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Charting a new course for trade finance
Macro headwinds such as the post pandemic, trade wars and cross-border tariffs are creating the conditions that will force the evolution of new processes that could see new players bypassing or disintermediating banks in the global trade finance market
With COVID-19 continuing to challenge different economic sectors across the world, the blistering pace of vaccine rollouts in the Middle East is spurring recovery momentum in the region despite pandemic-related supply chain bottlenecks that are threatening to choke volumes of global trade.
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The prolonged pandemic and the plunge in global oil demand and prices dealt the GCC countries a health crisis and a commodity market shock. However, the International Monetary Fund (IMF) projected that the economies of the six oil-rich Gulf nations, which contracted by an average of 4.8% in 2020, will grow by an average of 2.5% this year and an even bigger 4.2% growth in 2022.
A recent study by the Asian Development Bank (ADB) estimated that the gap in trade finance availability reached $1.7 trillion in 2020, representing 10% of global trade. McKinsey said that the global trade disruptions that were fuelled by the coronavirus are believed to have exacerbated this shortfall and the need to improv the $5.2 trillion global trade finance ecosystem, which facilitates the movement of goods and services around the world, has become more evident.
Macro headwinds such as health crises, climate change, trade wars and cross-border tariffs and sanctions together with greater competitive pressure, increased cost burdens and a technology-driven shift from traditional trade services are placing a strain on the profitability of trade finance. Combined, these threats are creating a perfect storm of changes that may see banks bypassed, displaced and disintermediated in the global trade market.
However, the ongoing transformation of trade finance offers banks a valuable opportunity to transform their operations and reimagine how they can facilitate and finance trade with no constraints and no legacy baggage.
Against a backdrop of the increasing digitisation of financial and commercial services, trade finance has been relatively slow to modernize its decadesold processes. It remains a very paperheavy and manual business making it particularly costly for banks to serve smaller enterprises, but digitalising trade finance to serve new markets more effectively will be an important driver as the global economy rebounds. “The
evolution of global trade threatens a steady income source for banks unless they can understand and adapt to change,” said EY.
The acceleration of digitisation being driven by the pandemic has been so widereaching that there’s no looking back. It is companies that are successfully implementing digital solutions in global trade that are finding themselves at an advantage amid a myriad of challenges. According to industry analysts, incremental solutions provide a base upon which every corporate can build as they work towards the end-to-end full digitization of trade.
“To fully reap the benefits of new technologies, the entire trade ecosystem including financial institutions, regulators, border agencies, trade bodies and corporates should cooperate to apply digital innovation and drive efficiencies,” said the World Bank.
For corporates, funding challenges are particularly a thorny issue especially small and medium-sized enterprises (SMEs), a sector that is a cornerstone of Middle East economies, accounting for more than 90% of all businesses and driving regional countries’ economic diversification away from heavy reliance on oil revenues.
“The SME sector is the bedrock of any economy and equally so in the UAE. It is imperative that banks support them with access to trade finance as cashflow can make or break a business,” Ali Imran, the Head of Transaction Banking & Wholesale Digital Services at the Commercial Bank of Dubai.
Digitising trade finance
The banks that provide trade finance were already at the forefront of innovation and digital transformation well before the outbreak of the coronavirus pandemic. The COVID-19 crisis arrived during a transformative period for trade finance, largely through digitisation and the emergence of new platforms.
The pandemic created some exceptional challenges for all industries, and cloud computing, is driving the rise of platforms and what is now referred to as the platform economy. The platform economy is reshaping global trade as most valuable entities are now based on platform business models such as digital marketplaces that enable groups to interact and transact, said the World Trade Organisation (WTO).
The use of blockchain in global trade makes it possible for documentation to flow transparently and securely between banks, trading companies and other network participants such as insurance companies.
“A blockchain-based infrastructure will drive efficiencies, reduce the cost base and open up new revenue opportunities,”
Subramanian Krishnamurthy, the Head - Global Transaction Services at National Bank of Fujairah said in an exclusive with MEA Finance adding that blockchain technology promises to increase collaboration, automation and oversight in trade finance transactions.
Blockchain has the potential to empower global trade and banks that finance it by making transactions more efficient while retaining a high level of security. It has the potential to digitalise trade and trade finance processes. WTO said DLT could be to trade and trade finance transactions what the internet has been to communication.
The WTO in a November 2021 report said that cross-border trade activities entail complex risks, particularly linked to
but it also created unique opportunities especially in the financial service sector by accelerating and strengthening the transition towards digital banking at unprecedented speeds.
“Just like 2008-2009 saw an exponential behaviour shift in the adoption of online commerce, 2020-2021 is witnessing a similar shift in how trade finance works,” said Imran.
Although travel and movement restrictions to curb the spread of the pandemic took a heavy toll on global trade and the industry that finances it, a commerce-led recovery has sparked a rebound in trade finance this year. To capture business opportunities amid
– The World Bank
growing competition from non-traditional providers, industry experts said that banks in the Middle East region should ramp up their digital transformation and innovate their products and operating models.
Technology is also helping shape trade facilitation as more self-funding and investment from institutional investors flow into the corporate supply chain. “Many global trade finance banks have already started to invest in digitalisation, with technologies such as optical character recognition (OCR), artificial intelligence and blockchain being used to develop innumerable use cases and proofs of concept,” said EY.
Digital technologies, which includes blockchain, Big Data, new algorithms
New research has provided unique insights into the evolving needs of Muslim high net worth individuals and how financial advisers in international jurisdictions can best meet those needs.
The study, Global Attitudes to Islamic Wealth Management, interviewed 2,000 individuals on Shari’a compliant and ethical wealth management services. Prepared by Gateway Global on behalf of Jersey Finance, a not-for-profit organisation that represents and promotes Jersey’s 60-year-old international finance centre (IFC), the paper revealed current and future demand for investment products, as well as attitudes towards the choice of investment jurisdiction, ethical investment values, wealth managers, tax, succession planning, and philanthropy. The report highlighted a number of significant attitudes; notably more than half of respondents would opt for a Shari’a compliant investment even if the performance was inferior to an equivalent conventional investment. And when questioned on philanthropy, the vast majority of interviewees affirmed the importance of the sector with 79% already making significant contributions. Trusts remained high on the agenda with 76% of respondents exploring the structure in relation to succession planning, with Jersey being the most favoured trust jurisdiction – ahead of the UK, the DIFC (UAE), the British Virgin Islands and Malaysia. Undoubtedly, the Island’s flexible legal system, forwardthinking regulatory regime and tax-neutral environment ideally place it as the go-to jurisdiction in this area. However, while the study outlined several key perspectives, it is clear the Islamic finance investor base is becoming ever more sophisticated and jurisdictions wishing to stay relevant will need to be capable of being responsive when it comes to supporting the evolving needs of Muslim clients.
To discover more, visit: jerseyfinance.je/our-work/global-attitudes-to-islamic-wealth-management
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By An Kelles
Director GCC
an.kelles@jerseyfinance.je
Faizal Bhana
Director Middle East, Africa and India
faizal.bhana@jerseyfinance.je
UK
JERSEY
FRANCE
foreign transactions and legal procedures. Meanwhile, ADB identified know your customer (KYC) and anti-money laundering (AML) concerns, which become amplified when transacting in multiple jurisdictions, as the eminent reason for rejections of SME financing. The multilateral development bank said 20% of trade finance applications for SMEs are rejected due to a lack of additional collateral.
However, blockchain is poised to facilitate the digitisation of trade finance and eliminate the pain points of today’s processes. Blockchain also possesses several key benefits to the parties involved including tokenisation of assets such as collaterals, transferring digital assets, preventing double-spending and forgery and rendering payments and other processes automatic.
Leveraging blockchain technology allows for all transactions to be unalterably timestamped and uniquely cryptographically signed, reducing paper waste and introducing a new approach to identity management.
Imran tells MEA Finance that the Central Bank of the UAE, the People’s Bank of China, the Hong Kong Monetary Authority and the Bank of Thailand recently joined forces to explore the possibility to make blockchain-based central bank digital currency (CBDC) interoperable to facilitate cross-border trade based on blockchain technology. “Preliminary findings showcased a reduction in transaction costs and an increase in speed,” said Imran.
A global perspective
Trade is the lifeblood of the global economy. It boosts growth and competitiveness, promotes fairness while driving growth innovation and efficiency. “With the pandemic taking its toll on global trade and supply chain, the priority for economic recovery is to mobilise capabilities and resources to trade flows back on track,” said Krishnamurthy.
Trade finance is the backbone of global trade, without it, the movement of goods and services across borders does not occur. By providing liquidity and cash flows and lowering risks, financial institutions ensure that buyers receive their goods and sellers receive their payments, said the World Bank.
Traditionally, trade finance is dominated by global banks including HSBC Holdings, Citigroup, Standard Chartered and the National Bank of Fujairah plus the National Bank of Kuwait and Saudi National Bank in the Middle East. However, the market is attracting investment from fintechs, capital market and institutional investors amid a growing trend of more self-funding.
Dubai Multi Commodities Centre in its ‘Future of Trade 2020 Report’ said that more than 80% of executives at medium to large-sized businesses in the UK, the US and China were considering switching from traditional banks to alternative lenders for trade finance.
Though the pandemic-induced economic collapse did not translate into the reduction in the liquidity of the global financial crisis of 2008, COVID-19 forced banks to focus their funding on established relationships. The so-called “flight to quality” left many worthy businesses especially particularly SMEs in the emerging markets without an option for trade finance.
– Ali Imran Head of Transaction Banking & Wholesale Digital Services at the Commercial Bank of Dubai
Driving growth in GCC
The weak global economy over the last few years has been an outcome of the trade wars between the world’s biggest economies, the US and China, Brexit, sluggish growth in international trade compounded by the coronavirus and the countries in the Middle East are not immune to these challenges.
However, the initiatives that were introduced by banks and corporates in the Middle East minimised the fallout on the much needed and over-burdened supply chain across the region. Earlier this year, HSBC issued the first green trade finance facility in the MENA region, raising $48 million for UAE-based Lamprell to support execution of the company’s fabrication work on the Seagreen Offshore Wind Farm project off the coast of Scotland.
Wall street bank, Citigroup, said in October 2021 that it is considering pursuing a banking license in Saudi Arabia to further boost its business in the Gulf state by expanding into trade finance and treasury solutions.
To mitigate risks associated with global trade, GCC export credit companies such as UAE’s Etihad Credit Insurance (ECI) are introducing initiatives that are aimed at easing access to financing for exporters and re-exporters in the regional while supporting the growth of SMEs.
ECI collaborates with several banks in the UAE including Emirates NBD, NBF and Standard Chartered Bank UAE and its insurance cover enables SMEs to obtain collateralised loans form banks within the country.
The federal export credit company unveiled ‘UAE Trade Finance Gateway’ in partnership with First Abu Dhabi Bank and Crediti Fintech in October 2021— a project that seeks to position as the main gateway of exporters and re-exporters to trade finance solutions that will be provided by commercial banks and financial institutions.
