Mena's Trade Tapestry: Weaving Global Integration

MENA’S TRADE TAPESTRY: WEAVING GLOBAL INTEGRATION

FEATURED

5 industry priorities for digital negotiable instruments

Breaking down MENA politics and trade

Factoring in the UAE: Developments and global implications

THANKS TO

Andre Casterman

Michael Byrne

Tom Cardamone

Alexander Malaket

Christopher Byrnes

Pradeep Taneja

Robert Besseling

John Miller

Sanjeev Dutta

Vishnu Purohit

Michael Matossian

Amjad Batayne

Ibtissem Lassoued

Achref Chibani

Rajesh Sasidharan

Haifa Al Kaylani

Katayoon Valizadeh

Abis Soetan

Marek Dubovec

TFG EDITORIAL TEAM

Deepesh Patel

Brian Canup

Carter Hoffman

Natasha Roston

LAYOUT Jerry Defeo

2.7

Taneja Global Trade Consulting

4.6

HAIFA AL KAYLANI President & Founder Arab International Women’s Forum

4.9

© Trade Finance Talks is owned and produced by TFG Publishing Ltd (t/a Trade Finance Global). Copyright © 2023. All Rights Reserved. No part of this publication may be reproduced in whole or part without permission from the publisher. The views expressed in Trade Finance Talks are those of the respective contributors and are not necessarily shared by Trade Finance Global.

Although Trade Finance Talks has made every effort to ensure the accuracy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for the consequences that may arise from any opinions or advice given. This publication is not a substitute for any professional advice.

MAREK DUBOVEC

Director of Law Reform Programs

International Law Institute (ILI)

PRADEEP TANEJA Managing Director

Foreword 1

1.1

New Horizons: The exponential growth in MENA’s trade finance industry

However, the region’s complex geopolitical dynamics, regulatory challenges, and ever-changing markets have posed significant obstacles to trade finance in recent decades.

Despite these challenges, the MENA trade finance landscape is currently undergoing rapid transformation, driven by digitalisation, innovation, and the shift from a petroleum-based to a knowledge-based economy.

There isn’t a clearer example of this than the growth of the UAE. It is expected that by 2030, exports will reach $1.7 trillion, more than double the 2020 total of $800 billion. This 70% increase will significantly outpace the growth of global trade.

But the UAE is not the only example of trade growth. According to the World Bank, in 2003, MENA as a whole had a GDP of $1.15 trillion, and in 2021, it increased to $3.68 trillion.

This exponential growth highlights the opportunities within the region and the ever-expanding influence of the market.

In this era of transformation and growth, navigating the MENA trade landscape requires a deep understanding of the region’s unique challenges and opportunities.

New corridors, thanks to Brazil, the US, India and Asia, as well as opportunities between MENA and the wider African continent, compounded by the RussiaUkraine war, are creating new trade flows.

Whether you are a trade finance provider, a corporate, or a government agency, staying ahead of the curve in MENA demands a proactive and collaborative approach that leverages the latest technologies, best practices, and partnerships. And with more international trade participation, comes more economic prosperity, innovation, resilience, higher wages and productivity.

This growth is constantly accompanied by changes in strategies and regulations, as shown by the evolving factoring laws in the UAE, and the enactment of the United Nations

Historically, the Middle East and North Africa (MENA) region has always been a cornerstone of the global trade landscape, with its strategic location, abundant resources, and diverse economies.

DEEPESH PATEL

Editorial Director

Trade Finance Global (TFG)

BRIAN CANUP Assistant Editor Trade Finance Global (TFG)

Commission on International Trade Law’s (UNCITRAL) Model Law on Electronic Transferable Records (MLETR) in both Abu Dhabi Global Market (ADGM) and Bahrain.

As MENA countries embrace sustainability, there will be internal battles about the transformation of the economy. While ESG practices are gaining momentum by the year, a 180-degree shift from an entrenched economic and market system will undoubtedly create divisions.

The last five years of global events have proved yet again, that no one can predict the future, even the most knowledgeable experts struggle.

Black swan events will always be lurking around the corner, and growing pains in rapidly ascending regions like MENA are expected.

But what we do know, is that MENA is experiencing a moment of growth that is truly impressive, and will cement its place in global economic and geopolitical standing for the foreseeable future.

And none of this would be possible without the influence of the individuals and companies spread throughout the vast region.

Digitalisation and developing technologies may make all of the headlines, but it is the people that drive this growth.

2.1

5 industry priorities for digital negotiable instruments

Middle Eastern policymakers have promptly embraced MLETR since its publication in 2017 and delivered two of the initial jurisdictions – Bahrain (2019) and ADGM (2021) – which are ready to embrace the use - and enforce the legality - of electronic transferable records.

Trade

Chair

Dubai’s undeniable growth in trade, logistics and the financing of international commerce has made it one of the most desirable trade destinations in the world. This is why I invested more time with members of the ITFA Middle East committee in 2022.

Given the strong regional appetite for advanced technologies,

we established the Middle East Tradetech Adoption Group to drive collaborative work on the digital negotiable instruments (DNI) Initiative, the TFD Initiative and other advanced innovations.

During the MENA conference panel, industry leaders shared the progress achieved on the DNI Initiative, i.e., aiming to

André Casterman

Founder & Managing Director, Board Member Casterman Advisor, ITFA

Sean Bowey

Head of Products, Global Trade & Receivables Finance

Amr El Haddad Head of Working Capital Solutions, CEEMEA

André Casterman

Fintech Committee

ITFA & DNI Initiative

Ibrahim Chammat

Finance, Middle East

SMBC DIFC Branch

adopt MLETR in order to digitise negotiable instruments across transport, logistics and banking.

On stage, members of the new tradetech group (as listed in the above image) reported on market dynamics related to MLETR and their recent pilot transactions. We debated the blueprint for digital negotiable instruments and shared five priorities.

1. Align policy to technological developments

DNIs require adapting national laws to deal with new technologies, aiming at upgrading existing logistics, trade and trade finance processes. Middle Eastern policymakers have promptly embraced MLETR since its publication in 2017 and delivered two of the initial jurisdictions – Bahrain (2019) and ADGM (2021) – which are ready to embrace the use - and enforce the legality - of electronic transferable records.

Amr El Haddad, head of working capital solutions CEEMEA, Kyriba said, “With the fragility of supply chains, inflation, and the geopolitical risks, world trade has never been more exposed, and subsequently, the need for more and better technology has never been clearer.”

As illustrated in the below chart, the priorities are

„ To align national laws with MLETR to ensure electronic negotiable instruments are legally enforceable

„ To implement interoperable technologies

„ Once those two steps are completed, adding new value may be prioritised.

Vishnu Purohit, group head of trade product management, Emirates NBD, said, “We piloted the DNI Initiative and validated that the additional MLETR technology is pretty simple to use. The impact on business practices is minimal, which is a major benefit.”

2. Focus on interoperability to scale the use of the new practice

The emergence of distributed ledger technology (DLT) and “digital assets” extend Open Banking practices with “asset and value transfer”. This capability is particularly suited to achieve the level of interoperability required for title documents such as negotiable instruments. In other

words, cloud platforms and APIs are not sufficient on their own.

A member of the Middle East Tradetech Adoption group said, “We witness great appetite from various jurisdictions to embrace advanced technologies such as DLT, as policymakers want to help the market benefit from new digital options. MLETR is no exception and everyone will benefit.”

Embracing interoperable technologies, as proposed by DNI Initiative’s dDOC specifications, enables the market to scale the use of MLETR-compatible instruments before more value can be added.

The blueprint for digital negotiable instruments

3. Add new value to digital flows

As the adoption of e-negotiable instruments scales, the next opportunity for the market is to add more value to those enforceable electronic records.

Four examples include:

„ Automated securitisation for the sale of assets to institutional investors

„ Programmable transactionlevel carbon offsetting

„ Escrow payment and instant settlement

„ Double financing fraud prevention and more to be developed by the market.

Those features are critical to extending further benefits such as increasing balance sheet velocity, achieving net zero, and mitigating credit, operational and fraud risks, as proposed by the below chart.

Sean Bowey, head of products, global trade & receivables finance, SABB said, “We are witnessing strong appetite from the Saudi policymakers to embrace MLETR, and have established a continuous dialogue on the way forward, with the support of UNCITRAL.”

4. Promote open platforms and eco-systems

Treasury management systems, supply chain finance, traditional trade finance, transport & logistics and trade distribution platforms are specialised software solutions which have proven - and will continue to prove - their value.

However, one typical issue with most of them is that they operate as closed ecosystems. Closed ecosystems worked in the previous eras, but trade is trending towards an open ecosystem.

André Casterman, ITFA & DNI Initiative, said, “DLT is a 21stcentury innovation that needs to be embraced with a 21stcentury open banking mindset;

that’s where most trade-focused consortia have failed so far (not only the bankrupt ones).”

Interoperability comes in different forms, and in the area of DNIs, platforms that embed the DNI Initiative’s dDOC specifications become focused on the instrument level.

This means the trust is embedded in the electronic record that represents the negotiable instrument (with the associated verifiable token written on a public blockchain).

This also means each party can use separate software solutions and channels. With such a level of interoperability, the issue of closed ecosystems will finally be solved.

As indicated in dark blue on the above chart, the interoperable negotiable instruments represent payment obligations such as bills of exchange (BoE), bills of lading (BL), and promissory notes and can navigate from one platform to another as self-contained and verifiable “digital assets” (as per DNI Initiative’s dDOC specifications).

The light blue layers outline additional features that can be

operated either on-chain, such as automated transactionlevel carbon offsetting, with an escrow payment, and onchain settlement. They can also be operated on the basis of dedicated technologies/ legal schemes for automated repackaging, fraud prevention and other types of value-added processing.

5. Expand Supply Chain Finance

Corporate clients active at the international level love the BoE used under English common law, as it provides extended credit from a seller to a buyer across multiple jurisdictions.

The most common use case for

a BoE is when a seller operates across multiple jurisdictions. Given the long experience of the corporate market with this instrument, it provides a comfortable solution.

Other supply chain finance programmes, like Irrevocable Payment Undertakings (IPUs), require additional paperwork. BoEs simplify the process, as there is no need for additional documentation for buyers to review. Additionally, BoEs are not characterised as bank debt, unlike IPUs, which have accounting implications. In other words, the IPUs present a risk of re-classification, whereas the BoE shields corporates from such risk.

Vishnu Purohit said, “Digital Bill of Exchange auto-embedded in a supply chain payable workflow can potentially replace proprietary payment service agreements.”

Marshall Islands to Liberia, monitoring 68,218 vessels raises alarms for trade financiers

MICHAEL BYRNE CEO Institute Banking Law & Practice (IIBLP)

Saying the world’s oceans are vast is an understatement. If one were to sail from Cape Town to Tristan da Cunha, the world’s most remote inhabited island, located over 2,000 kilometres to the nearest land, the voyage

would take longer than it took Apollo 11 to reach the moon.

Hawaii, one of the most popular vacation destinations for Americans, is roughly 3,800 kilometres from mainland

The oceans’ vastness presents a particular challenge to monitor and regulate ocean vessels for the maritime transport industry. Of the 68,000 ocean vessels, more than 12%, or 8,000, have an unknown owner, creating significant risks for the industry.

TOM CARDAMONE President & CEO Global Financial Integrity (GFI)

BRIAN CANUP Assistant Editor Trade Finance Global (TFG)

America. Overall, oceans cover 71% of the world’s surface, at roughly 361 million square kilometres.

In 2023, there are over 68,000 vessels sailing around the oceans, carrying the goods that we all rely on.

Simply put, the world’s oceans and maritime trade flow are massive.

The oceans’ vastness presents a particular challenge to monitor and regulate ocean vessels for the maritime transport industry. Of the 68,000 ocean vessels, more than 12%, or 8,000, have an unknown owner, creating significant risks for the industry.

To better understand the world of ocean vessels and maritime trade regulation, Trade Finance Global’s (TFG) Deepesh Patel spoke with Michael Byrne, CEO of IIBLP and Tom Cardamone, CEO of Global Financial Integrity.

Too many ships, not enough technology

Attempting to combat sanctionbusting activity and financial crimes is a monumental task, and often starts with monitoring vessels. Two of the largest regulators in the industry, the US OFAC and UK OFSI, released guidelines in 2020 for financial institutions (FIs) and traders.

Michael Byrne said, “When two organisations say ‘this is what you should be paying attention to, this is what we recommend, here’s some guidance’… It may as well carry the weight of the rules because you know you’re going to be audited against or your bank examination is going to ask you these questions.”

The OFAC and OFSI rules

essentially outlined that FIs need to be aware of what ships are carrying the traded goods, what vessel transfers will potentially occur, and what countries the ships may pass through.

The issue with this is that the current technology does not provide up to the minute information, meaning the FIs, traders, and banks all may be unaware of some of these elements.

Byrne said, “The technology used doesn’t track minute by minute, so the government or bank may not know that the vessel that their goods were on went to a sanctioned country.”

OFAC and OFSI’s solutions? Oldfashioned due diligence.

FIs need to do a deep dive into routes, potentially risky corridors, backgrounds of vessel owners, and recent illicit activity of the vessel.

But doing a thorough background check is extremely difficult in this industry. There are around 8,000 vessels with unknown owners, creating large amounts of risk for all parties involved.

Out of the over 8,000 vessels with unknown numbers, 70%, or 5,766 vessels received a warning or severe compliance score.

Further complicating the matter, there are differing definitions of what a beneficial owner of a vessel is.

Cardamone said, “There is some difference between how organisations define the word beneficial owner, and how the shipping industry defines beneficial owner. The shipping industry would suggest that if you have a company name, you have identified the beneficial owner. Whereas organisations that work in the transparency space suggest that you actually need

to drill down further to find the flesh and blood person, or people, who benefit financially from a particular company.”

Not just the unknown unknowns: risks with known unknown vessel owners

One would think that many of the risks would disappear if the vessels are clearly owned, with proper documentation. However, this is not the case.

According to S&P Global research, over 30% of vessels with known owners received a warning, or severe compliance score.

Cardamone broke down the definition of a warning and severe compliance scores, “A warning would suggest behaviour that indicates travels to high risk jurisdictions, ships going dark for a significant period of time, and excessive ship to ship transfers.

Severe could include all of those activities, but also would suggest that a country such as the US or the UK has sanctioned the vessel, or that it’s on a watch list.”

The 30% statistic is just one metric that shows the shipping industry, along with governing bodies like the WTO, need to increase oversight and regulation.

When reviewing the vessels with a warning or severe compliance score, the whitepaper also studied the Flag of Convenience (FoC), to determine where the vessels were registered. The report said, “Of the 8,337 Vessels with an unknown owner, 2,981 or 35.8% are Flagged in Liberia, the Marshall Islands or Panama.”

These countries represent significant fraud or illicit activities risks, as data shows

that vessels registered in those three countries “with an unknown owner had rates of Warning or Severe compliance status between 47.8% (the Marshall Isl.) and 61.2% (Panama).”

Overall, working with vessels from these countries is not worth the potential downside. Byrne said, “I think it would be fair to say when working with vessels from Liberia and the Marshall Islands, you should probably just avoid those.”

Anomalies with vessel ownership in the Panama Canal

Vessels from Panama are a bit of a statistical anomaly compared to many other countries. Because of the importance of the Panama Canal for international shipping, the country plays a massive role in the industry. However, there are numbers that have caused concern for many industry experts.

“The authors observed an anomaly regarding a considerable number of vessels Flagged in Panama with a Known Owner, while interestingly carrying a Warning compliance status. Specific to Panama, there are 5,277 vessels with a Known Owner irrespective of Compliance status. Of this subset, 3,912 or 74% of vessels have Known Owners and a Warning status (“Panama Known Owner-Warning Vessels).

Another intriguing observation is that 3,790 vessels of the prior 3,912 subset, (97%) have a Group Owner Domiciled among seven select APAC Countries: Japan, People’s Republic of China, Taiwan, Hong Kong, Singapore, South Korea, and Vietnam while their listed “Registered Owner” for Flag purposes is a subsidiary business registered in Panama. Stated differently, 3,790 of the 5,277 Panama Flagged Vessels with a Known Owner (72%) list their Group Ownership Domicile among those seven APAC Countries listed above.”

There is one explanation for why there is such a numerical discrepancy; vessels receive a business discount if they are registered in Panama. But this does not change the risk factor for vessels from Panama.

Byrne said, “I think it doesn’t change the bottom line. You’ve got to know the owner of the vessel.”

Illicit trade in the United States and beyond - how do we continue the fight against financial crime?

The United States is one of the major shipping countries in the world with around 360 active ports, creating the possibility for large amounts of illicit activity.

According to research, there are roughly 500 vessels with unknown owners visiting ports in the United States, but they are making nearly 7,000 trips per year.

Combined with the fact that only 2% of containers are checked by the United States Customs and Border Protection (CBP), this creates a potentially dangerous situation.

Cardamone said “It raises some red flags that there are that many visits with unknown ownership. It is estimated that the value of counterfeit goods that are traded around the world every year is around $1 trillion, and if you add illegal fishing, logging, and mining, all of which tend to be delivered by ship, you add another $150 billion of goods.”

With such a large illicit goods flow, what can be done to ensure future compliance and security? Cardamone gave two top-line recommendations for governments.

„ Create a global beneficial ownership registry managed by the International Maritime Organization

„ CBP to require beneficial ownership information before entering American waters and ports.

Though this will not eliminate all illicit activity stemming from maritime trade, it will be a step in the right direction in making the industry more secure.

2.3

ICC DSI: 7 key trade documents for digitalisation

The digital trade landscape is rapidly evolving, with ongoing efforts to harmonise and align trade processes and related key trade documents.

Diligently categorising the content of 4 billion sheets of paper - enough to form a stack over 400 kilometres tall - is no small task, but that’s just the task that the International Chamber of Commerce (ICC) Digital Standards Initiative’s (DSI) Key Trade Document and Data Elements (KTDDE) Working Group has done.

These 4 billion sheets of paper represent all international trade documents, from certificates of origin to commercial invoices, in circulation at any time.

In an effort to drive trade digitalisation by promoting the interoperability of digital documents, the DSI’s KTDDE has released its systematic digital standards analysis.

The 52-page report identifies and defines the key data elements held within each of the seven identified key trade documents: namely, the certificate of origin, customs declaration, packing list, bill of lading, commercial invoice, warehouse receipt, and insurance certificate.

The resulting dataset provides guidance on how common data approaches and digital standards could facilitate seamless data sharing across digital applications, reducing the

need for wasteful and error-prone rekeying processes.

Pamela Mar, Managing Director of the Digital Standards Initiative (DSI) of the International Chamber of Commerce, told TFG, “It’s no secret that a key barrier to digitising trade and supply chain processes is the many different versions of the same documents – created by different buyers, supply chain players or digital networks.

As one moves across supply chains, there might be great similarities in the data that is being captured, but the formats and documentation are vastly different. The purpose of the Key Trade Documents and Data Elements Working Group was to collapse these different versions into datasets. This will help to reach an agreement, or at least alignment, across key industry working groups, which set documentation standards on the core data needed at each stage of the supply chain.

We sought to provide recommendations on how these data elements should be defined and exchanged. Now, we have identified the core data points needed to transact at each stage, and a recommended glossary of terms.”

CARTER HOFFMAN Research Associate Trade Finance Global (TFG)

Key recommendations from the report

Accelerating digital trade adoption requires a collaborative, multifaceted approach from various interrelated industry stakeholders.

To achieve this end goal, the DSI’s KTDDE makes four fundamental recommendations in their report:

„ Make systems and platforms compatible by design: Electronic data interchange systems must work with at least one major recognised standard and ideally with multiple standards.

„ Align to best practice definitions of key data elements: Organisations issuing and accepting data, as well as relevant regulators, should align to best practice definitions to ensure interoperability.

„ Use existing agreements to adapt to a changing environment: It is important for governments and regulators to explore ways to collaborate on new trade standards for emerging digital trade issues like smart contracts.

„ Pursue a “digital by default” strategy: Organisations should adopt a 100% digital document issuing process, eliminating paper documents and wet stamps from the outset.

Analysis and key findings

The working group’s analysis examined the intended purpose and usage of each document, the applicable legal frameworks, existing key standards, and the current obstacles standing in the way of digitalisation.

Their work involved working closely with various industry stakeholders, including private, industry and public entities, with knowledge and experience in digitalising respective documents.

The analysis uncovered that while there are multiple existing standards with few material differences, a handful of differing data element definitions created difficulties for customs authorities in interpreting and processing some of the documents from abroad.

It also revealed noticeable gaps in standardisation, including a need for globally accepted standards for insurance certificates.

While significant progress has been made in developing international standards for these documents, interoperability challenges have created a lag

Overcoming the challenges of the current digital trade landscape

The digital trade landscape is rapidly evolving, with ongoing efforts to harmonise and align trade processes and related key trade documents.

Multiple industries, including banking, freight forwarding, and shipping, have actively promoted common industrywide standards around electronic documents such as the bill of lading.

The interoperability of supply chain data is often viewed as a prospective solution to address the long-standing challenge of trade finance faced by smalland medium-sized enterprises (SMEs).

in the uptake of digital trade documents.

The development of global standards for data sharing, transparency, and alignment of practices, however, is a complex task and remains a major challenge for advocates of digital trade.

Still, progress has been made through the emergence of digital trade and supply chain platforms, industry networks, and initiatives such as the ICC DSI that aim to align data and practices.

By identifying the key data elements used across documents and promoting best practices across markets, sectors, and national and international trade

landscapes, this latest report has taken a step toward narrowing the discrepancy between the current digital trade landscape and its ideal future version.

Looking towards the future, Mar said, “This is a first step at driving alignment across the industry on the data set needed to replace, and effect, the transactions that are currently processed with paper and PDF documentation. The next step is to encourage adoption of the core dataset amongst industry groups and supply chain platforms together with the protocols for exchange and data sharing.

There is a trendmeous amount of overlap in the data elements needed at each stage of the supply chain. Today’s supply chains replicate data terms from one player to another, from one document to another. We want to encourage everyone to use technology to start sharing data in their original secured form across the supply chain. So we will be going out to engage industry groups, supply chain platforms, and even financial institutions to align their systems to these common standards.”

2.4

Managing the implementation of trade finance as an asset class,

is ESG the answer?

At the 2023 ITFA Trade and Investment Forum in London, Trade Finance Global spoke with Alexander Malaket, president, OPUS Advisory Services, to learn more about trade finance as an asset class, the promise of a standardised rating system, and the role of ESG as a catalyst for investment.

Trade finance as an asset class

Trade finance as an asset class refers to the packaging of trade finance transactions into investable securities or funds and then securitising these trade finance assets, which can be bought and sold on financial markets.

The goal of structuring trade finance as an asset class is to attract investment capital from a wider pool of investors to provide liquidity for trade finance transactions.

Small businesses often struggle to access trade finance, as traditional lenders such as banks may not have the balance sheet capacity or risk appetite to meet their financing needs, which has

led to a significant trade finance gap, estimated at $1.7 trillion. By structuring trade finance as an asset class, it may be possible to attract new sources of capital from investors looking for uncorrelated assets that can help balance their portfolios.

Malaket said, “There’s an old saying that trade finance has never met a crisis it doesn’t love. Where certain assets are underperforming in specific cyclical dynamics of the economy, trade finance often tends to counterbalance that behaviour.”

This makes it an attractive complement to other investments that may be more vulnerable to market fluctuations, as it can provide a hedge against economic volatility.

Although there have been frauds in the market, structured trade finance is generally considered less risky than other types of investments.

Additionally, in a high-interest rate environment, the yields on trade finance may be more appealing to investors,

The goal of structuring trade finance as an asset class is to attract investment capital from a wider pool of investors to provide liquidity for trade finance transactions.

ALEXANDER MALAKET President OPUS Advisory Services International Inc.

CARTER HOFFMAN Research Associate Trade Finance Global (TFG)

incentivising more capital and injecting liquidity into the market, which can help small businesses access the financing they need to grow and expand.

This can support international development in emerging markets, which can be a significant driver of economic growth.

The promise of a standardised rating system

A significant barrier to this increased investment is that investing in trade finance today requires a sound understanding of the complex contractual and operational risk issues.

There is a need for standardisation in the industry to make the investment process

more comparable to other investment alternatives and less resource-intensive for asset managers. This would enable them to assess the investment opportunities more efficiently and make informed decisions without spending years developing domain-specific expertise.

This is one area where credit rating agencies can play a role, providing a level of comfort and trust for the investment community about the nature of these transactions and making it easier to attract investment capital.

Unfortunately, developing these ratings can be difficult and expensive.

Malaket said, “It’s one of those chicken and egg discussions: it’s difficult and expensive to

develop the credit ratings, but it’s also challenging to attract the investment capital needed to pay for it without first having the credit ratings.”

These challenges can be mitigated by addressing some of the fundamental issues in the industry, such as standardisation, language, and definitions.

It will also be necessary to build a bridge between the trade finance practitioners and the asset managers’ community to better understand each other’s functions and needs to scale this whole proposition.

Technology can also be an enabler in making the process of investing in trade finance easier, less complex, and more costeffective.

The role of ESG as a catalyst for investment

Environment, social, governance (ESG) and sustainability can act as a catalyst to increase capital flows into trade finance as an asset class; however, there are some challenges that need to be addressed first.

These include establishing clear definitions and standards for ESG and sustainability, identifying transactions and businesses that are ESG and sustainability aligned, and ensuring that there is credible data and support for these claims to avoid greenwashing.

Once these challenges are addressed, it will become easier to credibly link ESG to trade finance and to attract more capital and investment into

sustainable activities using trade finance as a mechanism for facilitating sustainable global supply chains.

There are several reasons why ESG and sustainability could be a catalyst to open up trade finance as an asset class.

Firstly, investors are increasingly interested in investing in companies and projects that align with ESG principles, meaning that trade finance deals meeting these criteria could become more attractive to investors, leading to increased capital flows into this space.

Secondly, integrating ESG considerations into trade finance could help mitigate risks associated with environmental and social factors, leading to more stable and resilient trade

finance transactions and making it a more attractive asset class for investors.

Finally, there is a growing recognition that sustainable and responsible trade is essential for achieving global environmental and social goals, such as mitigating climate change, reducing poverty, and promoting fair trade practices.

Trade finance has the potential to support these goals by facilitating sustainable and responsible trade, which could make it a more attractive asset class for investors who prioritise ESG and sustainability.

Director Trade Finance Global

Implementation of Basel 3.1: Unintended consequences for credit insurance?

The Basel regulations have been continuously refined and updated to address new risks and challenges in the global banking sector, with the overall aim of promoting financial stability and preventing future crises.

Basel. A historically significant city, sitting at the confluence of the Rhine and Birs rivers, a dynamic and ever-evolving destination, serving as the meeting point of three countries— Switzerland, France, and Germany.

In 1974, following the collapse of the German Bankhaus Herstatt, a committee, known as the Basel Committee on Banking Supervision (BCBS) was founded.

Headquartered at the Bank for International Settlements

(BIS), in Basel, BCBS created a set of regulations, aiming to enhance the stability and risk management practices of banks worldwide.

On Friday 29th, March 2023, I crossed one of the four remaining river ferries, Vogel Gryff, across the Rhine. Unbeknownst to me, my vacation coincided with the date for feedback on the Prudential Regulation Authorities’ (PRAs) latest iteration of the Basel rules (aka Basel 3.1).

DEEPESH PATEL Editorial

(TFG)

With that in mind, I had the chance to catch up with the International Trade & Forfaiting Association’s Silja Calac, insurance committee board member, discussing what Basel 3.1 means for trade credit insurance.

TFG also reviewed ITFA’s response to the PRA Consultation Paper 16/22 on the implementation of Basel 3.1 standards in the UK; a concerted market response from major associations in the credit insurance and bank market.

Over the years… a brief history of Basel I – Basel III

The Basel regulations have evolved through three major accords:

„ Basel I: Introduced in 1988, the first accord focused on credit risk by setting minimum capital requirements for banks. It established the concept of risk-weighted assets, which required banks to maintain a certain level of capital based on the risk profile of their assets. The Basel I minimum capital requirement for banks was 8% of risk-weighted assets. This means that banks were required to hold capital equivalent to at least 8% of their risk-weighted assets (RWA) to cover potential losses.

„ Basel II: Published in 2004 and implemented between 2005 and 2008, this accord expanded the scope of risk management by incorporating operational risk and refining the treatment of credit risk. It introduced a three-pillar structure, which we won’t cover in detail in this article. Basel II introduced a more risk-sensitive approach to capital requirements for

banks. The minimum capital requirement under Basel II consisted of two components: a minimum capital requirement (8% of RWA) and a capital conservation buffer (2.5% of RWA), bringing the total minimum requirement to 10.5%.

„ Basel III: Developed in response to the 20072009 global financial crisis, Basel III was introduced to address the shortcomings of the previous accords. It introduced new capital and liquidity standards, such as the Common Equity Tier 1 (CET1) capital ratio, the Capital Conservation Buffer, and the Liquidity Coverage Ratio (LCR). Basel III was agreed upon in 2010-2011, with phased implementation set between 2013 and 2019, and some parts further extended until 2022-2023.

The Basel regulations have been continuously refined and updated to address new risks and challenges in the global banking sector, with the overall aim of promoting financial stability and preventing future crises.

Basel 3.1 (UK perspective)

CP16/22 was a consultation paper published by the Prudential Regulation Authority (PRA) of the Bank of England in November 2022. The paper set out the PRA’s proposed approach to implementing the Basel 3.1 standards in the UK.

The PRA’s proposed approach to implementing the Basel 3.1 standards in the UK includes adopting the new standards in full, with some modifications to reflect the specificities of the UK banking system. The PRA also proposes to introduce new reporting requirements for banks to ensure that the implementation of the new standards is monitored effectively.

It’s worth noting that the PRA is part of the Bank of England, responsible for the prudential regulation and supervision of UK banks, insurers and investment firms. London retains its status as one of the world’s leading financial centres, and its insurance market, particularly the Lloyd’s of London marketplace, is a key component of the industry.

Since the UK’s departure from the EU, the PRA has been working to adapt and refine the UK’s regulatory framework for the insurance sector. It is responsible for ensuring that regulations remain effective and relevant while also allowing London’s insurance market to remain competitive on the global stage.

The consultation period for CP16/22 ran until 31 March 2023.

The Basel 3.1 standards include several key changes to the Basel III regulatory framework. Some of the key changes are:

1. Output floor: The introduction of an output floor that limits the extent to which banks can use internal models to

calculate their risk-weighted assets. The output floor is set at 72.5% of the standardised approach, which means that banks must use the standardised approach to calculate at least 72.5% of their risk-weighted assets.

2. Credit risk: Changes to the credit risk framework, including the introduction of a new methodology for calculating risk-weighted assets for certain asset classes such as trade finance and asset finance.

3. Operational risk: Changes to the operational risk framework, including the introduction of a new standardised approach for calculating operational risk capital.

4. Leverage ratio: Changes to the leverage ratio framework, including the introduction of a new buffer for global systemically important banks (G-SIBs) and the removal of some exemptions.

5. Market risk: Changes to the market risk framework, including the introduction of a new standardised approach for calculating market risk capital for banks that do not have an internal models approach.

Overall, the Basel 3.1 standards aim to enhance the resilience of the banking system and reduce the risk of financial crises by introducing more robust and consistent capital and risk management standards.

Basel, solvency II and trade credit insurance –managing systemic risk

Basel has an overriding goal of promoting economic stability and ensuring effective management of systemic risk amongst banks. Banks should have sound capital bases and regulators, such as the PRA, are encouraged to take actions to prevent a mass withdrawal of assets which characterises “runs” on banks.

Over the past decade, banks have become active users of credit insurance in order to provide unfunded credit protection (UFCP). Credit risk insurance is not a major component of the overall activity of multi-line insurers, it represents just 2% of overall gross written premium. This sector is regulated by another set of regulatory frameworks, the EU’s Solvency II regime.

Basel and Solvency II are two separate regulatory frameworks that apply to different sectors of the financial industry.

Basel regulations apply to the banking sector, while Solvency II regulations apply to the insurance sector.

Under Solvency II, insurance companies are required to hold sufficient capital to cover the risks they take on. The amount of capital that an insurance company must hold is calculated based on a risk-sensitive approach similar to that used under Basel II for banks. Therefore, Solvency II has some similarities to Basel II in terms of its approach to capital requirements.

Though credit insurance has been utilised by banks for many years, there has been a significant increase in the

utilisation of credit insurance by banks. Credit insurance has been recognised as the second most important Credit Risk Mitigation (CRM), according to IACPM/ITFA’s 2020 survey.

That same study also evidenced that on average each $1 of credit insurance policy limit facilitated $2.55 of lending providing valuable flows of funds to the real economy.

ITFA’s response to the PRA’s implementation of the Basel 3.1 standards

ITFA welcomed the PRA’s recognition of credit insurance as unfunded credit protection and how aspects of its specific characteristics should be interpreted within the eligibility requirements for guarantees. One article of the draft CRR presently being negotiated will allow Europe to explicitly recognise credit insurance within the regulation and consider the appropriate treatment thereof.

1. The importance of trade credit insurance to the UK and to global trade

The ITFA submission said: “ITFA would not wish for the UK to lose the competitive advantage that it had established, particularly in respect of a product in which the UK is so dominant and which brings benefits to the UK economy.”

“Though it was impossible to predict the expanded role that credit insurance would be playing in risk mitigation for banks by the time state regulators have to transpose Basel 3.1 into local regulation, ITFA believe this lack of foresight should not inadvertently penalise this critical risk mitigation tool at a time when reducing systemic risk and economic volatility is more important than ever.”

2. Internal RatingsBased approach for calculating capital requirements

In Basel 3.1, the PRA is proposing to restrict the use of the Internal Ratings-Based (IRB) approach for calculating banks’ capital requirements. This proposal may have an impact on banks’ use of credit insurance.

ITFA supports the use of a specific IRB approach for credit insurance providers. However, the proposed restrictions may prevent credit insurance policyholders from reflecting the true risk of non-payment in their capital requirements. This could lead to increased costs for banks and reduce their use of credit insurance, which could result in higher risk and financial instability.

Calac said: “Banks would then abstain from seeking insurance cover for ‘better risks’ – this would not only lead to a reduction of credit capacity available for higher rated corporates, but it would also mean that insurers would only be offered the lower end of creditworthiness (BBB- rating). However, this is contrary to the requirement of portfolio diversification, which is important for an insurer when looking at a risk class. This could result in several insurers withdrawing from the credit insurance market.”

3. Loss-given default estimations

The PRA is proposing changes to how banks estimate the loss-given default (LGD) of credit insurance policies.

ITFA suggests that the LGD for insurers who provide credit insurance should be lower than that for unsecured creditors.

The ITFA submission said: “We strongly believe that this should warrant a lower LGD for Solvency II or equivalent insurers when used as a credit risk mitigant since banks’ exposure, in this case, is as policyholders and not unsecured creditors.”

This is because insurance policyholders have precedence over other claims in the event of an insurance company’s default. This priority is recognized by Solvency II, a regulatory framework that applies to insurance companies.

ITFA proposes that the super-seniority of credit insurance claims to insurance undertakings should be

reflected in the FIRB approach and Standardised Approach by introducing respective LGDs and SA-CR risk weights. For SA-CR, the existing treatment of pledged life insurance policies is the recommended starting point for calibration, providing risk weights from 20% depending on the credit quality of the insurance undertaking.

As for FIRB, ITFA recommends proxying the LGD by comparing it to an exposure fully secured by receivables with a blended LGD of 20-30%. ITFA also suggests that banks should consider both the direct recourse and the recourse from the credit insurance policy when calculating LGDs for covered loans. This approach is more risk-sensitive and consistent with guidelines from the Basel Committee on Banking Supervision.

Overall, ITFA betlieves that the proposed changes to LGD estimation for credit insurance policies could lead to increased costs for banks and reduce their use of credit insurance, which could result in higher risk and financial instability.

4. Recognising unfunded credit protection

ITFA welcomes the PRA’s proposal to affirm credit insurance as credit mitigation, provided it meets the Capital Requirements Regulation (CRR) definition to be classified as unfunded credit protection.

However, ITFA believes that insurance companies should have their own recognition as an explicit class of eligible protection providers, and credit insurance

should have its own eligibility requirements and treatment as an identified class of unfunded guarantee.

This would avoid the complexities associated with incorporating it within existing but inadequate definitions and allow for the corresponding appropriate treatments.

The ITFA submission said: “ITFA believes introducing specific recognition and treatment of credit insurance and credit insurers in the PRA’s adoption of Basel 3.1 would not be inconsistent with the framework, nor a deviation from the standards as it would reflect a more risk-sensitive approach. This would be entirely consistent with the PRA’s primary goal of reducing systemic risk by avoiding unmerited and, we believe, unintended penalizing of credit insurance.”

Calac said: “The BCBS did not consider credit insurance when forming the 3.1 recommendations, given the undisclosed private nature of credit insurance. The role of insurance cover in the bank market may well be a small omission; however, this will have unintended consequences and wider implications on the real economy.”

ITFA suggests that the LGD for unsecured underlying exposures should be 20% and 10-15% for secured and insured exposures. Calac said: “The European regulator has already acknowledged the necessity to act on this omission by including the possibility for the EBA to act on this topic through the enabling clause of Article 506 of the CRR draft.”

ITFA requests that the PRA provide a period during which banks could phase in the implementation of any changes

to the treatment of credit insurance to ensure a smooth transition rather than any sudden change in treatment that could add volatility to what has been a stabilising risk mitigation tool.

Calac said: “ITFA appeals to its members and other players in the market to take this seriously, and in its own talks to regulators, to mention the importance of credit insurance to the real economy, and the unintended consequences of blanket wide policy on trade.”

The full ITFA submission to the PRA Consultation Paper 16/22 on the implementation of Basel 3.1 standards in the UK can be found here.

EU banks, corporates cautiously optimistic while awaiting decision on treatment of trade finance products

This article was originally published in Documentary Credit World (DCW), published by the Institute of International Banking Law & Practice.

Corporates from the manufacturing, transportation, and energy sectors, along with large industrial companies, aligned with the coalition of banks to push back against the proposed CCF increase.

Recent news reports have suggested that the European Union Parliament will likely retain treatment of certain trade finance instruments at a credit conversion factor (CCF) of 20% instead of increasing it to 50%, but trade finance specialists tracking the ongoing proceedings have said that the EU banking community needs to remain extremely cautious.

Christian Cazenove, group head of trade oversight at Societe Generale, is part of the coalition of bankers who have enlisted the help of corporates under the umbrella of the ICC (International Chamber of Commerce) and drawn from solid industry data to make the case to EU policymakers that hiking the CCF to 50% for performancerelated trade finance instruments such as bonds, guarantees,

and standbys is unwarranted and would be deleterious for corporates, competitiveness, and ultimately national economies.

In late October 2021, the EU Commission launched a Capital Requirements Regulation (CRR3) proposal, which included provisions to raise at 50% the CCF for performance guarantees and set fixed maturity at 2.5 years for all trade finance instruments as part of the much broader movement to implement Basel III capital adequacy reforms.

This unwelcome development prompted a small coalition of banks within the EU to band together along with corporates, Global Credit Data (GCD) and Fleishman-Hillard agency under the ICC to gather compelling data and initiate an effort to convince the EU to reconsider.

Since mid-April 2022, the coalition has conducted over 70 meetings with EU member states, the European Council, and other EU governmental bodies.

CHRISTOPHER BYRNES Assistant Vice President Institute of International Banking Law & Practice (IIBLP)

By November 2022, the Council adopted the text and agreed to consider the coalition’s amendment to keep the CCF at 20% and an effective maturity rate for trade finance products.

In January 2023, the European Parliament’s Economic and Monetary Affairs Committee decided to maintain the 20% CCF for off-balance sheet trade finance instruments. The EU trialogue (EU Commission, Council and Parliament) is expected to take up the matter in early March 2023.

Cazenove said, “When we discussed the issue, the (European) Council said they would not oppose the amendment, but we are still far

from the final outcome and must leave member states do their role.”

Sweden holds the Presidency of the Council for the first half of 2023 and indications are that the issue would be settled before the end of their leadership.

To get more appropriate treatment of performancerelated trade instruments this far was only possible with the backing of corporates and robust data.

“If it was only the banks, it would have been too tough”, Cazenove explained to DCW. “It was important to gather corporates because a move (of the CCF) from 20% to 50% would have a

huge impact on risk weighting for the banks and a massive impact on pricing for corporates. But a worst-case scenario would be banks cutting many credit lines, preventing small/middle-sized corporates from having access to credit from banks. That’s what’s at stake.”

To illustrate the pricing shock users of performance-related trade products could face if the CCF was increased to 50%, Cazenove cited an example from a December 2021 ICC paper on the treatment of trade finance assets under the proposed CRR3. This report demonstrated the potential impact on corporates needing performance guarantees to develop infrastructure projects (like building a road or an energy station) or participate in a tender.

In the scenario given, Company A delivers work to Company B (beneficiary), with a duration of 1 year and Company B is covered by a Performance Guarantee for €100 million. It has been estimated that the RWA (Risk Weighted Asset) resulting from an increase of CCF would reach €7.4 million (CCF 50%) compared to €2.9 million (CCF 20%). In total, the new 50% CCF proposed could cause a price increase of 150%, raising the cost to €330,000 instead of €130,000 for Company A.

Corporates from the manufacturing, transportation, and energy sectors, along with large industrial companies, aligned with the coalition of banks to push back against the proposed CCF increase. The coalition relied on statistical evidence obtained from Global Credit Data and the ICC Trade Register to demonstrate that trade finance products are a lower-risk asset class.

2.7

Demystifying UCP 600: an insiders look at rules underpinning the letter of credit

At a high level, a letter of credit is a financial instrument that enables trade and trade finance to happen by providing assurance to both the importer and exporter in an international transaction.

The letter of credit may be one of the most important types of documents in the world, underpinning vast amounts of the internationally traded goods that we enjoy today.

Despite its ubiquity, however, the rules and best practices for using this critical document can take time to grasp, even for some that are well-engrained in the international trade sphere.

To learn more about the letter of credit and the rules governing its use, Trade Finance Global (TFG) spoke with Pradeep Taneja, managing director of Taneja Global Trade Consulting and cochairman and board member of ICC Bahrain.

The letter of credit from 10,000 feet

At a high level, a letter of credit is a financial instrument that enables trade and trade finance to happen by providing assurance to both the importer and exporter in an international transaction.

It is a letter from a bank to the beneficiary that guarantees

PRADEEP TANEJA Managing Director Taneja Global Trade Consulting

CARTER HOFFMAN Research Associate Trade Finance Global (TFG)

payment to the exporter if the exporter can provide the documents specified in the letter of credit.

This helps mitigate the risk of non-payment for the exporter and provides assurance to the importer that they will receive the goods they paid for and the necessary documents for customs clearance.

A letter of credit also helps ensure that the imported goods comply with regulatory requirements and international trade agreements. Taneja said, “The simplest definition I learned was it is just a letter addressed to the beneficiary by a bank. ‘Dear sir, if you ship the following cargo to my client and present the following documents to me, I hereby undertake to pay you provided the documents are in accordance with what I am asking for.’”

Overall, a letter of credit helps facilitate international trade and mitigate the risks involved in cross-border transactions.

The rules governing letters of credit

The Uniform Customs and Practice for Documentary

Credit rules are a set of international guidelines created by the International Chamber of Commerce (ICC) to provide clear and standardised rules for using letters of credit issued by banks worldwide.

These rules were first developed in response to the need for a clear and consistent framework to minimise misunderstandings and disputes between parties involved in international trade, particularly due to large geographic distances as well

as language and cultural differences.

The various renditions of the UCP rules have been given a statutory basis by certain countries and can be subject to local laws if they conflict with the provisions therein.

The rules define the roles and responsibilities of the parties involved in a letter of credit transaction, including the importer (applicant), the exporter (beneficiary), and the banks.

UCP 600

UCP 600 is the latest revision of the UCP rules, and it was developed to address issues with the previous version, UCP 500. Taneja said, “To understand UCP 600 I always suggest you know UCP 500. But to know UCP 500, you must know UCP 400, and so forth. Each rendition is an improvement on the disadvantages of the previous.”

The main disadvantage of UCP 500 was the use of imprecise interpretative terms and phrases, which led to disputes.

For example, UCP 500 stated that a bank should examine documents presented under a letter of credit with reasonable care and within a reasonable time.

However, it did not provide clear definitions for these terms leading to inconsistent interpretations and disputes over the examination period.

To address these issues, UCP 600 clarified the term “reasonable”, adding a maximum period of five banking days for banks to examine the documents. The UCP 600 rules benefit all parties involved in international

trade transactions, including banks, negotiating banks, importers, and exporters.

The rules provide a clear framework for processing and examining documents, reducing the risk of disputes and delays. By creating a more standardised process, UCP 600 enables banks to conduct their business more efficiently and effectively, benefiting importers and exporters by reducing transaction costs and increasing trade.

Is there a need for a UCP 700?

There have been criticisms of certain provisions of UCP 600, and some experts have been discussing the need for a revised set of rules for a long time, with some hinting towards the creation of UCP 700 rules. However, the executive committee of the Banking Commission has reviewed this and concluded that it is a very expensive exercise to revise UCP 600, involving not just changing the publication but also efforts to assist with implementation, training, and system alignment. Furthermore, there are some practical limitations involved with fixing some of the discrepancies that exist in the current rules since they are likely to remain even if UCP rules are revised.

Taneja said, “You can’t do anything about a discrepancy like the late presentation of documents, for example. A significant number of documents are rejected globally based on this particular discrepancy. Even if you revise UCP, you can’t fix that.”

Despite criticisms, the Banking Commission’s executive committee announced in 2017

that there is no need to revise UCP 600. Banks have happily accepted it, making it unlikely that there will be UCP 700 rules anytime soon.

Practical tips for using UCP 600

Taneja provides some general and practical tips for those in the trade finance community using the UCP 600 rules to conduct their international trade and trade finance practices.

For exporters and beneficiaries:

„ Understand the definition of “complying presentation” in UCP 600.

„ Ensure compliance with the terms and conditions of the letter of credit (LC).

„ Understand International Standard Banking Practice (ISBP) 745, which complements and accompanies UCP 600 in articulating how the rules are to be applied.

„ Endeavour to know other ISBP that may not have been captured in UCP 600 or ISBP 745.

„ Review the conditions of the LC thoroughly and seek amendments if necessary before proceeding with the shipment.

„ Create checklists to ensure compliance with UCP 600 and the LC terms and conditions.

For issuing banks:

„ Make LCs simple and avoid giving excessive details to prevent problems for exporters, importers, and the bank itself.

„ Consider the interest of all parties involved and avoid creating complexities that may hinder successful transactions.

For advising and confirming banks:

„ Confirm that the LC is authentic and accurately reflective of what was received.

„ Conduct basic checks to ensure compliance with international legislation, including dual usage

of goods, overpricing, underpricing, and tradebased money laundering.

„ Ensure that the LC is workable when confirming it.

„ Exercise caution when advising and confirming LCs to avoid discrepancies.

These ideas can improve understanding and compliance with UCP 600, leading to smoother international trade and trade finance practices.

MENA Country Profiles 3

Trade Finance Global is proud to partner with Pangea-Risk and Trade Data Monitor to provide an overview of MENA-related political risk and trade data. Providing a succinct overview of MENA politics and trade breakdown is a crucial component of any publication that aims to provide comprehensive coverage of global affairs. The MENA region is a complex and dynamic part of the world that is home to a diverse range of cultures, languages, and political systems. It is also a region that is of immense geopolitical significance, with many countries in the region being major players in the global economy and key strategic partners for major world powers.

The MENA region has a long and storied history, and its political and economic developments have far-reaching implications not just for the countries in the region, but for the wider world as well. We hope that this breakdown can help readers make sense of the complex and ever-changing landscape of the region by providing an in-depth analysis of key issues and trends shaping the political and economic landscape. From the ongoing conflicts in Syria and Yemen to the evolving relationship between Iran and the US, to the rise of new economic powers like the UAE, the region is more complex but relevant than ever.

Meet the Experts

John W. Miller (JM) is a writer and filmmaker from Brussels. He is currently working on his first book, The Last Manager (Avid Reader/Simon&Schuster), about Earl Weaver and the role of the baseball manager. He is the co-director of the 2020 PBS film Moundsville, and creator of the Moundsville online magazine. From 2004 to 2016, he was a staff reporter at the Wall Street Journal, covering European economic, global trade, global mining, and occasional events like the World Cup and Tour de France. He is a contributing writer at America, the Jesuit Review, and Chief Economic Analyst of Trade Data Monitor, the world’s premier source of trade statistics.

Robert Besseling (RB) founded specialist intelligence company EXX Africa in 2015, after pursuing a decade-long career in political risk forecasting at industryleading firms in the UK and US. In late 2020, in the midst of the coronavirus pandemic, EXX Africa was rebranded as Pangea-Risk to cover 68 African and Middle East countries.

At Pangea-Risk, Robert leads a team of partners, researchers, and contributing analysts to produce commercially relevant and actionable analysis on political, security, and economic risk in Africa and the Middle East. Robert also retains the lead on many consulting projects for blue chip corporations in a wide variety of sectors.

JOHN MILLER Chief Economic Analyst Trade Data Monitor (TDM)

DR. ROBERT BESSELING CEO Pangea-Risk

ALGERIA

RB: Over the coming year, Algeria’s hydrocarbons sector is expected to benefit from increased public and foreign investment. Attempts to boost private sector activity and diversify the economy will nonetheless remain constrained by an overcentralised political system, distrust of foreign involvement, and cumbersome bureaucratic processes.

High oil and gas export revenue will help to improve the fiscal and current account positions. As a result of improved financial conditions, the authorities will likely boost social spending to help the population cope with strong inflationary pressures and to maintain social and political stability. This trend, combined with tighter control over the public space, means that a reemergence of the 2019 Hirak countrywide protest movement calling for political and institutional reform is not expected in the medium term. Nonetheless, geopolitical tensions with Morocco will remain high in 2023, and Algeria is unlikely to reopen the gas pipeline that connects Algeria to Europe via Morocco.

JM: Algeria holds the world’s third-largest reserve of shale gas, behind Argentina and China but ahead of the US, and has stepped in to fill the gap in the European gas market. Oil and gas make up 90% of Algeria’s exports. The country’s secondlargest export is fertilisers, worth $2.5 billion in 2022 and dependent on the fossil fuel industry. Algeria’s oil and gas industry is also poised for expansion, with Western energy countries announcing plans for further investment in the nation’s energy trade infrastructure. This development is expected to bolster Algeria’s standing as a top global exporter and maintain a substantial trade surplus for at least the next decade.

Algeria’s primary imports are the machinery needed for gas drilling and processing, valued at $3.9 billion in 2022, followed by cereals, plastics, consumer electronics, and dairy and honey. Middle Eastern countries have a milk shortage due to a lack of hay and an imbalance between their appetite and supply.

Overall, Algeria’s exports rose from $38.7 billion in 2021 to $66.3 billion in 2022, with its key markets being Italy, Spain, France, South Korea, and the US. Total imports increased from $33.5 billion to $35.1 billion, with China, France, Italy, Turkey, and Brazil being the primary sources of imports.

BAHRAIN

RB: Bahrain’s new parliament will bolster the government’s position over the coming months. However, the perception of the Shia population (around 60% of the population) being marginalised in political and economic terms will continue to be a source of latent political discontent. The stability of the Sunni Al Khalifa monarchy is largely guaranteed by the ongoing financial and military support from Saudi Arabia, which in turn is motivated largely by rival Iran’s expanding influence in the region.

Saudi Arabia, which is concerned about emboldening its own domestic Shia population, will likely ensure that Bahrain’s government refrains from granting meaningful political rights to its Shia communities. Bahraini-led government suppression of opposition leaders, activists, and protesters means that the threat of politically destabilising unrest is unlikely in the one-year outlook. The various security forces of Bahrain, including the Bahrain Defence Force, the National Guard, the National Security Agency, and the Ministry of Interior are overwhelmingly composed of Sunnis.

JM: Despite having a population of under two million, Bahrain boasts a thriving oil industry and has made a name for itself in the production of metals that rely heavily on fossil fuels. Its primary export is aluminium, valued at $7.1 billion in 2022 and predominantly shipped to the US, Saudi Arabia, and Turkey. The country’s second-largest export is oil and gas, worth $5.7 billion in 2022 and primarily sent to Japan, South Africa, Saudi Arabia, Singapore, and South Korea. Bahrain’s thirdlargest export is iron and steel, worth $1.4 billion.

Bahrain’s primary import is iron ore, and it is one of Brazil’s largest purchasers of the key ingredient for steel production. Additionally, the country imports machinery and electronics from China, cars from Japan and Germany, and ships from Saudi Arabia. In 2022, Bahrain’s total exports rose to $18.4 billion from $13.4 billion, with Saudi Arabia, the US, the UAE, the Netherlands, and Oman being its key export markets. Total imports also increased from $14.2 billion to $15.5 billion in 2022, with China, Brazil, Australia, the UAE, and the US being the primary sources of imports.

RB: Rising social discontent in Egypt is not expected to pose a threat to regime stability in the short term. It remains unlikely that growing economic grievances will stoke unruly demonstrations thanks to the high likelihood of security forces breaking up any unapproved gatherings. Since 2014, Egyptians have also had an overall lower appetite for large displays of popular unrest. In the meantime, Egypt has been severely affected by globally high food and fuel prices on its external account.

Egypt will continue to rely on its relations with regional neighbours over the medium term to ease the pressure on its external financial position. In October 2022, authorities reached an agreement with the International Monetary Fund (IMF) on a 46-month extended fund facility for $3 billion and have implemented a mix of monetary and fiscal measures. While the low-value loan is insufficient to resolve the crisis, additional sources of funding from Gulf countries are expected to act as an important buffer.

JM: Egypt, like Algeria, has taken advantage of Europe’s demand for energy following Russia’s incursion into Ukraine. Its primary export is oil and gas, which brought in $18.1 billion in revenue in 2022. Spain surpassed India as the largest fuel purchaser, with South Korea, Turkey, Italy, and China following close behind. Egypt’s second and fourth largest exports are plastics and fertilisers, both of which require significant amounts of fuel to produce. Additionally, Egypt is a major exporter of oranges, with sales totalling $683.7 billion in 2022.

Despite its robust export performance, Egypt maintains a trade deficit. It acquires clothing, electronics, and machinery from China, oil from Saudi Arabia, and soybeans from the US. If the regional economy continues to prosper, Egypt and other regional economic powers will likely continue to boost exports.

In 2022, total exports increased from $40.8 billion to $48.8 billion, with Turkey, Spain, Italy, Saudi Arabia, and the US being the primary markets. Imports, on the other hand, rose from $73 billion to $85.8 billion in 2022. The primary sources of imports were China, Saudi Arabia, the US, India, and Germany.

IRAN

RB: The continuation of civil unrest in Iran is likely to cause the Iranian economy to become more vulnerable over the coming year. A natural gas supply crisis has carried on through the end of July, and since August 2022, demand has exceeded supply. If anti-government protests continue well into 2023, the situation may become the most severe in Iran’s recent history. This energy crisis will likely lead to more protests as temperatures drop over the winter season. Increasing Iran’s production capacity requires the attraction of foreign financial resources and advanced technology; this, in turn, requires both a renewal of the nuclear deal and the approval of the International Financial Action Task Force (FATF). Neither of these steps appear forthcoming, and the government’s response to the Mahsa Amini protests has only resulted in further sanctions, all but eliminating any possibility of reaching an understanding with the US and its international partners over the coming months.

JM: Iran, renowned as a significant oil producer with the world’s fourth-largest oil and secondlargest gas reserves, has successfully diversified its export base. In 2022, the country exported over a billion dollars worth of iron and steel, plastics, chemicals, and fertilisers each, setting an example for its petroleum-producing neighbours. Iran also exported massive amounts of pistachios, copper, lime and cement.

Iran’s imports mainly consist of food and agriculture, with cereals being the top category. In 2022, Iran imported $2.9 billion worth of cereals from the UAE and over a billion dollars worth from India. Additionally, it imported cars and trucks from Turkey, China, and Germany, electronics from China, and palm oil from Malaysia.

Total exports in 2022 rose to $49.5 billion from $42.6 billion, with China, Iraq, UAE, Turkey, and India being the main markets. Meanwhile, overall imports increased to $58.7 billion from $49 billion. Its main sources of imports were the UAE, China, Turkey, India, and Germany.

IRAQ

RB: After the strong growth in 2022, the economy appears to be losing steam so far in 2023. Oil production rose 4% year-on-year in JanuaryFebruary, down from the 10% increase observed in 2022. Moreover, a dollar shortage and a weak parallel-market dinar could negatively impact commercial activity. In addition, in late March, oil exports from the Kurdistan region to Turkey were temporarily halted after an international court ruling.

A deal to restart exports was reportedly reached in early April. If resumed swiftly, this should limit the harm to Kurdistan’s economy. More positively, the cabinet recently presented an expansionary 20232025 budget. If approved by parliament, spending in each of the three years is seen rising to around $152 billion, an over 30% increase from the previous budget. While this bodes well for domestic demand, structural economic weaknesses will likely remain unaddressed.

JM: Iraq’s export economy heavily depends on shipments of oil to China, which accounted for over a quarter of its total exports in 2022, valued at nearly $40 billion. The country also sends significant quantities of oil to India and the US. However, unlike Iran, Iraq has not diversified its export economy, with no other category where it exports over a billion dollars worth of goods.

Meanwhile, Iraq depends on trading partners for a wide range of products. In 2022, it imported $7.4 billion worth of goods, including iron and steel, plastics, and pistachios, from Iran, making it Iran’s second-largest buyer of exports. Iraq also imported machinery and electronics from China, cereals and sugar from India, and aircraft parts from the US.

Total exports in 2022 surged to $138.9 billion from $88 billion, primarily due to a hike in oil prices, with its biggest markets being China, India, the US, South Korea, and Greece. Meanwhile, total imports in 2022 increased to $53.9 billion from $45.6 billion. Its main sources of imports were China, Turkey, Iran, India, and South Korea.

ISRAEL

RB: Israel has seen repeated domestic demonstrations this year, with a high likelihood of large-scale, long-term protests. These are the result of Benjamin Netanyahu’s emergence as prime minister in 2022, heading a four-party coalition government. A number of his right-wing policies have been criticised across the country for undermining judicial independence.

In terms of economic policy, the new government is expected to look for ways to increase extraction from current gas fields, look for new reserves and increase export capacity. Foreign policy will likely remain consistent, however, including in the pressure campaign against Iran and its proxies, and more efforts at normalising or improving relations with Arab countries.

JM: Israel’s strong export economy is largely supported by its thriving high-tech sector, with the US being its major export destination. Its top exports in 2022 were electronics, diamonds, and optical and medical instruments. However, due to its strained relationship with neighbouring Arab countries, Israel keeps some of its trade activities hidden. In 2022, it reported $6.1 billion in exports and $14.8 billion in imports from “unidentified countries,” mostly consisting of oil and gas imports from Iran and weapons exports. In addition, Israel imports electronics and organic chemicals from China, iron and steel from Turkey and cars and trucks from Germany.

In 2022, Israel’s total exports rose to $73.6 billion from $60.1 billion, with the US, China, India, UK and Ireland being its top markets. Meanwhile, its overall imports increased to $107.3 billion from $92.2 billion, with China, the US, Turkey, Germany and Italy being its major import sources.

JORDAN

RB: Growing unemployment and any proposed austerity measures affecting subsidies, wages, and benefits will continue to drive antigovernment protests over the coming 12 months. These protests are, however, unlikely to destabilise the monarchy. Having survived the initial wave of Arab Spring unrest by relying on its traditional political formula, the government is confident that it can maintain stability without making major compromises on political or institutional reforms.

Jordan’s pro-Western and pro-Gulf state stance will remain the cornerstone of its foreign policy for security and, increasingly, economic reasons. Jordan’s central strategic position in the region should ensure continued logistical, financial, and military support from the US, despite divergences with Israeli policy in the region. The business environment should benefit from structural measures currently being implemented, despite the frequent protests. Attracting investment, decreasing reliance on fuel and food imports, and cutting unemployment remain the government’s main policy aims.

JM: Jordan’s economy heavily relies on its export sector, which is mainly composed of industrial commodities that require low-cost energy inputs. Despite being situated in the Middle Eastern oil patch, its primary exports in 2022 were fertilisers valued at $2.3 billion, followed by clothing, cement, inorganic chemicals, and pharmaceuticals. On the other hand, Jordan primarily imports oil and gas, as well as gold, cars, and trucks. In 2022, the country imported $908.8 million worth of gold from Switzerland, $875.7 million from UAE, and $446.1 million from Indonesia. While Germany and the US used to be the main suppliers of Jordan’s automotive needs, China emerged as the leading supplier in 2022.

Jordan’s export market grew to $12.4 billion from $9.4 billion in 2022, with the US, India, Saudi Arabia, Jordan, and Iraq being the primary markets. Meanwhile, imports rose from $21.6 billion to $27.3 billion, with China, Saudi Arabia, UAE, the US, and India as the main sources.

KUWAIT

RB: Emir Nawaf al-Ahmad al-Sabah has ruled Kuwait since 2020, when he succeeded widely respected statesman Sabah al-Ahmad. Younger generations of the royal family will seek influential positions as they have been left out of the line of succession. Their power will be checked by the Kuwaiti national assembly, which is by and large the region’s most powerful parliamentary body given its veto right on legislation and the right to take away confidence from individual ministers.

However, the power struggle between Kuwait’s executive and legislative branches is a source of instability that weighs on the investment environment and the reform process. The government will hence remain vulnerable to interpellations by parliament, leading to paralysis, but not significant policy changes. Nonetheless, continuous cabinet reshuffles do not threaten the political stability of the country. Indeed, Kuwait benefits from the existence of a more independent legislative compared with its neighbours in the region. However, it will continue to delay important legislation, such as the passage of the debt law, and slow the development of the private sector and the ‘kuwaitization’ of its workforce, which would facilitate the reduction of the governmental sector staff that employs 80% of Kuwaiti nationals.

JM: Kuwait has been making efforts to diversify its export economy, but it still heavily relies on the mineral fuel industry. In 2022, its top export category was mineral fuels, which generated $83.8 billion in revenue, with China, South Korea, India, Japan, and Taiwan being the top customers.

Kuwait also exported $2.1 billion worth of organic chemicals, mostly to India, China, and Turkey. Despite running a significant trade surplus, Kuwait still imports a variety of goods from around the world, including cars and trucks from the US, iron and steel from Qatar, and rubber from Japan.

In 2022, Kuwait’s total exports increased to $89 billion from $56.5 billion, with top export markets located in Asia, specifically China, India, South Korea, Japan, and Taiwan. Meanwhile, imports rose to $30.9 billion from $27.6 billion, with China, the US, Qatar, Saudi Arabia, and Japan being the main sources.

LEBANON

RB: Najib Mikati was reappointed as prime minister following the May 2022 parliamentary election. Since then, government formation has been fraught, leading to a prolonged political deadlock. The parliament is more fractured but sectarian interest groups remain dominant, and they seek to protect their interests, slowing the required overhaul of the crisis-ridden economy.

Political venality, the lack of government, and rifts over the selection of a new president will delay the finalisation of the International Monetary Fund (IMF) programme agreed on in April 2022 into early 2023. Even if multilateral funding begins to flow, the recovery will be slow and partial over the coming year, reflecting the depth of the ongoing economic, currency, financial, and debt crises. Concerns about the influence of Hezbollah, an Iranian-backed Shia group, will make Gulf Arab states wary of extending financial support. Increasing inflation and basic goods shortages, and continued restrictions on banking withdrawals are likely to continue to drive unrest.

JM: With its troubled politics and a struggling economy, Lebanon runs a huge trade deficit relative to its gross domestic product, although its geography and economic capacity give it the potential to become an export power in the Mediterranean and beyond.

For now, its export economy lags behind that potential. It ships niche products to a few trading partners, such as apples and apricots to Egypt, nuts to the US, and cocoa and cocoa preparations to Jordan.

Lebanon imports cars and trucks from the US, and iron and steel from Turkey. Turkey is Lebanon’s top supplier of imports, shipping cereals, plastics, gold and a lot of other products to its Mediterranean neighbour. Overall, Lebanese exports slipped in 2022, to $2.3 billion from $2.6B, with top export markets the US, Egypt, Switzerland, Qatar and Jordan. Meanwhile, imports rose to $16.3 billion from $12.4 billion, boosting the trade deficit. Top import sources were Turkey, China, Greece, Italy and the US.

LIBYA

RB: Libya faces numerous challenges in 2023, despite a slightly improved political and security environment. A poor business environment and weak confidence in the rule of law could hamper potential economic output, raising risks over the course of the year. Security and economic reforms will also likely be hindered by political favouritism and high levels of corruption in government institutions.

Ongoing divides and parallel power centres have exacerbated rising corruption and a shortage of technical expertise over the years. Additionally, social tensions have been growing since the ceasefire that halted fighting in Libya’s civil conflict was announced in October 2020; given the failure of international mediation to close the gap between the main factions, it remains highly probable that attempts to hold elections in 2023 will provoke further political ruptures. Overall, Libya’s business environment will likely only improve once a unity government is in place, which is not forecast to occur in the 12-month outlook.

JM: Libya’s dominant export in 2022 was oil and gas, which made up over 95% of Libya’s exports. The formerly war-torn country has a burgeoning iron and steel industry, shipping out $546.3 million worth in 2022, along with $197.8 million of inorganic chemicals and $153.7 million of copper, examples of industrial sectors that could deliver further growth.

Libya’s top imports in 2022 were mineral fuels, machinery, cars and trucks, electronics and plastics. Its main sources of automobiles were South Korea, China and the US. If its society stabilises and the economy fully recovers, it will remain a promising automobile market. In 2022, total exports rose to $40.8 billion from $33.1 billion, thanks in part to increases in fuel prices due to Russia’s invasion of Ukraine, with chief export markets Italy, Spain, Germany, China and the US. Libya remains focused on Europe, with the potential to diversify to China and the US. Meanwhile, imports rose to $17.5 billion from $15.3 billion, with chief sources Turkey, China, Italy, Greece and Belgium.

MALTA

RB: In 2023, Malta faces a growing challenge from other European and OECD countries over its “golden passport” scheme which has attracted criticism over a lack of transparency, questionable governance, and tax avoidance initiatives. Nevertheless, Malta continues to attract foreign capital and the tourism sector is expected to remain buoyant throughout the year. Mediumterm challenges include the rising cost of living and high energy prices, as well as a slowing economy, even though its GDP will comfortably outperform the Euro area.

Malta’s country rating is supported by high percapita income and a pre-pandemic record of strong growth and sizeable debt reduction. Malta’s swift exit from the Financial Action Task Force’s (FATF) grey list and its resilient economic growth have been positive developments over the past year. The biggest downside risk to Malta’s economic outlook is remaining investor concern about corruption.

JM: As a member of the European Union, the only one on this list, Malta enjoys tariff-free access to the world’s largest trading bloc. One consequence of this geopolitical luck, as well as its position as a euro-using crossroads between Europe and Africa, is that it functions as a transhipment hub for manufacturing countries in the region. Malta’s top exports are mineral fuels, electronics, and pharmaceuticals. The latter two are the result of high-tech investment in niche manufacturing.

Malta has a large trade deficit, importing large quantities of fuels, aircraft, aircraft parts, electronics, and ships and boats. The aircraft and aircraft parts come mainly from Canada, to the tune of $786 million in 2022. Overall, exports in 2022 rose to $4.9 billion from $4.2 billion, with top markets Germany, France, Japan, Italy, and the UK. Malta ran a large trade deficit in 2022. Imports increased to $9.8 billion from $7.9 billion, with top sources Italy, Canada, France, Spain, and Germany.

MOROCCO

RB: Despite a moderately improving macroeconomic situation, Morocco will continue to face challenges driven by high unemployment and high inflation, which is expected to fuel increased levels of social unrest. Nonetheless, the government led by Prime Minister Aziz Akhannouch is likely to remain in power at least through 2023, as global factors could ease demand pressures, which could work to the government’s advantage.

Policymaking under the ruling centrist coalition led by Akhannouch is expected to face limited opposition in forming and passing policy. The government will be able to approve key legislation in the short term thanks to its ideological alignment with the monarch, who will likely persuade potential opponents to support the government in case of policy gridlock. The steps taken to reform state-owned enterprises, as well as the activation of the Mohammed VI Fund and the implementation of the new Investment Charter, are widely seen as potential catalysts for foreign direct investment.

JM: Morocco has a sizeable trade deficit it can afford thanks to a strong service sector, especially tourism. The World Bank expects Morocco’s GDP to grow by 3.1% in 2023. The country’s top export is fertilisers, worth $7.6 billion in 2022, followed by vehicles, worth $6.3 billion, electronics, worth $5.9 billion, and apparel, worth $2.7 billion. Its biggest markets for fertilisers are India, Brazil, Bangladesh, Djibouti, and the US.

So what does Morocco need from the world? Morocco’s top imports are mineral fuels, worth $14.9 billion in 2022, followed by electronics, machinery, vehicles, and cereals. Morocco is still closely tied to France. It’s one of the few countries where France is the biggest supplier of cars and trucks, followed by Spain, Germany, and Romania.

Overall, exports increased in 2022 to $41.5 billion from $35.8 billion, with top markets in France, Spain, India, Brazil, and Italy. Meanwhile, imports rose to $71.8 billion from $58 billion. The top sources of imports were Spain, France, China, the US, and Saudi Arabia.

OMAN

RB: Oman is set to witness higher economic growth into 2023 in the light of a better and stronger performance of its hydrocarbon sector with improved natural gas production and higher crude oil output. Stronger-than-expected energy prices will likely boost fiscal revenues, while spending remains muted as the government continues efforts to shrink its large debt burden. Unlike most other Gulf states, Oman’s key challenge is balancing its relationship with its Western allies, Iran, and other GCC member states. To this end, Oman will continue to pursue dialogue and diplomacy as the means of ending the war in neighbouring Yemen, rather than involve itself militarily.

However, this approach has complicated Oman’s relations with its GCC colleagues, who see the Houthi movement in Yemen as a part of Iran’s wider strategic plan of dominance. Domestically, strikes and collective bargaining are more common in companies that employ a large proportion of Omanis. Sustained policies to reduce state utility subsidies from 2021 are likely to increase the risk of worker protests. The government plans to introduce a personal income tax for high earners with proceeds going to social programmes, which will likely counteract unrest.

JM: In 2022, Oman’s economy heavily relied on oil and gas exports, which accounted for 72% of its total exports. However, Oman also exported other products such as fertilisers at $5.3 billion, iron and steel at $4.9 billion, and plastics at $3 billion, showing that it has the potential to diversify its economy.

Oman’s trade surplus was significant in 2022, as it imported less than one-third of what it exported. Besides mineral fuels, the country’s top import was vehicles, with Japan and the US being the leading car importers. Oman also imported substantial amounts of machinery at $2.4 billion, electronics at $1.4 billion, and iron ore at $1.3 billion.

Overall, Oman’s exports rose to $85.1 billion from $57.5 billion, with most of its products going to Asian countries such as China, India, South Korea, Saudi Arabia, and Japan. Meanwhile, its imports increased to $25.4 billion from $21.3 billion, with the primary sources being India, China, the US, Japan, and Saudi Arabia.

QATAR

RB: Qatar’s economic diversification and business attraction efforts, as guided by the 2030 National Vision, have substantially strengthened the country’s economic prospects. The legacy of the FIFA World Cup in 2022 has raised the country’s profile and boosted non-hydrocarbon industries such as real estate, hospitality, sports, and healthcare. These effects will help Qatar maintain long-term sustainable growth and create a wealth of opportunities for foreign investors.

The hydrocarbon sector is also expected to continue to support the economy, particularly with the North Field Expansion. The first gas from the $28.75 billion project is expected to be produced by 2025. Qatar’s high living standards, thanks to the large hydrocarbon revenues and general satisfaction regarding the quality of life, reinforce political stability. The World Cup will also strengthen Doha’s relationships with key security partners. Nevertheless, the divergences in foreign policy with other regional powers, namely the UAE and Saudi Arabia may become a source of instability in the long term.

JM: Qatar is an economy with a rich history in pearling and fishing that has transformed itself into a modern economy with a world-class petroleum industry. In 2022, the country’s total exports of oil and gas increased in value by 54.9% to $113.3 billion, mostly due to price increases. However, by quantity, these exports decreased slightly. Qatar’s other major exports were fertilisers at $3.6 billion, plastics at $3.4 billion and aluminium at $2.1 billion, which are good signs of diversification in its economy.

Qatar has a large trade surplus, and its top import in 2022 was machinery worth $5.4 billion, followed by electronics at $2.9 billion, vehicles at $2.2 billion, and arms and ammunition at $1.9 billion. Additionally, Qatar imports significant amounts of food, particularly meat, fruits and nuts, and dairy products.

In 2022, Qatar’s exports increased to $129.7 billion from $86.7 billion, with the top export markets being China, India, South Korea, Japan, and the UK. Meanwhile, overall imports increased to $32.2 billion from $27.9 billion, with the top sources being China, the US, India, Italy, and Germany.

SAUDI ARABIA

RB: Saudi Arabia’s normalisation of relations with Iran reduces the risks of a direct military conflict over the coming year. Separately, the country will seek to better balance its international relations between East and West. Saudi Arabia will increasingly adhere to a more independent foreign policy approach than in the past, which implies close ties with China and Russia at the expense of antagonising traditional allies with the US and the EU.

Increased energy sector collaboration with China will be a top priority in 2023, which will include additional joint refining and petrochemical projects that seek to lock in long-term demand for Saudi crude oil and secure supplies. After a year marked by a massive oil windfall and major project announcements, the government continues to allocate much of the funds towards replenishing depleted foreign exchange reserves and also facilitates an increase in off-budget spending on Vision 2030 projects through the country’s sovereign wealth fund, the Public Investment Fund (PIF).

JM: In 2022, Saudi Arabia exported $325.7 billion worth of fuel, as well as significant amounts of industrial products like plastics, organic chemicals, and fertilisers, totalling $46.6 billion. The country also exported ships and boats worth $3.7 billion.

On the import side, Saudi Arabia brought in $21.1 billion of machinery and $19.1 billion of vehicles, with Japan as the top source of cars and trucks. In 2022, overall exports rose to $409.6 billion, with the UAE, China, India, Singapore, and Turkey being the top destinations, while imports increased to $187.6 billion, with China, the US, UAE, India, and Germany being the top sources.

SYRIA

RB: The February 2023 earthquakes have allowed President Bashar Al Assad to bolster his position through deeper political and financial engagement with the international community. Saudi Arabia and Qatar, who both do not currently have any official diplomatic ties with the Assad regime, have offered humanitarian aid following the earthquake. The Assad regime subsequently accepted such assistance. Assad will likely use this opportunity to try and establish formal ties with the two countries, thus legitimising the presence of his regime.

These countries, and other regional states, will provide humanitarian aid, but this is likely to face disruption across Syria’s political divides and is not expected to match the spending necessary to meet reconstruction costs or to offset the effects on the economy. Damage from the earthquake will likely also compound existing currency and inflationary risks. The humanitarian risks of food and fuel shortages are likely to be exacerbated by the division of political authority between the governorates affected by the quake.

JM: Syria’s economy has been heavily impacted by the decade-long conflict that has caused millions of deaths, displacements, and destruction. The country’s GDP has been halved between 2010 and 2020, resulting in a poor export economy and a large trade deficit estimated at over $200 billion by the World Bank. Syria’s main exports are agricultural products, such as animal and vegetable fats, fruits and nuts, vegetables and tubers, and tea, sent through smaller niche shipments to trading partners in the Middle East.

Its top imports include plastics, sunflower seed oil, machinery, iron and steel, and malt and wheat gluten. Overall exports increased slightly to $868.5 million in 2022, with Saudi Arabia, Turkey, Jordan, Egypt, and Iran being the top markets, while imports increased to $4.4 billion, with Turkey, China, Egypt, Iran, and Jordan being the top sources. Without peace, Syria’s ability to produce and export higher-value goods will be a significant challenge.

Overall exports rose to $868.5 million from $865 million in 2022, with top markets Saudi Arabia, Turkey, Jordan, Egypt and Iran. Imports increased to $4.4 billion from $4.2 billion, with top sources Turkey, China, Egypt, Iran and Jordan.

TUNISIA

RB: Further delays to a $1.9 billion IMF programme seem increasingly likely due to concerns over the deteriorating state of Tunisia’s finances. The bailout is urgently needed to stave off a sovereign debt default. However, social discontent stemming from the ongoing deterioration in living conditions and labour unions’ ongoing objections to IMFrequested reforms is already high and will likely intensify as negotiations with the Fund progress. This will, in turn, elevate the risk of protests and strikes, though unrest is not expected to derail government policy.

President Kaies Saied is likely to proceed with implementing economic measures in line with the IMF’s recommendations. These would focus on reducing subsidies and trimming the public sector wage bill. The initiatives fall under the exclusive authority of the presidency and thus could not be blocked even by parliament. Nonetheless, ongoing unrest, corruption and bureaucratic inefficiency are expected to remain a hindrance to foreign operators investing in local projects.

JM: Tunisia has the potential to be a significant exporter due to its infrastructure and location. Its primary exports include electronics, clothing, and mineral fuels. As a manufacturing outsourcing alternative to Asia, Tunisia’s largest buyers of clothing are France, Germany, Italy, the UK, and Belgium.

Italy, France, China, Germany, and Turkey are Tunisia’s top import suppliers, sending in electronics, oil and gas, machinery, vehicles, and pharmaceutical products. Tunisia’s car market is among the world’s most diverse, with Germany, China, Mexico, Japan, and the US each sending it over $100 million worth of vehicles. In 2022, Tunisia’s total exports increased to $20.6 billion from $17.8 billion, with the top markets being France, Italy, Germany, Spain, and the US. Total imports rose from $21.7 billion to $22.8 billion, with Italy, France, China, Germany, and Turkey being the primary sources.

UNITED ARAB EMIRATES

RB: The Russian invasion of Ukraine is having mixed effects on the UAE. On the one hand, the conflict has had a significant impact on global trade, especially for energy and grain importers, for which Russia and Ukraine are important suppliers. Moreover, current restrictions in the Black Sea, which serves as a major hub for wheat and corn, have effectively shut down the world’s second-largest grain-exporting region. The UAE is heavily reliant on grain supplies from that region and will need to find alternatives, but it has the ability to do so. Moreover, the UAE’s non-oil sector is considerably exposed to recent global developments – including the aftermath of the pandemic – and the recovery in tourism is likely to be affected by the war in Ukraine.

On the other hand, the conflict also offers economic opportunities for the UAE. The strong rise in global oil and gas prices and demand for alternative sources of hydrocarbons will provide short-term fiscal and export profits to the UAE, with spillover effects on domestic liquidity and privatesector economic activity. This coupled with the UAE’s strong policy response during the pandemic should support growth prospects.

JM: The UAE has recovered remarkably well from COVID due to its position as a dominant regional trade and logistics power. Petroleum and petrochemical industries, along with niche sectors such as precious stones and gold, make up the majority of its trade, both in exports and imports. In 2022, the UAE exported $201.7 billion of mineral fuels, $46.1 billion of precious stones and gold, $12.2 billion of aluminium, and $8.4 billion of plastics.

The UAE has a diversified petroleum buyer network, with $43.5 billion exported to Japan, $39.9 billion to China, and $27.3 billion to India in 2022. The UAE imported $39.6 billion of electronics, $39.5 billion of precious stones and gold, and $31.7 billion of machinery. In 2022, total exports increased to $325.6 billion from $232.2 billion, with the top markets being India, China, Japan, Thailand, and Iran. Meanwhile, imports rose to $273.9 billion from $223.8 billion, with China, the US, Japan, Germany, and the UK being the top sources.

RB: The countrywide halt to offensive military operations brokered by the UN has led to a 90% reduction in the reported fatalities associated with confrontations between the Houthis and forces loyal to the Internationally Recognised Government (IRG), compared to the six months before the truce. The mechanism set in place by the UN provided important channels of communication to de-escalate the conflict, but it did not tackle the several drivers of violence at a micro-level.

Even if the truce is renewed, violations would likely rebound in the absence of trust-building measures aimed at promoting political dialogue between the warring parties. However, the failure to renew the truce agreement suggests the conflict could become increasingly intractable, with the prospects of another truce or longerterm negotiated settlement becoming ever more challenging. The conflict still has the potential to return to, or potentially exceed, previous levels of violence.

JM: Despite being one of the poorest countries in the Middle East and Africa and facing conflict, Yemen has a niche oil and gas export industry worth $1.1 billion in 2022, with fish and crustaceans as the next biggest export category at $192.2 million. Its top export markets for the latter were Saudi Arabia, Egypt, Malaysia, and Thailand. However, Yemen runs a big trade deficit due to the need to feed its people. Its top import category is cereals, worth $1.9 billion in 2022, followed by iron and steel, plastics, and cars and trucks.

Yemen depends on Saudi Arabia and the UAE for humanitarian support, although it has recently clashed with the former. In 2022, exports increased to $1.9 billion from $1.8 billion, with China, Thailand, India, Saudi Arabia, and Italy as the top markets. Meanwhile, total imports rose to $10.6 billion from $9.7 billion, with China, Saudi Arabia, Turkey, India, and the US as the main sources of imports.

Trade Finance in the MENA Region

4.1

close the $2tn global trade finance gap

Persistent structural gaps within and between the world’s economies will decisively influence trade in the years ahead. This was one of the key findings in the latest Future Of Trade report.

Change – and the reform processes that drive it – is challenging at the best of times, but it has been exacerbated by the longevity of the situation in Europe and the recent global banking crisis that has gripped the entire sector.

Despite these challenges, one gap that cannot be left unchecked is found in trade finance.

80% of global trade relies on finance, such as letters of credit and other short-term payment guarantees. This makes trade finance a crucial driver of economic growth.

The trade finance gap – meaning the unmet demand for trade finance through rejected applications – was measured at $1.7 trillion in 2020 and is estimated to have surpassed

$2 trillion today due to an increasingly hawkish stance on risk and inflation eating into lending limits.

This gap particularly hinders SMEs and emerging markets. SMEs tend to be the most credit-constrained and estimates project that half of SME trade finance requests are rejected, compared with only 7% for multinational corporations. Some 68% of companies surveyed also said they did not seek alternatives after being rejected.

The macroeconomic and financial backdrop is such that the trade finance gap will widen in the near term. Notwithstanding this, there is significant potential for digital technology to help close the gap – either via streamlining onboarding processes for SMEs, or by opening the sector up to new sources of liquidity.

Innovative platforms to address this challenge exist. One such platform is DMCC Tradeflow, a digitised system for registering the ownership of commodities stored in UAE facilities, which was

How blockchain-based facilities can

Blockchain is by no means a silver bullet, and the term is thrown around so loosely that eyes often roll when it is brought up as a radical challenger to the global financial services system. However, the benefits of its real-world application within trade finance cannot be denied.

SANJEEV DUTTA

Executive Director of Commodities and Financial Services

DMCC

launched to address the crucial gap in the regional trade finance market.

It has witnessed a substantial year-on-year increase in transactions over the past decade, driving the platform’s expansion and capabilities. With record-breaking transactions

reached in 2022, Tradeflow is a great case study of the ongoing appetite and need for innovative trade finance solutions.

Building upon this, one increasingly prevalent technology that addresses these root causes head-on is the blockchain. Blockchain is by no means a

silver bullet, and the term is thrown around so loosely that eyes often roll when it is brought up as a radical challenger to the global financial services system. However, the benefits of its realworld application within trade finance cannot be denied.

When it comes to trade, blockchain makes goods traceable in real-time, enhances trust by guaranteeing the security of payments and financing, facilitates the verification of digital quality and origin certifications, enables instantaneous sharing of information at different stages of trade, and helps improve how related public and private services operate.

To date, blockchain has played a role in reducing the amount of paperwork that facilitates global trade. Most trade finance activities involve a substantial

amount of physical paperwork ‘hot potato’ between the importer and exporter, their respective banks, shipping companies, receiving companies, local shippers, insurers, and a range of additional parties.

Blockchain networks eliminate this array of inefficiencies by serving as a shared ledger that all parties can access at any time to receive the information they need to keep the trade finance process flowing seamlessly. This is hugely beneficial in supporting the supply chain through reduced costs, errorfree documentation, and much

faster transfer of documents between parties. By extension, this streamlines the onboarding process for SMEs.

This application is well known; however, it falls short of blockchain’s true potential.

Signing

into

the future:

Smart contracts are the way to go

One of the more exciting areas for the widespread application of blockchain technologies within trade finance is smart contracts. This is where the real value will come from.

Smart contracts refer to a series of digital agreements that automate the execution of a contract from outside the chain. Because the actions are automated based on predefined terms and conditions, this enables parties to collaborate, either much more efficiently through an intermediary like a bank or without one entirely.

In a typical trade scenario, this blockchain technology would allow digital agreements to be set up between two parties. The import and export banks would be able to review documents swiftly and without the need for

physical paperwork. The export bank would be able to approve the payment details and issue a smart contract to cover the terms and conditions and lock-in obligations.

The export bank would then be able to track the goods throughout the entire process as different parts of the smart contract’s terms are met. Finally, the contract would be fulfilled once the payment was carried out, again, automated through the blockchain.

This automation is expected to save between $15 and 20 billion dollars annually. But aside from

the savings generated, this would have an immeasurable impact on many underserved businesses impacted by the $2 trillion trade finance gap by creating new, less constrained sources of liquidity that are still underpinned by trust and transparency.

As with any new technology, obtaining a critical mass for its adoption will be crucial, but the benefits of operational simplification, reduced risk, automated compliance, and faster settlement should be obvious to all. That being said, the largest potential benefit comes in the form of the vast untapped opportunities and markets that blockchain-based trade finance facilities would open up.

Progress is not linear: barriers to blockchain integration

There are, of course, barriers to overcome. Cost-efficient scalability is the most prominent, representing the main roadblock that blockchain’s application in trade finance has faced. But a fully-functioning, scalable blockchain platform offers enormous potential and is becoming increasingly feasible given the continuous iterative development of the technology. Recognising this, leaders in the space, such as various consortia of banks, including Contour, and eTradeConnect, are driving realworld adoption of the technology, unlocking new opportunities for businesses and nations.

Ultimately, the shortage of trade finance through lack of access and liquidity is a major obstacle to trade growth and is a significant contributor to keeping poorer nations poor. The efficiency with which blockchainbased facilities can address this cannot be understated.

4.2

MLETR: The snowball effect of digital trade

The passing of the UK trade bill, expected in June 2023, would create momentum that would hopefully encourage a host of countries to adopt their own versions. Given the volume of crossborder trade already conducted based on English Law, this will likely accelerate the digitisation of trade instruments.

The MLETR (Model Law on Electronic Transferable Records) is a revolutionary solution that aims to transform the trade finance industry by providing an open framework for digitising trade documentation.

MLETR enables a seamless exchange of digital originals through existing mediums. This is unlike other blockchainbased trade digitisation solutions, which operate within a ‘closed user group’ concept. This allows MLETR-compliant solutions to work alongside other platforms and systems with or without integration, creating an interoperable framework that can streamline trade finance processes. Once a digital original is created, it can be shared easily with other parties involved in the transaction.

Here is what a simple trade transaction would look like with MLETR-compliant solutions:

„ Shipping companies can digitally share the original ‘Bill of Lading’ with the shipper via email

„ Suppliers can generate their own documents (invoice, etc.) and submit the same, along with the ‘Bill of Lading’ to their Bank via internet Banking

„ Supplier’s Bank can relay the document to the Buyer’s Bank via SWIFT file act

„ Buyer’s Bank can further share the documents with their client using their own Internet Banking platform

„ Lastly, the buyer can submit the ‘Bill of Lading’ to the shipping company via email or any other channel.

VISHNU PUROHITT

Group Head - Trade Product Management Emirates NBD

MLETR-compliant solutions also ensure that only one party (i.e. the possessor in the physical instance) is in control of the document and only this party can electronically transfer possession to another (for example – from shipper to Bank to buyer to the shipping company).

A closed user group blockchainbased solution, on the other hand, would require all parties involved in the transaction to be part of the same closed group with the same blockchain platform, limiting the interoperability and flexibility of the solution.

Under MLETR, no party is required to use a mandated technology. In fact, closed user group solutions could operate as communication platforms, where MLETR digital originals can be exchanged. The only requirement is the adoption of a legal framework enabling electronic transferrable records by the relevant jurisdiction.

MLETR use cases

Some countries, including Bahrain, Singapore and Abu Dhabi Global Market, have adopted MLETR. The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM), in collaboration with commercial partners Emirates NBD, DBS Bank and Standard Chartered, successfully completed the world’s first cross-border POC digital trade financing transaction. This action proved that interoperability, with the right legal framework, can be achieved.

We are also witnessing major developments in the G7 countries. In fact, the UK is on the cusp of passing the Electronic Trade Documents Bill, which will serve

as an important stepping-stone to the widespread adoption of MLETR.

Notably, English common law is the most widespread legal system in the world, with 30% of the world’s jurisdictions using it and an even greater percentage having reciprocal agreements.

The passing of the UK trade bill, expected in June 2023, would create momentum that would hopefully encourage a host of countries to adopt their own versions. Given the volume of cross-border trade already conducted based on English Law, this will likely accelerate the digitisation of trade instruments. Financial instruments such as Bills of Exchange (BoE) and Promissory Notes or Irrevocable Payment

Undertakings could benefit the most. For example, a BoE autoembedded within a supply chain payable workflow could potentially replace proprietary payment service agreements.

Germany and France are also making progress in adopting a law that would enable electronic transferable records. As they are home to two of the four largest containerised shipping companies in the world, their adoption of an electronic trade law would be key to the acceleration of trade digitisation.

While these are welcome developments and will likely have a cascading effect; the need for countries to create their own laws around electronic transferrable records is imminent.

Not all parties in a trade finance transaction, especially domestic ones, would benefit from foreign laws and the respective reciprocal arrangements.

Understandably, the decision for policymakers to prioritise the adoption of MLETR can be a challenging one, especially given the number of stakeholders involved in a trade financerelated transaction. To fasttrack the work on this front, institutions and governments could focus on other local or regional applications.

For example, in 2021, the Bahrainian Central Bank introduced e-cheques. Bahrain’s own adoption of MLETR, in the form of the Electronic Transferable Records Law and the Electronic Communications and Transactions Law, came into force in 2018 and gave the required legal basis for this initiative.

The adoption of MLETR by governments in the MENA region could replace post-dated cheques – which underpins most of the rental market in the region – with a combination of an electronic promissory note and direct debit.

This would reduce paperwork while still allowing landlords to act against tardy tenants under the negotiable instruments’ legal framework. Such initiatives could provide immediate benefits and develop the ecosystem for digitising cross-border trade as it progresses.

As legal adoption progress, it is pertinent that technology solutions evolve for mass adoption. For trade digitisation to have a meaningful impact on narrowing the working capital trade gap of about $1.8 trillion globally, tech solutions must address the problem of ‘identity’ and ‘authorisation’.

Trusted Digital Identities: Final building block

A final block in the MLETR ecosystem would be ‘Trusted Digital Identities’. These are

crucial for the transformation of trade. They enable a smoother user journey on the path to adoption, as well as provide the much-needed confidence for Banks when lending to SMEs.

It is well-known that the longest journey in any corporate transaction is the completion of KYC checks, sometimes even more arduous than finding a lending facility. An open network where corporates can create their own identities, which can then be verified by their respective Bank(s) who act as ‘verifiers’ by

leveraging on the corporate KYC that already exists, can offer a ready solution.

Digital Identities can further act as extended wallets, where documents in possession of the owner can be held safely, and support extensions for eSignatures of various geographies in which they operate. It can also enable corporates to be ‘verified issuers’ of authorisation tokens for their own personnel that can be exchanged with Banks and/ or are embedded into digital documents instead of the traditional account operating mandates.

The potential of electronic transferrable records is extremely promising. Governments, financial institutions, and fintechs around the world must intensify efforts to accelerate adoption. This is especially the case at a time when economic headwinds around the world are mounting, and measures to support growth are urgently needed.

The good news is that we are pulling in the right direction. 

4.3

Financial crime in MENA: three ways to build resiliency

Combating financial crime, including the exploitation of trade finance, is a persistent challenge. It can only be addressed with the intense commitment of all key stakeholders, who must be guided by their moral compass to support the good of their communities.

The 2030 Agenda for Sustainable Development of the United Nations defines international trade as “an engine for inclusive economic growth and poverty reduction that contributes to the promotion of sustainable development”.

Trade is critical in advancing economies, including those in the MENA region. At the same time, trade finance presents unique opportunities for criminal exploitation, also referred to as Trade Based Financial Crime (TBFC). The inherent risks of trade finance are high and include moneylaundering considerations, potential sanctions violations, the vulnerability of cross-border transactions to fraud and terrorist financing, as well as the use of dual-purpose goods for nuclear proliferation.

As the MENA region includes countries subject to sanctions, parallel challenges emerge when non-sanctioned countries need to manage the effect of U.S. and E.U. sanctions. Closer proximity to sanctioned countries increases the risk of exposure to schemes that attempt to exploit loopholes in trade restrictions.

Additional challenges arise due to limited MENA-specific financial crime typologies of trade finance, which can both raise awareness of real threats and increase the ability of practitioners to identify TBFC. This deficit creates a limited feedback loop on key financial crime indicators among public and private sector actors.

Combating TBFC Efforts in the MENA Region

The recipe to enhance efforts to combat TBFC in the MENA region requires a blend of capacity building, enhanced collaboration between the public and private sectors, as well as digitalisation of processes.

1. Capacity building

Detecting TBFC is no easy task. It requires a deep dive into due diligence reviews to understand a customer’s trading activity, counterparties, and the analysis of trade-related data. This includes vessels, ports, dual-use goods, involvement of free zone companies and shipping information.

MICHAEL MATOSSIAN Founder and Deputy Chair MENA Financial Crime Compliance Group (MENA FCCG)

AMJAD BATAYNEH Trade Based Financial Crime Expert MENA Financial Crime Compliance Group (MENA FCCG)

IBTISSEM LASSOUED MENA Chapter Chair Global Coalition to Fight Financial Crime (GCFFC)

This scrutiny needs to be applied while keeping pace with evolving TBFC typologies, including those that exploit advanced technology. Banks in particular need to remain vigilant to continually evolving sanction evasion techniques. There are many different methods of concealing the involvement of a sanctioned party in a trade:

„ Concealing the end user’s identity, consolidating goods,

„ Using neutral jurisdictions,

„ Switching cargo on the open sea,

„ Concealing the final destination of goods,

„ Using transferable & backto-back letters of credit,

„ Concealing beneficial ownership.

The challenge is compounded for MENA banks, as sanctions evasion techniques misuse the Arabic language including by Romanising Arabic letters. By distorting the names of the parties, it is harder to identify matches to names and aliases included on sanctions lists.

When sanctions evasion is successful, a transaction that is restricted or prohibited unwittingly clears, resulting in significant TBFC risks including litigation exposure. Sanctions evaders often understand the rules on due diligence, filters, and name screening and dedicate time to bypassing these controls without detection.

Manufacturing, packaging, and shipping companies are at times also complicit in these evasion efforts, adding a further layer of concealment for banks and trade partners to contend with. In essence,

targeted capacity building is critical to minimising the intrinsic TBFC risks in the rapidly evolving trade environment.

2. Enhanced collaboration

Partnership between the public and private sectors is critical for TBFC, particularly as it relates to Trade Based Terror Finance. Key stakeholders from the public sector include law enforcement, prosecutors, Financial Intelligence Units (FIUs), tax authorities, and customs agencies.

Government authorities need to engage with the financial services industry through Public-Private Partnerships (PPPs), a critical tool for enhancing the effectiveness of counterfinancial crime efforts. PPPs support collaboration and information sharing and facilitate the building of trust and communication among stakeholders.

This allows public and private

sectors and law enforcement to align their understanding of risks and priorities in the counter-financial crime system. By breaking down siloed efforts, PPPs provide a holistic view of the TBFC lifecycle and thereby improve the quality of SARs and law enforcement outcomes, including prosecutions and confiscations. This enhanced understanding can feed into MENA-specific TBFC typology reports efficiently communicated to benefit the wider community.

3. The digitalisation of processes

Because trade-related transactions are often complex and multijurisdictional, innovative IT solutions, such as graph analytics, artificial intelligence (AI), machine learning (ML), and digital ledger technology (DLT) are particularly helpful in TBFC-related analysis.

These solutions can be used not only to analyse large data sets, but also to fill in missing

links in existing networks (for example, identifying unknown criminal networks based on known criminal networks) and pinpointing interactions that indicate fictitious trade activities.

On the other hand, recent Optical Character Recognition technology (OCR) extracts data from documents, tracks vessels in real time, monitors red flags, and validates prices. Separately, DLT, which incorporates sanctions screening, allows parties to upload and encrypt physical documents involved in a trade financing transaction, enabling all stakeholders to view such documents simultaneously and securely. This eliminates the need for stakeholders to manage and reconcile physical documents, dramatically increasing efficiencies including for TBFC defences.

Call to action

In October 2022, the Global Coalition to Fight Financial Crime – MENA Chapter (GCFFC), in collaboration with the MENA Financial Crime Compliance Group (MENA FCCG) launched a comprehensive Trade Based Financial Crime (TBFC) Reference Guide.

The Guide, available in both Arabic and English and posted on the MENA FCCG website was created by leading experts with a specific focus on how TBFC methodologies are experienced in the MENA region. It aims to provide a single, accessible source of knowledge on how the trade system is abused and what methods are available to detect these illegal practices.

The GCFFC and MENA FCCG are also working closely with the American University of Beirut (AUB) on developing a TBFC Diploma and Certification open to all key stakeholders, including compliance professionals from the financial services industry, FIUs, law enforcement, customs agencies, and consultancy firms. Its purpose is to build a community of practitioners with a developed understanding of TBFC issues, equipped with the right skill set to pursue a career in an industry that, in the modern world, increasingly requires a high level of technical expertise.

The TBFC Diploma and Certification will also benefit from the formation of a dedicated TBFC Working Group of subject matter experts from leading banks across MENA. This working group will serve to open dialogue and share leading practices across the region, including on evolving topics like advanced technology.

This will ensure that the course content is reflective of current thinking and that students have access to insights into how the industry is adapting to new threats and progressing across practices.

Combating financial crime, including the exploitation of trade finance, is a persistent challenge. It can only be addressed with the intense commitment of all key stakeholders, who must be guided by their moral compass to support the good of their communities.

A well-trained workforce with hands-on experience in detecting and preventing the criminal exploitation of trade finance can dramatically improve the detection of TBFC, meet regulatory obligations, and make a collective impact in reducing financial crime. 

This article was a joint collaboration between MENA FCCG and GCFFC (MENA).

Non-resident Fellow

The Tahrir Institute for Middle East Policy

4.4

Green power politics in North African countries: Continuity or change?

Morocco has set a goal of generating more than half of its power from renewable sources by 2030

In 2023, environmental and climate issues will again be at the top of the policy agenda in the Middle East and North Africa. The upcoming COP28 climate conference in Dubai and the rapid growth in the renewables sector in Egypt and North Africa both point to the growing power of MENA states within global climate politics. This has been backed up by these countries’ ambitious renewable energy targets. Morocco aims to produce 52% of its electricity from renewables by 2030 and Egypt has a 42% renewable electricity target for 2035.

How, though, will renewable energy reshape the region’s politics? And to what extent do renewables represent a continuity of older energy politics dynamics at the domestic, regional, and international level?

Extraction in the Maghreb

In 2009, Morocco launched a national energy strategy that aims to transition to domestic renewable energy sources. Historically an “energy-poor” country, Morocco has turned to renewables as a means to transform its energy security and dependencies, setting the goal of generating more than half of its power from renewable sources by 2030.

The solar energy mega project, Noor Ouarzazate, located in southeast Morocco at the foot of the High Atlas mountains, is made up of four solar plants covering an area of 3,000 hectares and possessing a 580-megawatt capacity to produce around 6% of Morocco’s total energy supply. It also includes the world’s largest concentrated power plant.

This paper was originally published by Arab Center Washington DC. Republished with permission. © Arab Center Washington DC, March 2023.

Too often, energy policies remain siloed from other policy areas. It is necessary to situate energy politics within the broader economic, political, and social sphere that it both reflects and constitutes. As was previously the case with oil and gas, green energy technologies are being used to reinforce hegemonic geopolitical relations in the MENA region.

This public-private partnership was partly funded by the EU Neighboring Investment Facility (NIF), which put up €106.5 million, as well as the European Investment Bank, the French Agency for Development, the German Development Bank, and others. It was built and is operated by a consortium consisting of ACWA Power (based in Saudi Arabia), the Moroccan Agency for Solar Energy (Masen), Aries, and three Spanish

ACHREF CHIBANI

companies: TSK, Acciona, and Sener. Meanwhile, Noor II and Noor III were built by the Chinese company Shandong Electric Power Construction.

The Noor Ouarzazate project is a feat of solar technology, bringing together a constellation of international engineering, construction, and financial knowledge and means. Its infrastructural monumentalism, however, belies local political and social dynamics.

The Noor solar complex is located in one of the poorest and most water-stressed regions of southeast Morocco and is built on land previously held in common by a Moroccan Amazigh community. While the project included a $6.8 million fund for local development projects, it offered no compensation to local pastoral farmers, and there are fears that its high water

Existing interconnectors between Morocco and Spain that since 2019 have been exporting electricity to Spain could easily be used to link Morocco to the European grid. More ambitious still, green energy startup Xlinks plans to lay an Atlantic submarine cable connecting Morocco with the UK at a cost of $22 billion. As of January 2023, it remains unclear whether the project will draw energy from solar and wind farms in the Western Sahara.

Such green energy projects and interconnectors are being replicated across North Africa. In Tunisia and Algeria, there are similar plans to connect solar plants to Europe. As such, some have argued that the world is now witnessing a new form of environmental colonialism that is powering Europe at the expense of North Africa’s indigenous populations. While this is certainly true, it is necessary to focus on the different and varied forms this colonialism is taking, including Europe’s exploitation of its North African neighbours.

Egypt and Geopolitics in the Eastern Mediterranean

Moreover, since the start of the war in Ukraine, it has been touted as a viable replacement for Russian gas.

The geographic proximity of these eastern Mediterranean gas fields has led to economic cooperation between Egypt, Israel, and Cyprus. States have looked to take advantage of economies of scale, pooling gas infrastructure such as Egypt’s LNG facilities at Damietta and Edku and existing pipeline infrastructure.

These economies of scale have also produced political effects, precipitating new bilateral and multilateral relations across the eastern Mediterranean and entrenching conflict. Economic cooperation was instituted through the Eastern Mediterranean Gas Forum in 2019. This regional intergovernmental organisation, which includes Cyprus, Egypt, Israel, Greece, Italy, and Jordan, reflects a realignment of states in the region and is notable for those states it excludes, namely Turkey, Syria, and Lebanon.

requirements will increase water pressures.

Russia’s now year-old war in Ukraine and the ensuing global energy crisis jumpstarted a search by European states for alternative energy supplies that would reduce reliance on Russian gas. Morocco—and the wider Maghreb—have been viewed as a possible solution to Europe’s energy requirements.

The EU has thus redoubled its efforts to invest in green energy in North Africa. In 2022, the EU and Morocco signed the EU-Morocco Green Partnership, which “aims to advance the external dimension of the European Green Deal through action on the ground.”

In the eastern Mediterranean, Egypt has been looking to become a regional hub for liquefied natural gas (LNG), green hydrogen, and ammonia and has the potential to become a significant global energy hub. As in Morocco, Egypt’s energy infrastructure is closely entwined with regional political relations reinforcing the eastern Mediterranean’s geopolitical hierarchies.

LNG, which is greener than coal and oil, has been sold as a “transition fuel” that can act as a bridge between high-polluting fuels and green technologies.

Eastern Mediterranean gas discoveries have also rearranged the direction of the flow of gas— and political power—in the Arab Gas Pipeline.

Eastern Mediterranean gas discoveries have also rearranged the direction of the flow of gas— and political power—in the Arab Gas Pipeline. Originally commissioned in 2003 to export gas from Egypt to Jordan, Syria, and Lebanon, a branch to Israel was added in 2008.

In 2016, a deal was signed to transport gas from Israel to Jordan, and in 2022 an agreement was signed in Cairo

Morocco has been viewed as a possible solution to Europe’s energy requirements.

to allow for the transport of two billion cubic meters of gas per year from Israel to Egypt before it is turned into LNG and sent along to Europe.

The European Union acknowledged this tripartite relationship officially when it signed a memorandum of understanding with Egypt and Israel to establish a framework for the export of natural gas to Europe via Egypt. As some analysts have noted, economic cooperation on gas exports between Israel and

Egypt is leading to ever-closer political alliances and to the normalisation of Arab countries’ relations with Israel.

In the longer term, Egypt aims to turn the Suez Canal Economic Zone into a global hub for the production of green hydrogen and ammonia. During COP27, Egypt took advantage of its host status to sign eight framework agreements for green hydrogen and ammonia projects, including with Indian renewables company ReNew Power and Dubai-based AMEA power.

While recent reports hype the transformational effects of hydrogen on energy geopolitics, such positive effects may have been overstated. Indeed, it is revealing that hydrogen movers are often those states—such as Egypt—that wish to further secure their positions as energy powers. Green transitions are overlaid upon older global energy inequalities, and energy powers are able to capture new green technologies so as to maintain their geopolitical positions and interests.

Egypt’s emergence as an energy hub was by no means certain, but required putting in place economic, legal, political, and economic infrastructure that would make Egypt a hinge point for the transport of energy. This was both partly reliant upon and has sped up Arab countries’ normalisation of relations with Israel and the creation of a new political bloc in the eastern Mediterranean.

Complex Geopolitics

It sometimes appears that the geopolitics of the green transition are both inevitable and natural, a reflection of the global distribution of wind, solar, and tidal resources. But the green transition then becomes solely a technical matter of connecting together energy producers (such as Western Sahara) with energy consumers (the cities of Europe).

This narrative, however, obscures the politics of renewable energy infrastructure. Wind farms, solar plants, electricity interconnectors, and LNG pipelines are all, in important ways, imbricated in the region’s geopolitics, reinforcing, renewing, and occasionally challenging geopolitical hierarchies in the region.

4.5

Riding the ESG train: MENA’s efforts to embrace sustainability

RAJESH SASIDHARAN Senior Manager, Transaction Banking Services Habib Bank AG Zurich

Trade has been an integral part of human activity for millennia.

Quite often, trade does not happen directly between the producer of the raw material, the manufacturer and the end user. The supply chain process involved are complex, with each point in the journey ‘adding value’ and potentially adding to the “sustainability footprint” of the product.

The sustainability footprint may include environmental impacts such as deforestation or loss of a species; it could be a social impact such as the health of a community affected by manufacturing pollution or forced labour; or it could be a combination of these factors. In 2018, the WTO and UN Environment co-authored a report with an executive summary which begins as follows: ”International trade offers unique opportunities to build a prosperous, climate resilient and environmentally sustainable world…Proactive forwardlooking trade approaches can be effective in playing their part to tackling environmental challenges while fostering economic and social prosperity.”

ESG in trade finance

The term ESG (Environmental, Social, and Governance) was first used in a 2004 U.N. report entitled “Who Cares Wins: Connecting Financial Markets to a Changing World”. According to the report, the main target of ESG was “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions.”

On a global scale, nations have increased their collaboration to enhance their collective approach to addressing worldwide environmental issues while also promoting economic growth. These collaborative efforts have resulted in significant policy advancements, including the adoption of the United Nations’ Sendai Framework for Disaster Risk Reduction in 2015, the UN Sustainable Development Goals (SDGs) in 2015 and the Paris Agreement on climate change in November 2016.

UAE has dedicated 2023 to sustainability, under the theme ‘Today for Tomorrow’ which solidifies the UAE’s commitment to addressing current challenges and promoting sustainable practices at an individual and community level.

ESG in the MENA region

The Middle East and North Africa (MENA) region witnessed a remarkable surge in green and sustainable finance, totalling $24.55 billion in 2021, representing a staggering 532% year-on-year increase, indicating a robust ESG momentum in the region. In 2020, Egypt made history by becoming the first MENA country to issue a sovereign green bond, raising $750 million through a five-year bond.

The regulatory environment differs significantly across countries in MENA, but it is evident that governments are increasingly prioritising ESGrelated regulations that span multiple sectors.

For instance, in South Africa, a carbon tax framework mandates certain carbon emitters to pay taxes, while tax incentives are provided to companies adopting environmentally friendly technologies. The launch of the first Code for Responsible Investing in South Africa (CRISA) was an effort to promote the integration of ESG factors into institutional investors’ decisionmaking, and a follow-up to this Code is already in the works.

In collaboration with the Energy Centre in Ghana, UN Environment conducted a study to evaluate the viability of exporting solar energy from Ghana, considering technical, financial, socioeconomic, and environmental factors. The findings revealed that a gridconnected solar power plant with a capacity of 100 MW in Ghana could potentially generate annual energy exports worth $38 million, reduce CO2 emissions by 40,000 tonnes per year, create 3,000 job opportunities, and improve livelihoods for 23,000 individuals living in poverty.

With Gulf Cooperation Council (GCC) nations focusing on diversifying their economies beyond oil, investors are presented with fresh prospects in a wide array of industries such as renewable energy, infrastructure development, digital technologies, e-commerce, and fintech.

While these sectors may seem diverse, they are all increasingly impacted by a common defining factor: sustainable financing. Investors, however, need reliable data to make informed investment decisions that consider the carbon footprint of

their portfolio and the potential contribution to temperature increases. This is currently lacking in corporate greenhouse gas emissions and projections for the short, medium, and long term, as well as on their green revenues and capex.

They also need more and better data on how companies are managing and preparing for climate risks to avoid falling victim to greenwashing by thoroughly researching a company’s ESG practices and seeking out independent, third-party verification of their sustainability claims.

The significant emphasis placed by the Gulf Cooperation Council (GCC) countries on enhancing the quality of life and overall wellbeing of their citizens is reflected in their national visions, such as Saudi Vision 2030, Oman Vision 2040, and Bahrain Economic Vision 2030, which align with the United Nations’ Sustainable Development Goals (SDGs). Sustainability is recognised as a fundamental principle, integrated into these visions as a key component of their strategic plans for the future.

Collaboration with policymakers has gained increasing significance, not only at the regional level but also globally. The upcoming COP28 in the UAE and the following COP27 in Egypt in 2022 present a fresh opportunity for governments, and public and private sectors in the MENA region to work together in refining national and regional finance frameworks. This collaborative effort aims to enhance clarity, which is crucial for bolstering investor confidence and appetite for sustainable investments.

UAE takes the lead for the ESG push

Having witnessed a 32% YoY growth in its 2022 green and sustainable finance issuing, the UAE continues to build on its ESG momentum MENA-wide.

UAE has dedicated 2023 to sustainability, under the theme ‘Today for Tomorrow’ which solidifies the UAE’s commitment to addressing current challenges and promoting sustainable practices at an individual and community level. Notable examples include the “Net Zero by 2050 Strategic Initiative”, which details the country’s commitment to promoting environmental protection, and its efforts to create thriving communities ideal for living and working.

Universities to involve youth in climate action

Some universities across the UAE have now joined efforts to launch a climate network that supports youth-focused objectives ahead of the upcoming COP28 conference in the UAE later this year. Aimed at encouraging youth engagement in the UAE

in the lead-up to COP28, the Universities Climate Network (UCN) is supporting UAE’s goal of creating a more inclusive and participatory environment for young people to be leaders in climate action.

ESG has become the new normal for financial institutions. In the MENA region, it is imperative for the banking sector to align with national and regional frameworks, such as the UAE’s climate goals, as well as global environmental initiatives, driven by moral and ethical considerations.

Embracing sustainability in banking practices is a crucial pathway to accelerate the development of sustainable finance, recognising the importance of social responsibility and environmental stewardship.

Environmental fiscal reforms such as offering sustainability incentives (e.g., tax credits, subsidies, or other business incentives) to encourage taxpayers to engage in behaviours and develop technologies that can positively impact the environment are indeed vital.

Just as trade can contribute to improving the environment, so too is a healthy, stable and resilient environment essential for a well-functioning trade. Rajesh has a BA in Bank Management and an MBA in Finance from Madras University. He started his career with Scope International in Chennai (a wholly owned subsidiary of SCB) in the Trade Services division with a foundation in Trade Finance.

Rajesh has been working with Habib Bank AG Zurich since January 2015 as Senior Manager in the Transaction Banking Services (Trade Finance) division

in their Centralised Trade Operations hub in Dubai. Was shortly associated with our Zurich operations prior to handling UAE operations. Primarily responsible for the entire Import operations managing a team of 17. Job profile primarily revolves around

authorising trade transactions in line with operational (external and internal) and regulatory guidelines.

Rajesh interacts and coordinates with internal stakeholders namely credit, legal and FI teams and

external stakeholders in resolving queries and ensuring smooth flow of operations.

4.6

Empowered Arab women: Education investments as a catalyst for regional growth

HAIFA AL KAYLANI President & Founder Arab International Women’s Forum

The Arab region has seen significant progress in education, particularly for women, thanks to the ambitious Visions for 2030 and the United Nations’ Sustainable Development Goals (SDGs). Governments have prioritised education reform to break generational cycles of poverty, inequality, and stagnant economic growth, leading to Arab women excelling in education and driving regional prosperity.

Increased investment in education has resulted in higher literacy rates and enrollment for women, with Arab women now surpassing men in primary, secondary, and tertiary education.

Women in the Middle East and North Africa (MENA) region account for 57% of STEM graduates, outperforming their counterparts in the United States and Europe. These achievements highlight the commitment of governments to ensure inclusive and quality education for all (SDG 4).

As Arab women attain higher education levels, they are breaking gender barriers and advancing in previously maledominated professions. They

now hold high-level leadership positions across various sectors, including finance, aviation, business, technology, academia, research, and STEM careers. Arab women are also increasing their presence on corporate boards and in executive leadership positions, with 32% of family-owned companies in the Gulf having female board members.

Entrepreneurship is another area where Arab women are excelling, as they opt for business ownership over traditional employment. Governments are investing significantly to improve the rate of women-led businesses in the MENA region, which currently stands at 5% compared to a global average of up to 26%.

Though the numbers are still low, this trend is inspiring the next generation of young Arab women business leaders and fueling innovation and social enterprise.

However, it is essential to recognise the varying experiences of women across the Arab region. While labour laws and entrepreneurial environments in the Gulf Cooperation Council (GCC) states are largely gender-

Women’s empowerment is not only morally right but also an economic imperative. Women serve as engines of economic growth, and their empowerment benefits families, communities, and economies.

neutral, women outside the GCC often struggle to navigate bureaucracy, access finance or training due to legal and regulatory frameworks.

Additionally, Arab women are particularly active in the agricultural sector, maintaining regional rural economies and food security. However, their contributions are often downplayed and not fully recognised.

Another challenge facing women in the MENA region is their over-representation in public employment, which limits the growth of the small and mediumsized enterprise (SME) economy. In some countries, women’s employment in the private

sector averages only 20% or less, pointing to the need for further reforms and initiatives to support women’s private sector economic participation.

In conclusion, investment in education in the Arab region has enabled Arab women to excel academically and professionally, driving societal and regional progress towards the Global Goals. Supporting and investing in the education and empowerment of Arab women is crucial to unlocking the region’s full potential for growth and development. Though there has been notable progress, this is only the first step, more initiatives are needed to further women’s participation in the private sector.

Arab

Arab women’s progress in education and the economy has led to a parallel rise in their political and parliamentary representation. They have ascended in the legal profession, judiciary, and diplomatic roles, promoting women’s voices in societal development and the international community.

As Arab women serve as governors, ambassadors, and diplomats worldwide, their engagement in political structures and legislative processes becomes crucial for long-lasting empowerment across all sectors.

women in politics: Shaping a more equal and prosperous future

Despite these advancements, the overall rate of parliamentary participation for women in Arab states stands at 18.6%, compared to Europe’s 30% and Asia’s 21%.

The UAE leads the way with 50% representation, followed by Egypt (28%), Iraq (29%), and Morocco (23%). In contrast, Algeria (8%) and Lebanon (5%) lag behind. Morocco boasts genderprogressive laws, while Saudi Arabia has made substantial progress, with women holding 20% of parliamentary seats and 30 Shura Council seats.

The increase in women’s representation in Arab parliaments has correspondingly improved their legal rights and positions. However, Arab women still face universal constraints on political participation and are underrepresented in ministerial positions, far behind the 16% global average share of female ministers in 2022. Cultural resistance hinders their ability to fully exercise agency in public life.

Looking ahead, we should be proud of Arab women and hopeful for a more equal, prosperous future where women are leaders and powerful forces for change. Challenges remain, many of which are universal and not exclusive to the MENA region. Women’s economic inclusion and equality are global issues, affecting every region and economy.

Female labour-force participation in the Arab world is the lowest globally, at 18%. Societal norms and traditions limit women’s opportunities, often confining them to family and household care.

Many women graduate from universities but do not enter the workforce for the reasons above.

Those who do choose to pursue careers often struggle to progress beyond entry or mid-career levels, particularly after starting families. Additionally, legislation is not always implemented effectively, and region-wide challenges include inadequate support after career breaks, lack of flexible working models, and barriers to finance and networking opportunities for female entrepreneurs.

Steps to promote equity for Arab women

To overcome these challenges, we must work together across borders, connecting and learning from each other to break down stereotypes and address the obstacles faced by female entrepreneurs.

We need inclusive legislation, policies, and programs that work for women and families, and education systems that inspire graduates to pursue their passions and tackle development challenges. Entrepreneurship and digital jobs hold great potential for Arab women, who are breaking new ground in technology, digital marketing, advertising, and e-commerce.

Governments, the private sector, civil society, and women entrepreneurs must collaborate to create a stable environment for innovation and creativity in the digital economy. This collaboration entails fostering an innovation culture, STEM education, digital literacy, and cooperation between universities, the private sector, governments, and international development institutions.

The challenges to women’s economic inclusion and entrepreneurship are universal, but by working collaboratively

and collectively, we can overcome these barriers and support each other in building bridges and businesses, shaping a more equal and prosperous future for all.

In conclusion, empowering women in all spheres, particularly in the economy and entrepreneurship, is essential for achieving global development, prosperity, peace, and progress.

Women’s empowerment is not only morally right but also an economic imperative. Women serve as engines of economic growth, and their empowerment benefits families, communities, and economies. With increased awareness and commitment, we can break down barriers and achieve gender diversity in the Arab workforce, fostering a better world for all.

Summary: Steps to promote equity for Arab women

ƒ Inclusive legislation, policies, and programmes

ƒ Education systems that inspire female graduates

ƒ Entrepreneurship and digital jobs

ƒ Collaborations between the private sector, civil society, governments and universities

4.7

Credit guarantees for supply chain platforms: A new way to help SMEs

For many SMEs, the financing gap is always a major concern. It is reported that financing shortages count for more than half of SMEs’ problems. This issue is important for national policymakers, and financiers, as SMEs are major drivers of economic growth, employment, and social development in all economies, but especially in developing countries.

In recent years, Supply Chain Finance (SCF), has been emphasised as one of the preferred ways of financing, because of its lower costs and physical action-driven nature, as well as its flexibility and variation in providing different solutions, which differs from traditional trade finance techniques. SCF can also support Supply Chain Management (SCM) which in turn has gained prominence since the COVID-19 crisis.

A new product to help SMEs

Having the above-mentioned points in mind, the “Small Industries Guarantee Fund of Iran” (SIF), a governmental credit guarantee fund for supporting small manufacturers (as a major part of SMEs), has recently developed a product called “Credit Guarantee for Supply Chain Platforms”.

In this product, the Applicant of the credit guarantee is a manufacturer, a member of the Supply Chain Platform. The beneficiary of the credit guarantee is a company owning

a SCM platform (in some cases SCF platform) for domestic transactions, and the Guarantor is SIF.

How does it work?

After receiving the application from the manufacturer, SIF performs a credit assessment on the manufacturer (first chain), then according to the credit limit approved, SIF issues the credit guarantee for the beneficiary, i.e. company owning the SCM platform.

The credit backed by SIF’s guarantee is transferred from one chain to the other chain reaching the raw material supplier. The credit might be divided among different chains, i.e. suppliers.

In case of non-payment on the due date by the first chain, the SCM platform makes the indemnification for any chain asking for the payment (usually the raw material supplier at the end of supply chains), and then it refers to SIF for indemnification.

KATAYOON VALIZADEH SCF Project Manager Small Industries Investment Guarantee Fund

SIF pays the claim to the SCM platform and then goes to the first manufacturer for debt collection. In case of nonpayment, SIF compensates for the collaterals received from the manufacturer on the first day.

Advantages of this new product

There are many advantages to using SCF, but the new product has numerous benefits, particularly for manufacturers:

1. It helps the supply chains to perform better and improves relations among suppliers and buyers, as well as helping the businesses to grow;

2. There is better access to finance, especially for Small Manufacturing Companies, which are usually nonbankable and credit-starved, mostly due to their weaker collaterals or their small size, making them unattractive to the banks. This will help the working capital optimisation and better liquidity for all chains;

3. There is no need for financing

from the banking system, and the credits among suppliers and buyers will be used;

4. There is no need to use trade finance instruments and bear the related costs. Just the credit wallet in SCM/SCF platform is used. Occasionally, BPO will be utilised as well.

5. The transactions in the supply chain will be done based on credit, and no cash is needed;

6. All the processes of supply contracts and credit transfers can be monitored via the SCM platform, so the guaranteed credit cannot be used outside the intended supply chain, and the guarantee is driven by a physical action of selling goods/services;

7. When the beneficiary is the SCM platform, there is no need to issue a credit guarantee for each transaction between a single supplier-buyer when the credit is transferred, which means a huge reduction in the workload;

8. Buying on credit terms will gradually build up a good credit portfolio for the member company with the fund;

9. Overall, it decreases the cost of financing for the whole chain.

For SIF, the major advantage is a lower default ratio compared to the traditional Supplier Credit Guarantee. It also helps with understanding that the credits are used in the manufacturing process, which is the fund’s major mandate.

What else needs to be considered?

As the SCM platform becomes the beneficiary, it should have full legal authority from member buyers/suppliers to ask for nonpayment proofs, claim from SIF, and receive indemnification. According to Mohsen Serajzadeh, MOB and supervisor to SCF Project in SIF, there is also another option. A pool of funds is created with the subscription fee paid by members of the SCM platform, which supports the risks accepted by SIF or the risks covered by the SMC platform over the approved limit of SIF. Meanwhile, if a member contributes more to the pool, they

“Small Industries Investment Guarantee Fund, affiliated with Iran’s Ministry of Industry, Mine, and Trade, is a body designed to help small industries in Iran have better access to finance and investment, assisting them in their growth and job creation.

For the suppliers and buyers inside the supply chain, SIF, along with the new Credit Guarantee for Supply Chain Platforms, can also issue its traditional Credit Guarantee with the beneficiary of banks, in case they wish to raise finance from the banking system for their fixed or working capital.”

Mohammad Hossein Moghiseh, Chairman & CEO of SIF

will receive a higher credit limit. Further consideration is needed for performance risk, AML, legal and IT issues.

SIF is close to finishing the “Credit Guarantees for Supply Chain Platforms”, and is on the verge of offering this service on one of the platforms, after completion of IT requirements on SCM platform.

After market research into SME Credit Guarantee Institutions and Export Credit Agencies, however, the research could not find any similar products. SIF welcomes any exchange of information with professionals on this new product. 

4.8

Trade finance fund ratings: keeping it simple

Trade finance funds are seen as a vehicle that can provide access to this wider group of investors, but education on the risks faced by investing in these funds and ‘keeping it simple’ are critical.

A typical fund structure uses proceeds from shareholder subscriptions to invest in a diverse pool of assets. A fund generally cannot default if it has no debt obligations but rather will experience changes in its total return or net asset value available to fund shareholders (the investors).

Example balance sheet of a traditional trade finance fund

Fitch rates Trade Finance Funds under its bond fund criteria. A bond fund rating gives investors an informed opinion on the likelihood they may experience losses in their investment. This opinion is based on Fitch’s assessment of the credit and market risks inherent in the pool

of assets and is represented on two distinct rating scales.

Bond fund Credit Quality

Ratings provide an opinion as to the overall credit profile and vulnerability to losses as a result of defaults within a fixed-income fund. These ratings are denoted with an ‘f’ suffix to provide clear differentiation from credit ratings assigned to debt instruments.

Bond fund Market Risk Sensitivity

Ratings, expressed on a scale of ‘S1’ (very low sensitivity to market risk) to ‘S6’ (very high sensitivity to market risk), provide Fitch’s opinion as to the sensitivity of a portfolio’s total return or net asset value to changes in interest rate, credit spread and currency risks, considering the effects of leverage or hedging, where applicable.

ABIS SOETAN Director Fitch Ratings

What investors want to know about bond fund ratings

Consideration

Rating Scale(s)

Bond Funds Ratings

‘AAA’ to ‘D’ and ‘S1’ to ‘S6’

Rating Suffix f

Summary Rating Definition

A fund’s overall credit profile and vulnerability to losses as a result of defaults (Fund Credit Quality Rating) and fund’s relative sensitivity to changes in interest rate, credit spread and currency risks (Fund Market Risk Sensitivity Rating).

Does Rating Address Credit Risk? Yes (via Fund Credit Quality Rating)

Does Rating Address Market Risk? Yes (via Fund Market Risk Sensitivity Rating)

Does Rating Address Liquidity/Redemption Risk?

Typical Rating Range

Credit Risk Scoring Approach

Credit Risk Scoring Time Horizon

Market Risk Scoring Approach

Consideration of Asset Manager Capabilities

Applicable Regulatory Frameworks

Source: Fitch Ratings

Trade finance funds have many attributes akin to traditional bond funds. However, certain features are unique and led to additional analytical considerations being introduced to Fitch’s Bond Fund Rating Criteria. Specifically, the use of trade credit insurance, exposure to unrated subsidiaries of rated entities and investments in structured notes backed by trade finance assets are now addressed in our criteria.

No

Full rating spectrum

Weighted average rating factor

Full time horizon, in increments ranging from 90 days to threeplus years.

Interest rate duration plus risk-adjusted spread duration, adjusted for unhedged currency exposure and leverage.

Yes

No specific regulation, but may be subject to broader mutual fund regulations, such as the UCITs or AIFM directives in Europe.

Summary of criteria introduced for trade finance funds

Trade Finance Fund Feature

Fitch’s Criteria

Use of Trade Credit Insurance

For a given exposure covered by trade credit insurance, Fitch will recognise the protection provided by an insurer (via an Insurer Financial Strength rating) to determine the exposure’s credit rating factor, subject to a qualitative review of policy terms and other conditions that can affect the enforceability of the insurance contract. For the insured portion of an exposure Fitch will add the expected timing for a claim pay-out to the maturity date to reflect the additional market risk sensitivity of the insured exposure.

Exposure to Unrated Subsidiaries of Rated Entities

Notch down three notches from the parent rating, provided the parent is rated by an external credit assessment institution, the subsidiary is at least 75% owned by the parent and the parent and subsidiary have shared branding.

Investment in Structured Notes Backed by Trade Finance Assets

Look through the structure to the underlying trade finance assets/obligors, subject to satisfactory review of documentation addressing whether the economic gains and losses of the underlying assets are effectively transferred to the fund through the note (i.e. the note cannot default, but rather can only experience changes in value equivalent to the net asset value of the assets backing the transaction).

Source: Fitch Ratings

The Asian Development Bank estimates that the global gap in trade finance is $1.7 trillion. This represents the amount of trade finance that has been requested by importers and exporters but rejected.

The very large trade finance funding gap has created an opportunity for the growing number of institutional investors drawn to the asset class. Trade finance funds are seen as a vehicle that can provide access to this wider group of investors, but education on the risks faced by investing in these funds and ‘keeping it simple’ are critical. 

4.9

Factoring in the UAE: Developments and global implications

Factoring: An important finance product that is gaining popularity in recent years. While factoring is becoming more well-known, it is important to take proper steps to understand the legal framework that governs these transactions.

Factoring laws play a critical role in determining the rights and responsibilities of the parties involved in a factoring arrangement, as well as the powers of financial institutions to provide various factoring products.

Of particular interest, the UAE recently passed a new factoring law, which marks a significant milestone for the trade and supply chain finance community. To break down the intricacies of factoring and to provide an overview of the UAE law, Trade Finance Global (TFG) spoke to Marek Dubovec, director at the International Law Institute and professor at the University of Arizona.

What is factoring?

Factoring is the financing of receivables, typically arising from a trade transaction where receivables are transferred to a factor that may be a bank or an NBFI. Traditionally, factoring entailed an outright transfer (absolute assignment) of receivables. The more recent understanding of factoring includes security transfers and

pledges of receivables that may not necessarily arise from a trade transaction but may be generated from a sale or license of IP rights or provision of data.

Dubovec said, “Traditionally, factoring entailed absolute assignments or outright transfers of receivables generated by businesses. But more recently, those transfers have been extended to also encompass security assignments and pledges.”

Additionally, factoring laws are beginning to cover new elements as well. The UNIDROIT’s Factoring Model Law, adopted in May 2023, enables factoring companies to finance receivables arising from the use of intellectual property rights and from data transactions.

The development of international factoring standards has taken a while, in fact, it has taken four iterations of standards. The four most vital standards adopted in recent decades are:

„ 1988: UNIDROIT Convention on International Factoring

„ 2001: United Nations

MAREK DUBOVEC Director of Law Reform Programs International Law Institute (ILI)

BRIAN CANUP Assistant Editor Trade Finance Global (TFG)

Convention on the Assignment of Receivables in International Trade

„ 2016: UNCITRAL Model Law on Secured Transactions

„ 2023: UNIDROIT Model Law on Factoring

Factoring in the UAE

The United Arab Emirates (UAE) has taken a significant step in modernising and reforming its legal regime for the financing of movable assets, including receivables. In 2016, the UAE enacted the Secured Transactions Law with the aim of creating a more efficient and transparent framework for financing movable assets. However, the law contained ambiguities and gaps that required revision.

To address these issues, the World Bank Group project engaged in a revision process

that led to the enactment of a new Secured Transactions Law and Factoring Law in 2020 and 2021. The Factoring Law covers a wide range of transfers of receivables, including pledges and security transfers, and distinguishes receivables from other payment rights, such as negotiable instruments. It also overrides anti-assignment clauses, enabling suppliers to obtain financing on the back of receivables even when their transfer would be precluded by a clause in the supply contract.

The UAE has thus enhanced legal certainty for businesses engaging in factoring transactions. One example of an approach that creates a predictable environment is the requirement to publicly register a notice concerning a transfer in a registry operated by the Emirates Development Bank, promoting transparency and

preventing multiple transfers of the same receivables. The time of registration determines priority conflicts between claims to the same receivable.

A notable aspect of the Factoring Law relevant to cross-border transactions is the clause that determines the applicable law for transfers of receivables based on the location of the transferor/ assignor. This is important because factoring has become an international phenomenon, with many receivables being transferred across borders.

Factoring in markets around the world

As more countries and legislative bodies pass factoring laws around the world, it will create a snowball effect. Dubovec is involved with multiple factoring projects globally and said, “These projects now follow the

underlying principles for the UNIDROIT Model Law on Factoring, which means they extend their scope of application to a variety of transfers, not being limited to outright transfers, and to different types of receivables not being limited to trade-related receivables.”

This development helps create uniformity and harmonisation of factoring laws across multiple jurisdictions. However, this does not mean that there are no instances where the laws need to be flexible to accommodate prevailing practices in the relevant economy.

Dubovec said, “I’m engaged in a project to develop a factoring law in one jurisdiction where we have discussed with the Central Bank that the framework might need to be limited to outright transfers of receivables.”

Although the world is moving towards unification of factoring laws, different countries and different regions require unique approaches. Modernisation and harmonisation of factoring laws require a joint effort between governments, private sector actors, and multilateral institutions. Dubovec noted that the EBRD and the World Bank Group are actively supporting factoring law reforms in the Middle East and Central and Eastern Europe, Afreximbank is supporting such laws in Nigeria, and the Asian Development Bank is active throughout ASEAN.

The future of factoring is bright

As more and more economies adopt factoring laws, it is bound to have an impact on international trade and global markets. This development is coming at the right time as well,

as the very structure of the trade finance and supply chain industry is undergoing changes.

Dubovec said, “The financing of trade has shifted over the past two decades away from instruments such as letters of credit and collections to more of open account financing.”

While the industry is experiencing a fundamental shift in practices, this requires regulatory adjustments, such as in the licensing of factoring companies as well. Dubovec believes that as more companies embark on factoring reforms and the practice becomes more accessible, SMEs and microenterprises will benefit from eased access to finance.

Partner Events 5

Partner Events

C4DTI Digital Trade Conference

Fintech & Emerging Payment Systems

8th EU Factoring Summit

Instant Payments & Fraud Management Summit

City Week 2023

U.S Economic Sanctions Enforcement and Compliance Commodity Trading Week

Mines and Money Connect London

BAFT Global Annual Meeting

London Calling

Hong Kong Annual LC Survey

Singapore Standby LC and Guarantee Forum

Singapore Annual LC Survey

Trade Compliance Confrence

ABOUT TRADE FINANCE GLOBAL

Trade Finance Without Barriers

Trade Finance Global (TFG) is the leading B2B fintech in trade finance. TFG’s data-led origination platform connects companies with innovative trade and receivables finance solutions from over 300 financial institutions.

This is combined with TFG’s award-winning content, informing a global audience of 160k monthly readers (6.2m impressions) – across app, podcasts, videos, magazines and research.

STRATEGIC PARTNERS

TRADE & RECEIVABLES FINANCE

Trade Finance Global (TFG) is the leading B2B fintech in trade finance.

TFG’s data-led origination platform connects companies with innovative trade and receivables finance solutions from over 300 financial institutions.

We assist specialist companies to scale their trade volumes, by matching them with appropriate financing structures – based on geographies, products, sector and trade cycles. Contact us to find out more.

TRADE INFORMATION & EDUCATION

TFG is a leading provider of educational resources on international trade and trade finance - across app, podcasts, videos, magazines and research.

Attracting around 160k monthly readers, our publications have a global audience in 187 countries.

Our specialist content hubs provide free guides, thought leadership articles and features on International Trade, Letters of Credit, Shipping & Logistics, Risk & Insurance, Treasury & FX, Blockchain & DLT, Legal, Receivables and Export Finance.

TFG are strategic media partners for trade conference providers around the world.

TFG also hosts the International Trade Professionals Programme with LIBF, and funds the Accelerate Scholarship, a grant to help students to pursue a career in trade. Others know us through our Annual International Trade Awards, celebrating outstanding players and contributors in the trade ecosystem.

Through these activities, TFG is democratising trade finance.