk from the importer and it would be in their benefit to accelerate the receivables. On the other hand, the importer wants to mitigate the supply risk from the exporter and it would be in their benefit to receive extended credit on their payment. Efficient usage of trade finance and services can remove the payment risk and supply risk, whilst providing the exporter with accelerated receivables, and the importer with extended credit.

As a bank that can trace its origins back to the formation of the UAE, Mashreq has supported countless entrepreneurs and family businesses and partnered with them. Indeed, just as Mashreq has grown and flourished, so have the businesses it partners with. Today, SMEs remain a core part of Mashreq’s growth strategy, with the bank investing considerable resources into ensuring that SME clients receive the best and most innovative products in the market.

For facilitating the import-export transactions, Mashreq offers a full suite of trade finance products and services on both import

Rohit Garg, Head of Business Banking at Mashreq

At Mashreq, we understand the significance of offering innovative, forward thinking financial solutions to SMEs enabling them to grow and expand their business. and export side. Mashreq has an extensive network of correspondent banking tie-ups and is able to provide superior coverage with a surety to execute the transaction without any delays and free of hassles.

Rohit Garg, Head of Mashreq Business Banking, commented: “Trade finance is the lifeline of trade because more than 90 per cent of trade transactions involve some sort of credit, insurance or guarantee. Trade finance contributes to international trade in four areas; payment facilitation, risk mitigation and financing and the provision of information about the status of payments or ship-

ments. At Mashreq, we understand the significance of offering innovative, forward thinking financial solutions to SMEs enabling them to grow and expand their business.”

Increasing access to finance by SMEs is important because SMEs are the engine of economic development; they constitute the majority of business enterprises.

Mashreq has market leading products and services to benefit the SMEs such as trade and working capital products, merchant overdrafts and business accounts, PoS loans and merchant overdrafts and collateral free business and personal loans to name a few.

To offer further convenience to customers, Mashreq is the only bank in the region that offers a state-of-the-art treasury service, which is 365 days and 24/7 to cater for clients with foreign exchange needs.

Mashreq Business Banking products are available in both conventional as well as Shariahcompliant Islamic variants to give the choice to the customers.