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

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 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.

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

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.