Dear Reader, The current economic situation has left corporates feeling bruised. For example, it has had major supply
chain implications for both large regional, and multinational, trading companies in the Middle East, as well as major manufacturers.
In our cover story, Liz Selecka discovers that greater currency fluctuations have become a concern to large exporters of oil and oil-related products as well as commodities such as steel. Also, trading companies importing large-ticket items, eg cars, for pan-regional distribution have been affected.
Arup Roy, head of transaction banking, Saudi British Bank, believes that currency fluctuations continue to be a key risk. He is quoted as saying, “Keeping in mind the sizeable and growing amount of euro-denominated trade, large manufacturers are concerned about the volatility of the euro and the recent developments in the eurozone.”
He added, “One of the common upstream risks faced by trading companies is shipment delays, which can delay the supply chain and exacerbate the effect of currency fluctuations.”
As of today, only a handful of Middle Eastern banks are actively offering modern-day supply chain finance facilities to their corporate customers, preferring to deal with traditional instruments such as letters of credit and standard discounting.
Many local banks are, however, now recognising that trade-related financing is much more capital efficient than traditional lending, and this will become increasingly important as the industry moves towards the adoption of Basel II and then, in time, Basel III.
Looking to the future, Roy is optimistic. “Local banks remain fairly aggressive in the area of trade finance and recognise the benefits of this type of business. They are capable of competing head to head with global banks,” he says.
“Local banks are also exploring various options to facilitate the provision of supply chain finance, and are making greater investments in technology to achieve this.”
In the world of global Islamic finance, there has been “a rebound of sorts” but prospects for 2011 are at best mixed, with the consolidation of the recovery especially of the Sukuk market and core business lines, including trade finance and cash management, according to our correspondent Mushtak Parker.
In this issue, he quotes Stella Cox, managing director of DDCAP Limited, . Cox told him, “Many reports suggest that Islamic banks have weathered the global crisis better than conventional banks. Selectively, this may be true, but some reports have been based upon over-simplified assumptions about Islamic finance without analytical evaluation or statistical data. “
“It is inappropriate and dangerous to make conclusions about the sector as a whole on such basis and without consideration of the varying regulations, controls and conditions that prevail across the numerous jurisdictions in which Islamic banks operate.”
Recovery, says Parker, is not only about economic fundamentals, prudent banking, early warning systems or stress testing. “It is also about confidence – political and market confidence. Some countries where Islamic finance prevails side-by-side with conventional finance, especially in the Middle East, are undergoing a crisis of confidence precipitated by the recent ousting of Zainul-Abiddine Ben Ali as President of Tunisia.
There’s no doubt that the Middle East has experienced a rapid transformation over the past few years, and corporates continue looking for a range of innovative transaction banking products and services from their banks, as well as support, to grow their businesses – both locally and internationally. With that in mind, it is interesting to read in another article in this issue that Citi is committed to expansion in the region “to meet Middle Eastern corporates’ growing and changing needs”.