Smoothing the Path

Ali Imran Head of Transaction Banking & Wholesale Digital Services, CBD tells MEA Finance that trade finance is experiencing significant changes, with easier ways and means by which it is conducted and with considerations such as ESG and digitisation taking bigger roles in its processes

Ali Imran Head of Transaction Banking & Wholesale Digital Services, CBD

As were other parts of the financial markets, was the digitisation of trade finance accelerated by the global pandemic?

Until recently, a major part of international trade was conducted using paper letters of credit and bills of lading. However, the pandemic has significantly helped accelerate digitization of trade finance which is a trend we consider irreversible.

Just like 2008-2009 saw an exponential behavior shift in the adoption of online commerce, 20202021 is witnessing a similar shift in how trade finance works. For example, Letters of credit (LCs) used to be frequently impacted by delays in the delivery of goods and remote document inspections. However, we have now seen clients move towards online solutions to ensure LCs are issued quickly and trade continues to be properly funded. This is partially helped by developments such as legally binding e-signatures to keep funding flowing, guidance being published (globally) on the acceptance of e-signatures and an increase in risk appetite to the new normal-e.g., not needing to see physical paperwork.

There has also been an increase in bank-fintech partnerships within the realm of trade and supply chain finance. This includes CBD’s recent fintech partnership with Demica, a fintech based in London, resulting in a fully digital supplier and buyer led solution. This move towards fully digital transaction and document processing, will drive the emergence of a new era of paperless trade.

Do you expect more use of Blockchain based methods, such as CBDC’s being adopted in trade finance?

I think its important to clarify that there are two types of CBDC’s: a) retail which is a digital equivalent complement to physical banknotes or coins and b) interbank which is accessible to financial institutions to settle transactions. Within interbank, there are two ways to drive adoption: either it is mandated, or it is so intuitive to use that all parties want to adopt the technology. According to the Bank of International Settlement, more than 80% of Central Banks around the world are studying the feasibility of interbank CBDC use-cases. The development of this form of CBDC will clearly accelerate the integration of distributed ledger technologies into existing market infrastructures.

In fact, the People’s Bank of China has combined with the Hong Kong Monetary Authority, the Bank of Thailand and the Central Bank of the UAE to explore the possibility to make CBDC interoperable to facilitate cross-border trade based on blockchain technology. Preliminary

findings showcased a reduction in transaction costs and an increase in speed. However, these benefits can only be commercialized at scale once CBDC’s are placed under some sort of regulatory safeguard that is commensurate to its role in the global financial system.

Do you expect to see changes in the way letters of credit and promissory notes will be used?

The volume of promissory notes is increasing by an average of 15% per annum. We are witnessing these types of transactions being increasingly handled through digital platforms. In the recent past, some of the largest transactions were conducted digitally (the Lufthansa group collecting 800M euros being a key example). This increase in digitization of notes is because the traditional process of setting up a promissory note is highly cumbersome. It requires a multitude of analog interactions and is expensive in nature. Hence, the simplicity of a digital platform and the transparent nature of pricing drives its increased adoption.

We have already seen a successful pilot of promissory note transactions on private block-chains with the certification performed using a qualified electronic signature. There is still a long way to go; for example, the transfer and termination of promissory notes is yet to be digitized. We do expect to see more changes in the way letters of credit and promissory notes are used especially with more bank–fintech partnerships driving this change. These partnerships will bring a digital, efficient, cost saving process combined with the scale and size of the banking network to reach the widest possible audience.

Would you say that SMEs in the region have equal access to trade finance as do larger corporations?

The SME sector is the bedrock of any economy and equally so in the UAE. It businesses. This is a key challenge in the wider GCC that needs to be solved through a collaboration of all stakeholders.

JUST LIKE 2008-2009 SAW AN EXPONENTIAL BEHAVIOR SHIFT IN THE ADOPTION OF ONLINE COMMERCE, 20202021 IS WITNESSING A SIMILAR SHIFT IN HOW TRADE FINANCE WORKS

is imperative that banks support them with access to trade finance as cashflow can make or break a business. Access to finance in this sector requires a specialized approach which expedites the assessment and decision-making process. Specialization is imperative because certain cases require additional

SPECIALIZATION IS IMPERATIVE BECAUSE CERTAIN CASES REQUIRE ADDITIONAL FIXED ASSETS, REPAYMENT HISTORY, BALANCE SHEET OR COLLATERAL WHICH ARE NOT ALWAYS AVAILABLE

fixed assets, repayment history, balance sheet or collateral which are not always available. The solution, potentially, is to offer solutions on a non-recourse basis; however, this requires a more sophisticated insurance market and rates which are acceptable to small

How are banks going to factor ESG considerations into their trade finance operations?

Consumers and corporates alike are increasingly focusing on environmental and sustainability practices when making financial decisions. In fact, consumer demand for ethically and sustainably sourced products has led more and more businesses to consider incorporating environmental, social and governance factors into their trade and finance decisions. This is an outcome of the fact that sustainable practices are now at the forefront of brand strategies as they seek to address concerns of environmentally aware client bases. From a trade perspective, in the automotive industry, for example, attention is focused on looking into reconfiguring supply chains to switch to EVs instead of the traditional combustion vehicles.

It is incumbent on banks to commit to lend and facilitate the allocation of capital towards green initiatives which focus on a reduction of the environmental impact. However, banks would require industry standards to be set-up and robust benchmarks to be created, which would help encourage companies to adopt ESG practices and provide tangible proof that ‘going green’ will result in material benefits to their business as well as the environment.

Changing with the times

According to Dave Aldred Head of Treasury and Trade, Citi, MENA, the market is going to witness developments including the increasing adoption of technology, with greater use of blockchain and digitisation of processes, along with the implementation of strategies to assist SME’s with access to funding, and efforts made to help trade finance play a bigger role in efforts to curb climate change

Dave Aldred Head of Treasury and Trade, Citi, MENA

As were other parts of the financial markets, was the digitisation of trade finance accelerated by the global pandemic?

In the period before the onset of the pandemic Citi had already seen a move by our clients towards leveraging digital solutions and supply chain finance as a classic example of digitising the end-toend process. However, the lockdowns and disruption to logistics and supply chains including couriers having the ability to deliver physical documents from one point to the other, resulted in clients being more open minded and willing to rethink their digitization strategies and to adopt digital tools such as e-signatures, CitiDirect BE etc. What we are seeing now is that organisations are now using the experience gained during the pandemic to reengineer their trade processes and imbed digital tools. Additionally, building in pre pandemic momentum, the continued disruption to supply chains has meant that supply chain finance has accelerated with additional momentum and has firmly become a solution where corporates can now get a much-needed working capital benefit. As a result, we have seen a significant increase in the digitisation of trade business and in our experience, MENA is a world leader when compared to some other regions.

Do you expect more use of Blockchain based methods, such as CBDC’s being adopted in trade finance?

Blockchain is gaining in prevalence

rapidly with systems like KOMGO and others too, whereby a marketplace or platform is created which allows financers, exporters and buyers to come together to intermediate trade. It is a certainty that these systems will grow in number and will be driven largely by their ability to provide ease of usage, flexibility and integration within the major banks. As standards become more robust and organisations learn from their experience about the ability to manage flows for certain ecosystems, the use and leveraging blockchain technologies is more likely to grow.

CITI’S TRADE TEAMS ARE WORKING TO PROVIDE CAPITAL WHERE BORROWERS CAN ACHIEVE MORE COMPETITIVE PRICING FOR CAPITAL TO BE DEPLOYED TOWARDS PROJECTS FOCUSED ON ESG WHERE THE PROGRESS CAN BE AND IS MEASURED

Do you expect to see changes in the way letters of credit and promissory notes will be used?

Letters of Credit (LCs) and Promissory Notes are necessary instruments which have been around as an important part of the process for many years. They are required for those markets where the risks of non-payment are viewed as high element of the economy. The United Arab Emirates Central Bank support to SMEs via the National SME Program is a clear case in point.

WHAT WE ARE SEEING IS THAT ORGANISATIONS ARE NOW USING THE EXPERIENCE GAINED DURING THE PANDEMIC TO REENGINEER THEIR TRADE PROCESSES AND IMBED DIGITAL TOOLS

and where beneficiaries such as sellers, want surety of payment for their products. For as long as those risks remain, I do not see the need for LCs diminishing. LCs are now being digitized so while the need for paper-based documentation is reducing, it does not necessarily mean that the instruments will be eradicated completely. So, LCs will remain extremely relevant, but they will also see increased digitisation to drive the efficiency of the end-to-end process.

Would you say that SMEs in the region have equal access to trade finance as do larger corporations?

Unfortunately, no I would not. It is widely accepted that SMEs are seen as having a higher risk profile by the traditional financial institutions. This coupled with the fact that SMEs are either not resourced to produce the type of financials major banks would like to see, or do not have the volume of flows to attract the attention of major banks. They have historically not been able to attract the kind of funding from a pricing or quantum perspective that large corporates can command. Additionally, SMEs are also seen as having limited requirements which may not necessarily fit within the model of large banks looking to attract or service clients with multiple cross sell opportunities. However, given the importance of working capital management within supply chain ecosystems, access to trade finance and funding in general is critical for SMEs. As a result, some governments in the region have implemented strategies to assist SMEs who are a very important

How are banks going to factor ESG considerations into their trade finance operations?

ESG is a key business priority for Citi. Banks are already implementing specific goals and targets to ensure compliance towards achieving net zero by a certain date. Citi’s Trade teams are working to provide capital where borrowers can achieve more competitive pricing for capital to be deployed towards projects focused on ESG where the progress can be and is measured. Similarly, Export Credit Agencies and Multilaterals have also come out with specific policies that puts a stop to the support for those business and industry sectors that are considered dirty or polluting, such as coal for example. The International Finance Corporation, IFC has come out with CLIMATE SMART, whereby they will support banks in the world’s emerging markets who are looking to provide LCs, price incentives of longer terms for equipment specifically bought to address climate change, such as wind turbines, solar panels etc., or for projects that are guaranteed under the Global Trade Finance Programme that have clearly defined environmental benefits. Additionally, we have also seen a growth in corporate appetites for sustainable supply chain finance programs and expect this to grow to become a higher priority for corporations going forward.