Middle East debate: Open for business


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Middle Eastern companies and their banks are still very much open for business, despite the instability arising from the Arab Spring. But with risks rising, companies want ever more visibility and control over the way they manage their cash.

Middle East debate: Learn more about the panelists


• While business might have been disrupted by the Arab Spring, finance functions and payments systems have held up

• Even still there is greater focus on working capital management by all companies from small to large

• With less liquidity in the system a greater emphasis is being placed on visibility of cash balances

• Multinationals are still looking to enter the market and local groups are looking to expand overseas

• Partnerships between international and local banking groups in providing cash management solutions to the clients is finding strong resonance in the market

Nick Lord, Euromoney With all the turmoil going on in the markets, and specifically with the downgrade of US debt, what impact has this had within your banks and companies?

MH, Mubadala Everyone expected the downgrade – it was talked about for long enough. The timing has caused a bit of a liquidity shock through the markets, but the downgrade has mainly highlighted weak leadership, not just in the US but also in Europe. From a corporate perspective, I’m not changing the way we do business. Focusing on cash and liquidity has always been of paramount importance, regardless of what crisis is going on. It’s too early to start making knee-jerk changes to investment strategies or business approaches.

NL, Euromoney Ricky, how has the increased political risk in the Middle East affected your business and in particular the finance function you run?

RT, Etihad We have seen very little real impact to our operations other than assisting our passengers and offices in locations like Cairo with alternative sources of funds, such as cash when other payment methods at banks’ branch operations were not working. The initial impact with banking counterparties was limited to enquiries from counterparties about the impact from the region and the outlook – typical credit questions. Things have settled down a lot and we can see how the world has started to differentiate between the risk profile of different countries and specifically their comfort with the UAE and Abu Dhabi.

NL, Euromoney From a local bank perspective, Murali, how do you see local companies manage their working capital and cash?

MS, ADCB The landscape is mixed. There are extremely sophisticated diversified business groups that manage their treasuries centrally, and their needs are more consistent with how developed market corporates would manage their cash. At the other end, there are the smaller businesses that manage their cash in a more cost-conscious way. Everyone agrees that the goals for cash management are visibility of cash, control of liquidity and managing cost in terms of operations. But everyone’s made different progress toward all these objectives depending on their evolution in working capital management.

MK, BAML The most important thing that multinational corporations in the region have to watch is the status of the individual jurisdictions. The region has an overall high level of growth, but some markets are still contracting, some are neutral, while others continue to show growth like Qatar and the UAE. The frequency of reporting and the immediacy of information has become more important. Our clients are trying to ensure they have multiple sources of funding and multiple sources of investment vehicles. We’re seeing more clients move towards a dual plus-banking model, so that if one institution does have a problem, they still have the day-to-day capability to make those payments.

MH, Mubadala For this economy to grow, as one of the few regions in the world that has positive GDP now and forecast, it requires funding. The local banks provide an awful lot of liquidity but they can’t provide enough. So corporates need to attract international investors. With the current economic backdrop, people are sticking to what they know. Therefore, I can see banks trying to reduce exposure to emerging markets. So one of the big issues we’re going to face here is, can you get enough liquidity to support business growth? I don’t know what the banks’ executive committees are looking at, but I’ve started to feel a little bit of squeeze coming through.

NL, Euromoney Are lines being reduced?

MH, Mubadala It’s getting harder. The glut of liquidity that we saw two years ago has probably gone a bit, and banks in the region know the region, so they have a very different risk premium expectation than an international bank with no presence here.

DR, BAML The premiums you mention, certainly on the asset side, reflect not only the risk premium but also the liquidity premium. The latter’s becoming a key issue for banks. We’re seeing a big pick-up in terms of liquidity premiums paid for dollar funding, for example. I don’t know if we’re unique, but Bank of America Merrill Lynch is strengthening its local offering by adding additional infrastructure, systems, staff, risk management, governance and controls as clearly the emerging markets are an outstanding opportunity. Additionally, we are seeing fixed-income investors looking for diversification in the emerging markets. They’ve started to come in quite aggressively for the strongest credits. You’ve got big fixed-income investors buying Qatar bonds instead of US treasuries.

MH, Mubadala You’ve got a double-A sovereign that’s got a CDS spread that is on par with a triple B in the Philippines or Colombia. Investors are very keen. It’s just trying to work out what part of their portfolio they want to allocate to this part of the world. But there are some great fixed-income opportunities. Daniele, you were on the road recently, so you can say more.

DV, Majid Al Futtaim In general, there is a big misperception of the region. Why should a double-A name be priced like a triple-B country in Latin America? You get penalized simply because you’re based in Dubai and you get bad coverage from the press. Of course, there is a lot of work to do from a governance perspective: disclosure, cost of capital, right metrics for handling a business. Corporates need to do their own work on that side.

MH, Mubadala As corporates here look to diversify their funding sources and open up to fixed-income investors, we need to really focus on transparency and accountability in corporate governance. But my bigger concern is leaving a void for those SMEs in the region that can’t access international capital, that have to go to local banks. I’ve often wondered whether the local banks’ loan-deposit ratio is improving enough to provide liquidity to the SMEs. The growth of the economy doesn’t come from big multinationals. It’s from those SMEs, those family groups that can’t go international yet, that are very dependent on the local banks. The local banks’ loan-to-deposit ratios have been moving around for the past few years. Are they getting better?

CF, ADCB The loan-to-deposit ratios of the UAE banks are certainly getting better. ADCB’s loan-to-deposit ratio has come down dramatically in the past couple of years. My concern with what’s happening in OECD markets is that because there’s increased risk aversion among the banks, there’s a focus on looking at better-quality borrowers in addition to which, once again, the banking industry is underpricing risk at the good end of the credit-quality spectrum. Our challenge as a bank, and I know our peers in the market have the same challenge, is that we need to have our balance sheet growing more quickly than it is. We have to find good-quality borrowers to do so. And that’s not to strike SMEs out – in fact SMEs in the UAE and other Gulf countries are net contributors of liquidity to the banking system, suggesting many SMEs are liquid and with strong balance sheets.

ADCB has considerably more credit balances from SMEs than the loan book, and I have a team of sales people out in the market actively looking to support SMEs with working capital, financing equipment, and so forth. Most banks, I would say the top 10 banks in the country, are all actively working out how they can provide more credit to SMEs. And through the downturn, SME working-capital cycles contracted, which delivered excess liquidity into the banking system. We saw our balances grow very rapidly at that time.

The 363 rule

DV, Majid Al Futtaim I’m going to be a bit provocative. The banking system is going back, in some ways, to the 363 rule: you borrow at 3, you lend at 6, and at 3pm you’re on the golf course. As a company, once you realize that the core of your funding is not going to come from the banking system, you need to have options and build different channels to fund the development of the organization. But I wonder where these people are going to get the money. The pricing that they are probably getting imposes such a high return on investment that I’m not sure they’re getting what they need.

CF, ADCB I would really push back on that. When we ask SMEs what they want, they say their desires are simple: quick decisions and good service. They are price-focused, but we don’t see any push-back on pricing when it comes to loans. Now, what banks in the UAE have stopped doing is lending to speculative real estate projects, particularly in non-institutionally developed real estate. Why? Because the market remains oversupplied in the UAE and the region. Even Qatar, which is growing at 18% a year, has a real estate overhang.

MS, ADCB The model for lending to SMEs is changing for the better. Finance requirements are tied to the working-capital-cycle needs of the SME. SMEs often work with uncertain working-capital cashflow, so they very much appreciate credit enhancement or unfunded channels for trade wherein they can afford to pay much later. So SMEs are increasingly looking at more capital-based financing arrangements and fewer collateral-based arrangements. The banks are having to work a lot more in terms of decisioning credits.

CF, ADCB If price sensitivity or liquidity availability from the banks was a big issue, then supply chain finance ought to be massive in this market. Yet it’s not big at all, despite the fact that there are a number of banks very keen to provide supply-chain financing. And that’s the reason I’m confidently saying that’s not the challenge. The lending spreads are not thin, I agree. But if that spread came in lower, I don’t believe there would be much difference in demand.

MH, Mubadala It’s also the level of sophistication of the SMEs. Trade finance – that is, credit, bid bonds, advance payment guarantees – are just a part of the standard suite of doing business here, more so than you’d find in the west. But I’m not sure whether there are many organizations that have the understanding and sophistication to start looking further into that working-capital supply chain to start really getting the benefit.

NL, Euromoney Martin, as an international bank expanding in the region, what can you bring to market to help these local clients?

MK, BAML To Matthew’s point, there’s a key role for banks to play in the context of a trade finance package, whether it’s receivables financing or supply chain. If you look at global trade flows, 80% of the world’s trade flows continue to be on open account in the Middle East, 75% are based around traditional trade instruments. The trade finance solutions are already here. Now it’s a question of how banks deliver and package them to the market as part of a trusted advisory role.

MS, ADCB Excellent point. And in the specific context of SMEs, out of the 54 or so banks in the UAE, only about 10 are active with SMEs. And some of these are traditional banks. They’re happy to do the 363 kind of structure that you mentioned, Daniele, though there are more regulatory and infrastructure initiatives and banks are starting to be more client focused.

CF, ADCB I would challenge that. For example if you go to the UK, how many banks in the UK would actively cater to SMEs? It’s probably around four or five major banks, and the economy is much larger than the UAE. So I continue to say that the SME market here is pretty well served.

NL, Euromoney Are bank relationships being consolidated? For bigger groups such as yourselves, how are you developing your bank relationships at the moment, given everything we’ve heard?

DV, Majid Al Futtaim As long as you don’t have enough diversification of funding sources, it’s going to be difficult, because you need to rely on funding to change your banking policies. The past three years have shown people that local and international banks are committed to the region. So it’s more up to corporates. Some relocation has taken place, but I wouldn’t say we have reduced the number of banks we are doing business with.

NL, Euromoney Do you concur?

MH, Mubadala We deal with banks slightly differently. As a catalyst for the government to diversify the economy, we have a portfolio of opportunities for banks to get access to ancillary businesses so they can get some return equity. We sit down with them and show them where those opportunities are. We also see an awful lot of credit guys coming through because, especially for international banks, they hold the power now. So I’ve got to look in the whites of the eyes of the credit committee and say why this region is good for the money and then why Mubadala is good for the money. As a government-rated entity, we’re very fortunate to be one of the few places that banks will actually try to access.

We expect more

RT, Etihad We continue to expect more from our banks in terms of the ability to pool and sweep funds and as far as integration with our treasury and ERM systems are concerned. We also expect more in terms of assisting with risk management on FX in restricted currencies like Indian rupee and Chinese renminbi.

MH, Mubadala The risk we face is that we could be taking too much liquidity away from the SMEs. If we’re trying to diversify the economy, we want to engage with the private sector and make sure there’s sufficient liquidity for everybody to achieve their own goals and objectives. At the moment, banks who want to have access to this region probably want to back fewer horses who have larger amounts. We’re lucky in that we see returns for the time we’ve invested with the banks. We can see that the approach we’ve taken to bank relationships works. But at the same time we also want others to see our progress as a benchmark, as the way they should do it in order to have access to that same level of liquidity.

NL, Euromoney Are you worried about counterparty risks with some of the banks that you’re dealing with?

MH, Mubadala Well, I’ve got a credit rating that’s stronger than most of the banks. So when I’m looking at long-dated transactions, I have to bear that in mind. I have a sophisticated counterparty model that looks at what their capital structure looks like, but for the mutually beneficial relationship to work, they support us with balance sheet and we have to provide that ancillary business. I don’t really mind where I get the money from. I’ll borrow from a single-B rated bank. It’s more the ancillary business where I look at a much wider counterparty risk.

DR, BAML And you have access to the bond market.

MH, Mubadala And we have access to the bond market. But we spend a lot of time on counterparty risk and making sure that we’re comfortable.

DR, BAML Can I just pick up on one point that Matthew mentioned, which was the ancillary business coming with the balance sheet. Historically, everybody’s been talking about reducing their number of banking relationships. But based on feedback and conversations we’re having with clients, it’s less about the number of banking relationships and more about the inter-operability of banks. That’s really where we’re seeing the focus, because people don’t seem to have been consolidating banking relationships for the past two years. That’s really the rationale underlying our strategic partnership with ADCB here in the market. We bring our international balance sheet and cash management capabilities and ADCB supports our clients in the region. This solution works really well in this market.

NL, Euromoney From a client perspective, does this structure work for you as well?

MH, Mubadala Absolutely. We’re a government entity, so we have a social responsibility to support the local banks. So each time we do a significant transaction, we’ll have local as well as international banks in on that trade. The strategic relationship that’s been set up between BAML and ADCB is great; I can support the local banks but also have access to an international platform, so I’m winning on multiple fronts.

DV, Majid Al Futtaim Yes I agree, because all the local countries are in general served well by local banks. And internationally there is good coverage. The weaknesses are on the regional basis, where you find international players that are hybrid but still relatively weak. I really welcome these sorts of partnerships.

MS, ADCB I wanted to add to the comments about this partnership. Over the last 20 years, I’ve seen more partnerships not coming together in the short term to deliver real value to clients than the opposite. Building a sustainable partnership that delivers consistent value is not a default, it is a very constructed phenomenon. And it requires investment on both sides. Leadership on both sides is a critical defining factor. I am delighted at the partnership value we are bringing to our clients.

DV, Majid Al Futtaim On this point, it’s also critical to look at who’s fronting the customer. Today, if you buy, let’s say, a Dell computer, the supply chain is totally fragmented but you’re always working with Dell. So if I buy a service from ADCB or BAML, I want to know which phone number I have to dial if I have a complaint or if I have to convey a good message.

MH, Mubadala The barriers to entry for this are high here. The connectivity, the ability to put in a technology platform to support Swift messaging, net settlements, is not easy. And actually that investment, particularly in this part of the world, where access to labour is quite cheap, is quite hard. Why do you want to spend this much money on a technology framework when I can just get people to do the same jobs? But the GTS business is what’s bringing in the money, and therefore you need to continue to reinvest in the developments in technology to support that. And for the local banks here, it could work out whether they want to be an investment bank or a local bank or whatever it is they’re trying to be.

MS, ADCB It’s not just banks locally here, it’s perhaps everywhere in the world. Every bank that gets an operating licence can open an account, make payments, receive payments and offer an account statement. So by definition, every bank can be a GTS bank. However, value addition requires investment and focus on key clients and target industry segments, and thought leadership that provides them with a consistent trusted adviser. This differentiates the vast majority of institutions from the few that clients will recognize as quality GTS providers. So, I agree, the barriers to entry are high.

Client relationships

CF, ADCB The other thing it comes down to is how banks think about their client relationships. And the client-relationship approach of many banks in this region is quite old-fashioned. Generally, for example, the investment banking thinking in the local market is quite transactional. But the relationship also needs to be about an operating platform that’s helping the client become more efficient. It’s about an investment banking relationship that’s not just there when the next deal is happening, but is in constant touch with the client, thinking up ideas, and bringing a matrix between coverage and product relationship to a client.

DV, Majid Al Futtaim I want to touch again on GTS, because it looks as if the pricing of services is still more expensive than in other parts of the world. The combination of the float and low cost of labour leaves electronic fund transfer at a loss so long they are priced inefficiently. I would really welcome a push on this from us corporates, from the banking system and from the regulator as well.

CF, ADCB Daniele, you raise a valid point. It can be argued that transaction pricing is too high. What international banks in other markets have done is price to encourage their clients to move onto these electronic platforms because they know over time this will help the bank to become more efficient and deliver better service. The other challenge is that, with interest rates as low as they are, banks are loathed to reduce cash management fees and see their cash management earnings fall, which has an impact on investment in these products. But provided we get the offer right and the service right, we hope the market will then respond to what we have done and there will be a commercial benefit for both the bank and the client.

MH, Mubadala It’s a two-way street. And this is where we see the biggest chance for change – not so much a push from the users as a push from the providers. What we’re experiencing now, at long last, is a growth of experienced, sophisticated professionals in the treasuries of the large organizations: people who know what it is they want. Historically, you’ve had people trying to run a treasury while serving as a finance manager, along with many other activities. The events of the past few years have highlighted the skills and value that a proper treasurer brings. But out in this part of the world, you can probably still count on a couple of hands the organizations that have an experienced treasurer at the top with the proper experience and understanding. As we see a growth in that and a growth in knowledge of how to train and develop those people, that is really going to provide much more of a lobby to the banks.

MS, ADCB To add to all these comments, pricing evolution in the developed markets has started high and come to an almost commoditized structure, with value-added transactions being priced differentially, with the rest almost being given away at cost or lower. Everyone knows what the industry practice is, and nobody will pay more. Out here, we’re still at an early stage in our evolution. So, pricing tends to reflect opportunism, relationship and competitive situations rather than cost and value add. And that leads to a certain pricing structure, which is self-perpetuating, because if three banks are doing it, the fourth bank will adopt it. That’s been the practice more or less. The evolution may be slow, but it’s inevitable that the market has to proceed along to a point where price is set on cost and value-add considerations.

DR, BAML We refer to this product as cash management when it’s really working capital management. At the moment, cash in any currency yields zero. It’s a sheer cost to carry it. But what’s key for bigger companies with international operations is their ability to manage debits. You’re looking at netting capabilities, physical sweeping, notional pooling, how you can use cash surpluses that yield zero in one jurisdiction to actually offset larger credit balances in others, when permitted to do so. And that’s something that is new to this region. But we’re hoping our partnership will bring it to this to our local clients.


DV, Majid Al Futtaim Can I ask a question to our colleagues from BAML: How do you see what has happened in the region in general this spring, from a strategy perspective? It’s unquestionable that Egypt has great fundamentals, great potential, so do you see it as an opportunity? Or are you saying: "OK, let’s step back and focus on Qatar, the UAE, maybe Saudi, and then we’ll discuss Egypt in 10 years"?

MK, BAML Our long-term strategy and commitment to the region hasn’t wavered despite what’s going on. What’s been happening in the region is going to have a positive effect but it’s a question of timing. There will obviously be short-term challenges, in terms of the reforms that need to happen, but long-term it’s a positive story.

DR, BAML We see it as an opportunity and we’ve actually started new relationships with some large institutions in the region. We’re also looking to strengthen our focus on the UAE and Qatar.

NL, Euromoney Is the smart money seeing this as a buying opportunity? I read Daniele, that your company is going ahead with your investments in Syria?

DV, Majid Al Futtaim We have a big plot there, and we will start to do some work soon, more infrastructural work than anything else. We definitely have a commitment to the country and we will spend money in Syria in the next few years. Obviously we always do business on a commercially sound basis, but going back to the point that you were making, we fully understand that international banks may have an issue with some countries.

MH, Mubadala But the risk appetite is very different when you’re based here. Iran’s always been one of the biggest trading partners for the UAE, so the risk premium we’d expect is a lot less than someone removed from the region.

NL, Euromoney What do you expect from your banks in terms of technology that gives you visibility on your cash and balances and helps you manage heightened risks?

MH, Mubadala Data that is timely, relevant and easy to access. I don’t need to have layers of details. I have enough information, I can dig deeper if I need to.

DV, Majid Al Futtaim It’s a word that’s widely used, but straight-through processing is definitely the must-go route. That’s where we expect all the investment: the technology to integrate systems of communication between financial institutions. There is a commitment to this from corporates and, to a certain extent, from banks.

I have a question for our banks. In this region, there has been a lot of push to create awareness around treasury technology, and you guys have done your best in marketing products. Are you seeing progress in the corporate world on this?

CF, ADCB Great question. It is very mixed, partly around the way that companies are organized and operate. So for example, ADCB has launched an online straight-through trade platform. What’s interesting is that some clients are very keen to use it, and want to support a local bank that has developed market-leading technology. Other clients will not move to an online platform because, for instance, they want to put their physical signature on the letter of credit, and of course there will always be concerns about security that we have to overcome when we go online. One thing that we have learned is that many clients have said: "We’d love an online trade platform that will show us the status of our trade transactions but we don’t want to originate on-line". This has led us to offer a view-only version of our platform. All that said, this is a country that does adopt new technology quickly. Once there’s a sufficient wall of change and optionality and availability, uptake will happen very fast.