Cash and Trade Mag-Issue 1

Enterprise resource planning: systems integration is the keyConsolidating for the upturnBMMI: The pursuit of excellenceControlling financial turbulence

new

View Point: Trade Banking & Finance

Exclusive interview with Saudi Hollandi Bank’s Zaki H. Jawad

Swift – a communication revolution

Trade finance – vital to the

solution?P. 24

For Cash and Trade professionals in the Middle East Launch Issue

CASH AND TR ADE LAU NCH ISSUE !""# 3

Contents

Trade finance has been caught in the crossfire of the global economic crisis, both as a symbol of its extensive reach and as a vital piece of the solution.

In an exclusive interview for Cash & Trade Zaki M. Jawad, Saudi Hollandi Bank’s Head of Transaction Banking Group explains why he believes there is tremendous growth potential for trade business in the kingdom.

The Middle East has only recently begun to feel the impact of the global downturn but the region is well placed to take advantage of the upturn as it arrives

5 Letter from the editorial director

8 Regional roundup

12 Corporate banking in focus

18 Systems integration is key

21 Open Account Trade – a Standard Chartered solution

22 Attention on asset quality reaps rich rewards

24 The pursuit of excellence in di!cult times

26 Trade banking and finance

32 Turning the tables on financial turbulence

34 Financial talent means the future looks bright

36 Outsourcing for Corporate Banks

38 Corporate treasurers move centre stage: how best to manage cash and leverage it?

40 SWIFT – a communication revolution

24

20

32

Hani Al Maskati Editorial Director & PublisherPat Lancaster EditorCarlo Nicolaou Art EditorVivienne McKenzie Commercial DirectorMichael Messam Production ManagerContributors: Pamela Ann Smith; Caroline Maginn; Maki Vekinis; Alexander R. Malaket; Derek Ennis; Robert Watsham

Cash Management Matters $%$ Falcon Tower Diplomatic Area &' (') *%+*, Manama Kingdom of Bahrain-./: +0+* 1 +2* %% +,www.cashmanagementmatters.com www.africasia.comCash and Trade is published on behalf of CASH MANAGEMENT MATTERS by IC Publications.All correspondence and queries should be addressed to-./: +33 $%+ ,31 *$ 1%[email protected]

©IC Publications: All material is strictly copyright and all rights are reserved. No part of this publication may be reproduced in whole or in part without written permission of the copyright holder. Opinions expressed in Cash and Trade are not necessarily those of IC Publications and IC Publications does not accept responsibility for advertising content.


Welcome

Dear Reader,Responding to huge demand, we are proud to launch the region’s 4rst home-grown publication to focus on cash management and trade. During these turbulent times, we believe an independent analysis of these core business activities and market developments is crucial to both national and multinational corporations as well as the international banking and legal professions. By interrogating developments in these sectors, a more successful 4nancial transfer industry within the region can be fostered. In a clear and succinct manner, Cash & Trade will present invaluable market intel-ligence to inform and advise senior decision-makers on how to enhance business e5ciencies.

6e development of the Gulf Cooperation Coun-cil’s (GCC) common market is widely anticipated to herald profound changes to commerce within the region, and will signal adjustments that businesses must respond and adapt to. We can learn much from the precedents of the development of other regional economic communities, most notably the European Union (EU).

6e experience of the EU showed that, with the increase in both the value and volume of trade and new communication technologies, a rapid evolution of sophisticated trading and settlement systems took place. 6is evolution added a fresh layer of complexity to the management of cash and trade 7ows for corpo-rations, institutions and the banking sector serving them. 6is complexity was further compounded by the credit crisis that preceded the current economic downturn.

Regional businesses are demanding more from their banks. Meanwhile, banks are insisting on more from their technology suppliers and correspondent bank partners. Corporations and 4nancial institu-tions, in the interest of the e5cient management of cash, are insisting on new products and solutions that will provide better and faster information on account balances and movements, improve transaction speeds and enhance liquidity through tools such as netting and pooling.

Where local regulatory legislation permits, banks are also increasingly being required by their corpo-rate customers to provide NOSTRO and VOSTRO accounts, i.e. accounts held in the currency and/or territory of a foreign country that facilitates easier cash management by avoiding the vagaries of the forex market.

Corporations based in the GCC region cite “trade

and 4nance services” as the issues they are least satis-4ed with. Speci4cally, they complain of shortcomings in the quality of the advice, products and services that are available from 4nancial institutions. 6ey call for a faster service when negotiating letters of credit and other guarantee and collection products. 6ey also require more 7exible 4nance and credit facilities as well as better risk mitigation solutions for both con-ventional and Islamic trade 4nance.

For their part, the region’s Central Bank regulators and associated entities are increasingly concerned that the 4nancial services sector as a whole evolves in a way that ensures liquidity is available to support core trade 7ows domestically and internationally. As much as 0%8 of the world’s merchandise trade, valued at between 91* and 913 trillion a year, is funded by trade 4nance through letters of credit – but there are grow-ing worries (aired at recent G$% and WTO meetings) that liquidity in these traditional, low-risk forms of credit is drying up. 6is is having a disastrous e:ect on importers and exporters, particularly those from developing economies.

6e increasing shortage of credit will inevitably have a negative in7uence on trade 7ows generally, which are widely acknowledged as the engine for reversing the current economic slump.

6e GCC’s banks and corporations are under pres-sure from their overseas counterparts, suppliers and customers (many of whom have been hit even harder by the current global slowdown) for improved trade and payment terms. 6is puts greater pressure on GCC banks, corporations and regulators to ensure solutions are available to deliver the crucial liquidity that is required to stimulate an increase in domestic and international trade.

We have already seen the beginning of the evolu-tion of a new generation of trade and cash manage-ment products and expect this to accelerate over the short to medium term. 6is publication is designed to be a dynamic forum to inform all the relevant stakeholders of this evolution, so that they can make informed choices and ensure the best possible return on their investments. Accordingly we invite and wel-come your input and support.

www.cashmanagementmatters.com

Letter from the editorial director

Hani Al Maskati has over !; years experience in the Transaction Banking Sector. He has spearheaded several businesses with the express intent of placing local and regional 4nancial institutions at the forefront of delivering innovative Cash and Trade products, services and IT solutions to customers, through the Bahrain based Cash Management Matters (CMM).

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CASH AND TR ADE LAU NCH ISSUE !""# 98 CASH AND TR ADE LAU NCH ISSUE !""#

News

SAUDI ARABIA

MoneyGram expands Middle East presence with NCB ATM remittance dealNational Commercial Bank (NCB), the largest bank in the Middle East, is to of-fer MoneyGram's international money transfer service at 13%% ATM locations in Saudi Arabia.

6e agreement signi4cantly expands MoneyGram's presence in the Kingdom, which is seen as a leading global remittance destination.

Home to more than six million expatriates, Saudi Arabia saw remittances grow to more than 91+bn in $%%<, according to the World Bank.

Safe and simple mioney transfers are vital for expatriates who frequently need to send money home to their families who depend on it arriving swi=ly.

Anthony Ryan, president and CEO of MoneyGram International, comments: "Saudi Arabia is the second largest send market in the world behind the United States, and our alliance with a premier 4nancial institution like National Commercial Bank represents a signi4cant opportunity for MoneyGram's expansion plans in the Middle East."

MoneyGram has been operating in Saudi Arabia since 100, and manages its services to the region from an o5ce in Dubai. 6ese transfers at NCB will be sent over NCB's Quickpay platform. Initially, only send services will be available.

DUBAI

Nasdaq Dubai taps SunGard for equity derivatives tradingSunGard has extended the capabilities of its GMI system to facilitate processing of equity derivatives traded on Nasdaq Dubai, the Middle East's international stock exchange. GMI is a clearing and accounting solution for exchange traded derivatives, futures and options.

SunGard's GMI helps NASDAQ Dubai customers and exchange members to readily trade and process business on the new exchange. GMI has been customised to support futures, futures options, stock futures, equity options, Contracts for Di:erences (CFDs), foreign exchange and dividends listed instruments in the Middle East. It provides the automation 4rms require to help trade and process transactions from contract to settlement, providing post-trade processing, margin calculation and quick valuation of derivative transactions for brokers and their clients.

NASDAQ Dubai is the only United Arab Emirates exchange that trades equity derivatives. It launched the market in November $%%, by listing futures on the FTSE NASDAQ Dubai UAE $% index and on $% individual stocks listed on NASDAQ Dubai, the Dubai Financial Market and the Abu Dhabi Securities Exchange. In April $%%0 NASDAQ Dubai added an equity options service.

BAHRAIN

National Bank of Bahrain H1 net profit marginally aheadNational Bank of Bahrain reported net pro4t of BD$2.<%m (9<,.%0m) for the < months through June *%, compared to BD$2.2+m(9<,.%1m) for the corresponding period last year.

Net interest income rose to BD$2.13m (9<<.,<m) from BD$$.+%m (9<%.*+m), while 'other income' fell to BD1*.*$m (9*2.3*m) from BD12.3$m (931.%1m)–principally due to a fall in income from syndications and mutual fund business on account of a slowdown in market activities. Operating expenses meanwhile increased to BD1$.<0m (9**.+2m) from BD1$.22m (9**.*,m) due to 'expanding business requirements'. No major credit deterioration was noted and therefore no impairment provision for loans was made during the period.

Loans and advances as at June *% were +.08 at BD1.12 bn (9*.%+ bn). Customer deposits stood at BD1.3*bn (9*.,1bn), compared to BD1.*+bn (9*.<3bn). 6e annualised return on average equity of $*.< 8 during H1 $%%0 compared to $%.+ 8 in the half of $%%,.

Union National Bank, one of the UAE’s leading banks, has announced the introduction of the interest in advance deposit.

It enables account holders to receive interest on their deposits in advance as and when they place the deposit

with UNB, instead of at the time of deposit maturity. Customers can book an Interest in Advance Deposit for a minimum amount of AED 1%%,%%%. Customers can choose a period from a range of 0 months to $3 months based on their convenience. Commenting on the launch of UNB’s latest product o:ering, Mahmoud Halawa, Executive Vice President & Head of Business Groups said: “6e Interest in Advance Deposit Account has been introduced to provide our customers with an attractive value-addition and is in line with our philosophy of being ‘the bank

that cares’. 6e guaranteed return on deposits at the time of placing their deposit with us enables customers to enjoy immediate liquidity…6is latest initiative underlines our commitment to o:er innovative products and services in a bid to help our client base accomplish their 4nancial goals ", he added. 6e launch of this latest product which is primarily targeted at medium & High Net Worth Individuals, is in line with the UNB's multi dimensional approach aimed at targeting all segments of the UAE community via various socio-economic initiatives.

UAE

Customers can enjoy compliance with new regulations outlined by UAE Ministry of Labour

HSBC Bank Middle East Ltd announced the o5cial launch of the new Payroll Card Service, which will allow customers to process salary payments electronically while giving their employees the bene4t of security

Regional roundup Keeping you up-to-date with the latest developments in the region and further a4eld

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Training

10 CASH AND TR ADE LAU NCH ISSUE !""#

News

and the convenience of a debit card. 6e service is being provided in partnership with C* Card, a company specialising in prepaid card and payroll services.

With this new service, companies employing a large number of low wage earners can ensure convenient and timely payments of employee salaries. 6e MasterCard prepaid card can be used at ATMs across the UAE and the world. Card users can also swipe their card at any enabled point of sale store terminals to make purchases.

Paul Edgar, Head of Transaction Banking, HSBC Bank Middle East, says “Our new payroll product further enhances our extensive menu of business services. Existing wage payment methods have been fraught with ine5ciencies as well as posed security issues. With our new and innovative solution, customers can be assured of making prompt payments in an expedient manner, electronically.

“6e Ministry of Labour is in the process of implementing the Wage Protection System in order to protect workers’ dues. We believe that the use of a robust electronic payroll system will have an essential role to play in delivering this objective.In order to help with usage and overcome 4rst time card user di5culties, HSBC will work with its partners to provide training support. User enquiries will be attended to through a dedicated telephone line available through the C* support lines in many languages including English and Hindi. Mobile ATM vans may be made available to visit large customer sites, if this is requested as a part of the service proposition.6e payroll card is a PIN protected card and will have the user’s name and passport/labour card number imprinted on the card. 6e user can access the funds anywhere using any ATM connected to the UAE’s ATM network. With the new Payroll Card Service, HSBCHSBC has revolutionised the banking experience of low income earners enabling us to provide our employees with a

more e5cient and comfortable work environment.

WORLD

IMF updateIn an update to its April Economic Outlook, the International Monetary Fund (IMF) has lowered its Middle East growth forecast for $%%0 by half a percentage point, as oil exporters draw on 4nancial reserves to prop up domestic demand. 6e IMF has said that Middle East economies will expand by $8, compared with 2.$8 in $%%,, while the growth forecast for $%1% was raised %.$ percentage point to *.+8.

REGIONAL

EastNets to o"er SmartStream’s TLM OnDemand across the Middle East, North Africa and US

SmartStream Technologies, the 4nancial Transaction Lifecycle Management specialist, today announced a new partnership with EastNets, a leading provider of global compliance and payments solutions and services, and one of the world’s largest SWIFT Service Bureau’s.

EastNets, which has more than 1,%%% customers and over $2% 4nancial institutions on its Service Bureau, will act as a distributor for TLM OnDemand, o:ering SmartStream’s SaaS solution to its clients in the Middle East and US. 6e reconciliations service is a natural extension to the 4rm’s already established Service Bureau and o:ers EastNets’ clients additional strategies to control risk and cost in their business.

SmartStream’s TLM OnDemand service was designed to provide small to medium-sized 4rms with a:ordable and rapid access to the same technology that is already deployed at many of the world’s leading institutions. In addition

to delivering SmartStream’s SaaS reconciliation o:ering, EastNets will also distribute SmartStream’s suite of TLM and Corona solutions.6is is the 4rst distribution agreement for TLM OnDemand and will enable EastNets to o:er rapid on-boarding and transaction based pricing for the market-leading reconciliations solutions. EastNets and SmartStream will be holding a series of workshops over the next few months to explain to 4rms across the Middle East region and the US how they can take advantage of the partnership.

REGIONAL

Renaissance Capital implements Actimize AML and market abuse platforms

Actimize, a leading provider of transactional risk management so=ware for the 4nancial services industry and a NICE Systems company (NASDAQ:NICE), today announced that Renaissance Capital, a major emerging markets investment bank, has fully implemented its Anti-Money Laundering (AML) and market abuse solutions to comply with strict FSA and Russian regulations and to automate, streamline and drive down the costs of its enterprise compliance enforcement, gaining lower total-cost-of-ownership (TCO).

Renaissance Capital, founded in 1002 as a Moscow-based investment bank, delivers innovative 4nancial and investment solutions to government, corporate and institutional clients in high-opportunity emerging markets around the world. It has expanded signi4cantly to become the pre-eminent specialist in emerging markets, with a presence in Sub-Saharan Africa, the Middle East, Russia and the CIS (Commonwealth of Independent States).

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12 CASH AND TR ADE LAU NCH ISSUE !""# CASH AND TR ADE LAU NCH ISSUE !""# 13

Analysis

A survey of banks in the region reveals the growing importance of the corporate segment to the fortunes of the banking sector as the search widens for new areas of pro4t. BY CAROLINE MAGINN – CMM TRADE PARTNER

Corporate banking in focus

How important is the corporate bank segment as a contributor to bank liquidity? As demonstrated by the tables, right, the absolute level of corporate liabilities grew uniformly across the sampled banks, clearly illustrating the importance of this segment as a contributor to bank liquidity. Consequently corporate liabilities will attract increasing attention from banks’ senior management during the current economic turmoil. Corporate liabilities as a percentage of total liabilities shrank for all banks in the sample, except SAMBA, Arab Bank and Saudi Hollandi, and contributed to a third or more of total liabilities for all banks except BBK, Al Rajhi and Al Jazira. SAMBA leads the banks sampled in terms of total corporate liabilities and their growth, followed by Riyadh Bank and Arab Bank. Attracting stable or growing levels of corporate liabilities is highly dependent on strong cash management and money market propositions. 6is should create a compelling imperative for senior management to invest in building capabilities and product propositions in these areas.

How important to the region’s banks is the corporate banking segment?

In both the absolute and percentage levels of corporate assets, the corporate segment has increased amongst the banks sampled. 6is re7ects the growing focus on the corporate segment in terms of overall bank business, most markedly in the case of Arab Bank and Saudi banks as a whole, con4rming a growing consensus among the region’s corporate bankers that investment had been unduly focused on the retail and brokerage segments. 6e importance of a presence in Saudi Arabia for any bank with ambitions to grow its regional corporate business is underscored by the relative size of the market there compared with other GCC countries. With the exception of Saudi Fransi and Saudi Hollandi, corporate assets as a percentage of total assets increased across the banks sampled. Interestingly, both these banks also grew the absolute level of corporate assets. (6e size and percentage contribution of corporate assets with Arab Bank’s total asset base rose by roughly 2%8 in each case.) Source: CMM analysis of individual bank annual reports and notes

How important is trade in the context of total corporate assets?Trade contra items represent a signi4cant percentage of total corporate assets in the majority of cases. Our conclusion is that trade business should be a central aim for any bank building its corporate business segment. 6e year-on-year trend was positive in terms of the growth of the trade contribution to the corporate business for all banks except Al Jazira, SABB and Arab Bank. Cash & Trade forecasts that the increasing importance of trade 4nance as a percentage of the corporate banking segment will continue.

Source: CMM analysis of individual bank annual reports and notes


How important is the corporate segment to banks’ net profitability?6e data in the tables, right, indicate that corporate net pro4t grew year-on-year for all banks in the sample. Except for Al Jazira and Al Rajhi Bank, the percentage of this corporate pro4t as a contribution to total pro4ts exceeded *%8. In the case of Arab Bank, Riyadh Bank and SABB, corporate pro4ts contributed to more than half the banks’ total pro4ts. 6is again emphasises the importance of focussing on the corporate segment, in particular cash management and trade.Cash & Trade will publish updated information for $%%, when it becomes available, but we con4dentally anticipate that the fall in brokerage and investment income will reveal that the corporate segment is becoming an increasingly important element of banking operations.

Al Khaliji 2007Al Khaliji 2006Al Jazira 2007Al Jazira 2006Al Rahji 2007Al Rahji 2006SABB 2007SABB 2006Saudi Hollandi 2007Saudi Hollandi 2006BBK 2007BBK 2006Ahli United Bank 2007Ahli United Bank 2006Arab Banking Corporation 2007Arab Banking Corporation 2006Arab Bank 2007Arab Bank 2006Riyadh Bank 2007Riyadh Bank 2006SAMBA 2007SAMBA 2006Commercial Bank of Kuwait 2007Commercial Bank of Kuwait 2006National Bank of Kuwait 2007National Bank of Kuwait 2006National Commercial Bank 2007National Commercial Bank 2006Saudi Franzi 2007Saudi Franzi 2006Qatar National Bank 2007Qatar National Bank 2006Nat'l Bank of Bahrain 2007Nat'l Bank of Bahrain 2006Nat'l Bank of Abu Dhabi 2007Nat'l Bank of Abu Dhabi 2006Housing Bank for Trade & Finance 2007Housing Bank for Trade & Finance 2006Gulf Bank Kuwait 2007Gulf Bank Kuwait 2006Gulf Int'l Bank 2007Gulf Int'l Bank 2006Dubai Islamic Bank 2007Dubai Islamic Bank 2006Commercial Bank of Qatar 2007Commercial Bank of Qatar 2006Bank Muscat 2007Bank Muscat 2006Emirates Bank / NBD 2007Emirates Bank / NBD 2006

What is the corporate segment’s dependency on income from trade?

6e signi4cance of trade income to total corporate income is hugely variable across the sample ranging from in excess of 2%8 for Saudi Hollandi to between 1%8 and $%8 for other banks in the sample as illustrated right.In light of the current global economic slowdown, what is the inherent credit quality of the region’s banks?Broadly speaking, there is stability in the region’s banking sector compared with the situation globally and this should continue to enjoy the con4dence of the international banks, corporations and retail customers, representing a safe haven for their funds and providing the liquidity to support trade credit business and sound cash management operations. 6e table, right, illustrates the position as of

Analysis

What are the growth trends of trade finance? 6e level of trade 4nance grew for all banks in the sample year, making it a win-win product for all banks. In particular, Emirates and Saudi Al Fransi virtually doubled their trade related contingents and liabilities. Guarantees represent the dominant product for all banks in the sample, followed by letters of credit and acceptances. Arab Bank and HSBC Middle East show the highest portfolio concentrations on guarantees, which are more capital intensive than letters of credit. 6e growth in trade 4nance, year-on-year, is highest for guarantees (218) followed by letters of credit (3+8) and acceptances (3+8). 6e overall growth across the product line as a whole is impressive at 3+8 and contrasts

March $%%0 for their short and long term ratings as determined by Moodys, the respected external credit assessment institution.However, it is important for customers to actively monitor the situation and

collect local intelligence as external credit assessment institutions are not infallible. However while a stable outlook applies to most banks, the outlooks for Dubai Islamic Bank and GIB are negative.

favourably with trends in other product lines that have actually seen declines. Trade 4nance looks set to remain an attractive area for investment.


Analysis

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SAMBA JKKN SN,SKJ P Nat'l Bank of Abu Dhabi JKKL QN,LOK ON8SABB JKKN SS,LKR S SAMBA JKKL SR,PRJ N8

Saudi Fransi JKKN SJ,SRT Q Saudi Fransi JKKL SN,QOP R8Saudi Hollandi JKKN JR,ROP N Saudi Hollandi JKKL PO,JSN S8Gulf Int'l Bank JKKN OQ,LKK L Gulf Int'l Bank JKKL JK,TKK PJ8

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Moodys Banks and Country Ratings

Have the region’s banks the capital adequacy and scope to invest further in their core businesses?6e data indicates that the region’s banks are generally well capitalised with ratios comfortably in excess of those required by Basel II regulations. With the exception of Bank Muscat, Gulf International Bank, Ahli United and BBK, all the banks in the sample improved their use of capital, contributing to improved returns for shareholders.

Not withstanding this trend, capital adequacy among banks in the region remains robust and prudent within the guidelines of the individual Central Banks that have successfully balanced the interests of shareholders and depositors to maintain systemic liquidity and investor con4dence. 6is means that banks have the scope to invest further in their core businesses, ideally those characterised as low both in risk and the volatility of their earnings, with a focus on fees and commissions growth. 6e cash management and trade segment

meets all of these criteria and given the growth in these product income streams and their contributions to the overall balance sheet, and despite the current economic turmoil, the cash management and trade segment warrants the attention of senior management in setting or revising future business strategies in light of the continuing global uncertainties. Cash & Trade look forward to the release of the $%%+-, comparative analysis once a meaningful range of annual reports are made available by the region’s banks. So

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Enterprise Resource Planning

6e integration model between banks and their corporate customers is an ever expanding processBY MAKI VEKINIS – CASH MANAGMENT MATTERS (CMM) MANAGING PARTNER

Systems integration is key

The rise of enterprise resource plan-ning systems (ERPs) in the GCC, and in Saudi Arabian markets in particu-

lar, are well recorded. ERPs have proved to be one of the key components in e:ective business management for corporations. Initially deployed to reduce complexity and introduce e5ciencies to very large companies with multiple, sophisticated operations, over time these systems found applications in wider markets. As a di-rect result of the evolving nature of these ERPs they have since expanded applica-tions and services to reach a much larger segment of corporate configurations.

In tandem with the switch to ERP sys-tems by GCC corporations, Gulf states have been striving to apply the same principles of information and process discipline to their banking sector.

6e current state of methodologies and applicable processes corporations can em-ploy to integrate with their bankers, and whether these are single or multiple rela-tionships, is the central question. Firstly, let’s assess a typical set of requirements from a corporate viewpoint.

ERP systems have a base functionality and a set of modules designed to support integral company functions. In banking, transactions are generated from various modules (payroll from a human resources department, vendor payments from the accounts o5ce, etc.) which are then col-lated and prepared for submission to the bank from a common area. At the same time, ERPs provide reconciliation facili-ties. Any payment requested will ultimate-ly be reconciled and reported in real time.

An important aspect of ERP imple-mentation is the rationalisation of bank-ing relationships. It has become a catalyst for a change from multiple collection and disbursement banks to single entities, al-lowing for the concentration of cash at the parent bank level as well as multiple client companies to use the same bank accounts, reducing costs and manual processing. ERP is the driver behind an environment of well practised controls and further innovation that thereby heralded an era where data integration, G/L automation, funding and sweeping real time as well as month-end error free processing, en-hances the reputation of the individual institution.

Yet the deceptive simplicity of these requirements hides a complicated reality, creating problems that have driven banks to devise elaborate platforms for straight-through processing, o=en for just a single user (i.e. a single bank). 6e complication arises from the actual transmission of data mechanism and the condition of the information that needs to be exchanged.

Communication between a bank and

a corporation’s ERPs requires coordi-nation on multiple levels. It demands implementing a common data format for transactions, enabling them to be identi-4ed and ultimately processed; agreement on the communication methodology to allow data to be transmitted and received; agreement on a secure, authenticated communications platform so data is hid-den and protected; and agreement on common reporting, rejections and re-pair transactions platforms. From each of these considerations, further com-plications can arise, simply due to the variety of options embedded in each. For example, the format of the information can be SWIFT based, EDI, or message based with a treasury workstation system. 6e communication of the data itself can be ‘bulked’ and transmitted in batch, or transmitted following preparation and approval. Security and con4dentiality are achieved through digital certi4cate authentication or public key.

Other mechanisms for generating payment requests in various formats can also be present. For example, divi-dend payments, initial public o:erings, rights issues and other corporate actions require an ability to process and authen-ticate large volumes of information. To achieve this requires reliable integration between the systems of the corporations and their bankers being widely available, i.e. the ERP providers (such as SAP, Ora-cle, J.D. Edwards) and transfer (SWIFT, in-country clearings). Corporations and bankers must invest in creating simple integration tools that can be used to

It is important to note the di"erent components of each operating environment and the challenges facing the team tasked with complete integration. For example, in a relatively simple task, o"ered by most banks with an emphasis on corporate business, total integration ensures that output from the ERP system, suitably formatted to the SWIFT standard, can be securely transmitted to the bank environment for payments to be executed and statements either made available for collection or transmitted immediately back to the corporate servers. Corporate clients can utilise other systems to generate trade requests, treasury settlements or securities trading.The obvious questions, such as how would these requests be

transmitted to their preferred bank provider for processing?, how is the associated information returned from the bank to be managed?, have no comprehensive response.

There have been numerous attempts to produce a unified solution that can cater for numerous corporate-based systems and multiple bank processing platforms – but a unified solution remains an elusive goal. It is di!cult to qualify the business case because of its complexity and heavy service and support requirements. Until a powerful and fully parametric solution is created, in both integration as well as the connectivity components, separate integrators will service the separate business components and functions.

Corporations and bankers must invest in creating simple integration tools that can be used to achieve the desired level of connectivity

achieve the desired level of connectivity. SAP initially deployed a ‘business connec-tor’ capability of facilitating integration with external platforms. Recently the SAP NetWeaver, a far more advanced capabili-ty, was introduced to connect and securely transport data between the SAP installa-tion and a selected bank. Correspondingly, Oracle developed the ‘Financial Gateway’ to o:er, as described in the company’s own June $%%+ white paper, “a centralised framework for payment processing and electronic banking. It can be deployed to

connect a corporation’s ERP system to all of their banks’ cash and payment systems. ‘Financial Gateway’ enables the corpora-tion to manage all of its payments from a single platform, and helps with the prepa-ration, formatting, validation, approval and release of clean payment instructions to the bank or external payment system”.

It is not only ERP providers that have invested in these tools; various banks have announced they will provide the corresponding functionality to enable ERP systems to seamlessly connect to


transmit and receive transactions, report information, reject and repair transac-tions. Notably HSBC is o:ering a corpo-rate solution powered by SAP NetWeaver. According to HSBC’s September $%%, announcement: “6e new bank-client integration solution will enable corpo-rate clients to link into HSBC’s world-wide banking network via a single entry point, simplifying communications for the bank’s corporate services such as account payables, account receivables and reconciliations. HSBC’s customers will gain easier access to their banking information.”

Since November $%%,, Wells Fargo has

o:ered corporate customers the ‘Wells Fargo Adaptor’ that it claims “automates payables, receivables, cash management, and reconciliation activities, with either Oracle E-Business Suite or JD Edwards Enterprise One 4nancial applications”. Finally, to add further credibility to in-tegration as an important direction, the SWIFT organisation announced the ‘SAP Integration Package for SWIFT’ with the directive “Manage Your Bank Relation-ships More E:ectively; SAP Integration Package for SWIFT gives you direct ac-cess to SWIFTNet, the 4nancial mes-saging network built and maintained by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). It also includes out-of-the-box message and process mappings that seamlessly integrate the SAP ERP Financials solution with the SWIFT infrastructure. You have the ability to centralise communications, consolidate statements, pull data from banks in an automated fashion, ability to repair and reject transactions in an automated fashion.”

With a plethora of developments on both sides of the ‘ integration bridge’, is it safe to assume benefits

to the corporations and their bank-ers will outweigh the capital invest-ment and the ongoing operating costs?

The answer depends primarily on transaction volumes. As we investigate the detail behind customer requirements for an integrated solution with their bankers, we 4nd a variety of informa-tion submissions. This includes both transaction requests and demands for information pertaining to speci4c ac-counts as well as other information, such as money market or foreign exchange rates, AP and billing systems and ap-plications.

A complete integration solution, where all information exchanged with a bank or banks is performed through a direct interface, is demanding on.

When all these connections are syn-chronised with minimum human in-tervention and adequate reporting and transaction lifecycle management, the corporate customer’s 4nancial managers will hold the key to direct involvement with day-to-day banking, allowing them to concentrate on their core activities, such as investment and expansion plan-ning and execution. ■

With a plethora of developments on both sides of the ‘integration bridge’, will the benefits outweigh the capital investment and the operating costs?

A complete integration solution enables financial managers to focus on their core activities

Many businesses have cash 7ow that varies considerably. A business might have a rela-tively large cash 7ow in one period, and a relatively small one in another. Because of this, 4rms 4nd it necessary to maintain a cash balance on hand, and to use working capital 4nance to enable coverage of short term cash needs in periods when they exceed the amount of cash 7ow.

Each business must decide how much it wants to depend on working capital 4-nance to cover short falls in cash, and how large a cash balance it wants to maintain in order to ensure it has enough cash on hand during periods of low cash 7ow.

Generally, variability in the cash 7ow will determine the size of the cash bal-ance a particular business will hold, as well as the extent to which it may have to depend on such 4nancial mechanisms as: invoice 4nancing, post-dated cheque dis-counting; bill discounting; factoring, etc. Cash 7ow variability is directly related to two factors: the 4rst, the extent to which cash 7ow can change and the second, the length of time cash 7ow can remain at a below average level.

If cash 7ows decrease drastically, the business will 4nd it needs large amounts of cash from either existing cash balances or from a bank to cover its obligations during this period of time.

Likewise, the longer a relatively low cash 7ow lasts, the more cash is needed from another source (cash balances or a bank) to cover obligations during this time.

As international and domestic trades are increasingly conducted on open ac-count terms, there is a corresponding need to o:er 4nancing solutions to cash 7ow problems encountered by sellers who trade

on open account. Standard Chartered Bank o:ers various solutions for open account 4nance requirements. One of the popular and e:ective solutions has been receivable services products.

Standard Chartered Bank o:ers vari-ous with and without recourse solutions under the receivable services products.

Factoring is fast-gaining acceptance among exporters and is being o:ered as a valuable 4nancial product among banks and major 4nancial institutions. 6e $%%, global factoring volume has almost doubled to 9$ trillion since $%%$ and is growing at a healthy 128 year on year [1] as compared to the growth rate of world merchandised trade of ,8 year on year in $%%+[$].

By leveraging on Standard Chartered Bank’s global network, we are able to pro-vide open account trade products, which are comprehensive working capital solu-tions that provide funding, credit pro-tection, sales ledgering and collections services to clients.

6e open account trade product o:er-ing by Standard Chartered Bank consists of receivables services (with and without recourse); portfolio receivable services with recourse; correspondent factoring through Factors Chain International (im-port and export) as well as invoice 4nanc-ing (import and export).

Factoring in UAE has been growing at a phenomenal pace, especially in the last 1, months when traditional working capital 4nance is di5cult to come through with banks posing various hurdles for sellers to avail 4nancing facilities.

What is unique in Standard Chartered Bank’s o:ering is that we are able to lev-erage on the global network and provide

credit cover on buyers who are banking within our network. Exporters who are based in the UAE and export to US, Eu-rope and the Asia-paci4c region, as well as within the GCC, are able to use the Bank’s services covering credit cover on the buyers, collection services and sales ledgering.

6e provision of all services under this working capital tool makes it attractive to sellers who are able to focus on their sales, especially in atmospheres such as the current global one, where cash is all important for the business.

As the majority of trade in the UAE is either local or within the GCC, Standard Chartered Bank is able to deliver receiv-able services covering markets like Bah-rain, Oman, Qatar, Jordan, Lebanon and Pakistan in the Middle East and North Africa (MENA) region.

Standard Chartered Bank o:ers this service across all segments from oil and gas in the energy sector to companies trading in foodstu:s and items such as electronics.

6e services are used by global cor-porates and large local corporates right through to middle markets, as Standard Chartered Bank is able to customise o:er-ings on an individual need basis.

With no immediate signs of global eco-nomic recovery on the horizon, customers are looking to mitigate risks in their re-ceivables at an a:ordable cost and Stand-ard Chartered Bank’s world class solutions helps sellers address this risk. ■

[1] Factors Chain International (www.factors-chain.com ) [$] International Trade Statistics $%%+, World Trade Organi-zation, (www.wto.org/english/res_e/statis_e/statis_e.htm )

BY KRISHNAKUMAR DURAISWAMY, DIRECTOR-TRANSACTION BANKING, REGIONAL TRADE PRODUCT MANAGEMENT STANDARD CHARTERED BANK

Open Account Trade – a Standard Chartered solution

Feature



Interview

In an exclusive interview for Cash & Trade Zaki M. Jawad, Saudi Hollandi Bank’s Head of Transaction Banking Group explains why he believes there is tremendous growth potential for trade business in the kingdom.

Attention on asset quality reaps rich rewards

This must be an opportune time to be a banker in Saudi Arabia, which has been protected from the worst e"ects of the global downturn, and especially to be working for the bank showing the healthiest growth in profitability in the Kingdom during 2008.Of course, our achievements during $%%, were excellent and the result of teamwork, commitment and also our exceptional customer care policy.

Were you satisfied with the growth in your trade fees and commissions in 2008, up from 117,018 Saudi Arabian Riyals (SAR) ($31,209) in 2007, to SAR162,658 ($43,422) last year?Overall, we are very satis4ed with our trade performance in $%%,. All areas of trade performed well and each recorded impressive growth in imports.

Have you budgeted for further growth in 2009? Is the interest income for trade asset backed finance inter alia bigger or smaller than the fees and commissions?Budgets are in place for $%%0. Income from the lending portfolio is a key component in any 4nancial institution’s pro4ts and SHB is no exception to this general rule.

Can you elaborate on the success of your trade asset backed finance products in terms of number of customers, level of assets and scope for growth and innovation?At SHB we adopt a conservative approach to our 4nancing. 6e quality of the asset is of prime concern to us, more important than any other factor and this has led to our success in asset backed 4nancing. 6ere is tremendous scope for the growth of trade business in the Kingdom of Saudi Arabia and we would compete for any business that matches our risk criteria. We have also developed some products to conduct asset backed 4nancing.

Do you find certain industries make more use of this source of finance than others and from which industries,

if any, do you expect a wider take-up in future?In general, the trading sector is much more involved in this source of 4nancing. Meanwhile, in view of the increasing credit periods o:ered/demanded by the competition, the need for bridging 4nance is increasing.

How have you developed your relationship with The Saudi Fund for Development and in particular its SEP programme?We have had several discussions with the Fund to explore opportunities to work with them within their SEP programme. We are currently evaluating the programme and its bene4ts, and will make a decision soon.

How has the shape of your trade business changed in terms of volume and value of L/Cs, guarantees and collections?We have not noticed a signi4cant change in the shape of our trade business. Customers are becoming increasingly risk conscious – more than ever before, so the instruments that provide a greater degree of protection to both seller and buyer are still much in demand.

Like other Saudi Arabian banks you have enjoyed continuous growth in profits from trade. Is trade considered central to SHB’s corporate bank o"ering?We have always enjoyed a signi4cant share of Saudi Arabia’s trade business and this situation remains unchanged. Trade is the core business of the corporate banking sector and one of the main contributors to the bottom line.

Have you found that the utilisation of trade related credit facilities has increased in recent, turbulent times?In $%%,, all our trade facilities were well utilised; although some areas are now showing a slight downturn, overall our trade facility utilisations remain at healthy levels.

Has SHB’s risk appetite for trade

facilities, corporate and FI changed in recent times and, if so, how? We are cautious and watching the situation very carefully. Obviously the risk appetite for FI needed to change following certain surprises taking place in the global market.

Have you adjusted your political risk appetite to support exporters and, if so, how, and in connection with which countries/regions?We have taken some measures to strengthen FI risk management but it has not a:ected our support to exporters.

What is the structure of your team responsible for supporting trade in terms of product management, sales, client services and operations?We have fully assessed the requirements of trade customers and established the necessary lines and allocated the appropriate numbers of sta: for the smooth conduct of business. Operations Units are the delivery points. Trade Finance, a division under Transaction Banking Group (TBG), gives support through:1) sales teams to monitor and increase, where necessary, the utilisation of facilities; swi=ly resolve customer issues and, where required, provide technical training to customers.$) product management for relevant improvements in products, services, systems and procedures and also for the development of new products and implementation of best practice.We serve our customers locally, through the regional o5ces in Riyadh, Jeddah and Al-Khobar. Additionally, a trade sales team in Jubail focuses on business in the industrial area. We are proud of a strong, well-experienced team to manage the trade business at our bank.

How do you see the future of online services for trade?Online users are increasing. Customer con4dence levels in the new technology are key to this development. Currently, most of the customers use

online trade facilities for inquiries only.

Trade is notorious for exception processing due to credit issues and document discrepancies. Can you comment on your experience in this area and on any initiatives you have put in place to help customers improve their e!cacy?Credit and compliance are inseparable in trade; protection and rights come from these two elements. We take a keen interest in educating our customers on such matters. We regularly conduct training programmes and seminars to update them on current global trade a:airs, products, ICC rules and publications.

What investment is SHB making in improving its sta"’s skills to help educate trade customers and promote increased levels of support for them?We pay a great deal of attention to the training needs of our sta: and ensure they participate in important local and foreign seminars in order to constantly update and enhance their knowledge and skills. In addition to regular seminars for our own customers, SHB trade sales managers also conduct customised training programmes as a service to other companies whether they are existing clients of ours or not.

What is your choice of core banking system and trade system application and are you satisfied with their implementation? We are satis4ed with the performance of the existing systems and are continuously improving them to enhance operation and e5ciency. Presently, we are working on expanding our online and back-end trade capabilities.

Do you have any plans for further investment in this area?We are committed to provide the best to our customers and would not hesitate to invest in technology in order to provide convenience and superior service to them if and when it might become available. ■


Commerce

Headquartered in the Kingdom of Bahrain for the past 1$2 years, the Bahrain Maritime Mercantile International group (BMMI) is a diversi4ed retail, distribution, logistics and contract services group.BY CAROLINE MAGINN – CMM TRADE PARTNER

BMMI specialises in the distribution, wholesaling and retailing of food and beverages, and represents a leading

portfolio of global household brands. 6e group is also a strong international player in the provision of contract-based supply services for overseas governments and non-government organisations, build-ing its franchise within the GCC and latterly in Africa, with the establishment of Global Sourcing and Supply, where logistics remains a challenge given the shortcomings of the continent’s transport infrastructure.

BMMI has established an o5ce in Washington DC to manage important relations with the US government and non-governmental organisation clients, reinforcing its status as part of the broad-er-based community involved in govern-ment contracting.

Listed on the Bahrain stock exchange, BMMI is one of the fastest growing companies in its sector, with an annual turnover exceeding 9$%%m despite an unprecedented downturn in the global economy in which logistics has been one

of the hardest hit sectors.Last year, $%%,, was a record one for

the group. Contributing to this success was the opening of a new Alosra outlet at Amwaj Islands in Bahrain – part of BMMI’s new strategy to broaden its su-permarket activities in the kingdom. A strong focus will be placed on high qual-ity delicatessen and ready-to-eat items as seen in the launch of the group’s Great Deli division.

While Africa has contributed to a sub-stantial increase in pro4ts, work at home continues at a brisk pace.

Since BMMI decided to expand the group’s presence outside Bahrain in $%%$, operating pro4ts have more than doubled, indicating that well-managed companies can aspire to regional and international expansion.

Strongly capitalised, with healthy li-quidity, no debt, a solid client base and a steady earnings stream, BMMI is well positioned to survive the current di5-cult market conditions and continue its acquisition programme as opportunities arise.

6e company has continually invested in human resources development, launch-ing its internship programme for local school-leavers and an executive pro-gramme for graduates.

6e Alosra University Sponsorship scheme helps students from low-income families study for a degree at the Uni-versity of Bahrain. Now in its 4=h year, the project has already bene4ted over 1%% students.Like all companies, BMMI is naturally exposed to the same vari-ety of risks that stem from the changing economic environment and the volatility of supply and delivery of products and services. Managing and mitigating risk on a systemic basis has been the key to the group’s success.

Of particular interest to CMM and the readers of Cash & Trade is how suc-cessfully BMMI has managed its cash management and trade terms to enhance liquidity and pro4tability. Several factors should be examined:

Firstly, it came to agreements with many longstanding suppliers to switch from relying on Letters of Credit to devel-oping open account terms, despite ongo-ing concerns about political risks in the re-gion (see table, right). 6is move required con4dence and conviction to negotiate, and its success is a testament to the in-vestment in people that BMMI has made.

Secondly, having invested in its ORA-CLE ERP-based solution in $%%+, it has continued to extract value from the in-vestment, working with ORACLE on a number of fronts to 4ne tune the system to meet its requirements. For example, it introduced automated invoice processing, which reduced processing times from 1% minutes to 13 seconds, serving not only to speed collections but also to improve liquidity.

Notably, BMMI took the decision to build a dedicated team of ORACLE advisers who came to understand the business and helped leverage further bene4ts from improved management information to aid day-to-day decision-making from the ORACLE system.

Using IT to convert data into custom-ised information and informed manage-ment decisions is something few organisa-

The pursuit of excellence in di!cult times

Milestone Year 2008Key Achievements

Completes 125 years of operations in the Arabian Gulf

Expands group’s footprint to 12 countries across three continents

Establishes new African subsidiary GSS (Global Sourcing & Supply)

Opens corporate liaison o!ce in Washington DC

Launches another Alosra store, at Amwaj Islands, in Bahrain

Revenues surpass BD80m ($210m) for the first time

Record operating profit of just under BD10m ($26m)

Total assets increase by 10%

tions capitalise on successfully.Clearly, the future for BMMI, as for

others, will continue to present new chal-lenges but the group’s ability to develop in-house talent to deal with these chal-lenges will be the key to BMMI’s ongoing success. ■

BMMI’s management teamMohammed Turaif – Assistant HR ■

ManagerAmmar Aqeel – Group Financial ■

ControllerLaura Mejia – Corporate Quality, ■

Performance and Communications ManagerJad Moukheiber – Legal A:airs ■

ManagerSalah Al Haiki – Administration ■

Manager


View Point

Trade 4nance has been caught in the cross4re of the global economic crisis, both as a symbol of its extensive reach and as a vital piece of the solution.BY ALEXANDER R. MALAKET, CITP, PRESIDENT OPUS ADVISORY SERVICES INTERNATIONAL INC.

Trade banking and finance

chain solutions was observed across the globe, even in regions – and with trading partners – previously considered too risky for such terms. 6e Middle East, where documentary credit and other traditional solutions have enjoyed relatively consistent market demand, was caught in the wave of innovation, and is working to develop new variations to open account, supply chains and working capital solutions.

Almost in parallel, leading 4nancial institutions worked to integrate certain related lines of business such as trade 4-nance and cash management, as well as correspondent banking, under broadly mandated global transaction banking units.

Hedge funds also saw great potential in 4nancing short-term trade, particularly in then-lucrative emerging markets.

6ese realities, coupled with ongoing global consolidation in the 4nancial sec-tor, and a pattern of pro4t compression in trade banking, motivated senior bank ex-ecutives to seek ways to “re-intermediate” themselves, with enhanced pro4t, into the business of international trade.

6e current global crisis has reinforced the attractiveness of trade 4nance as a line of business, particularly given its counter-cyclical nature, and has generated both attractive returns and a positive pro4le for business.

In short, these have been transforma-tional times in trade 4nance, and that re-ality will endure beyond the current global crisis. 6e current 4nancial downturn has also highlighted and ampli4ed the inter-est, developing for some time, in Islamic banking and Islamic trade 4nance.

American and European authorities have sought to improve understanding of the stewardship dimensions of Islamic banking and to appreciate the character-istics that have e:ectively served to screen those institutions from the fundamental drivers of the crisis.

6e demise of the documentary letter of credit was predicted and promised for many years, to the chagrin of long-time bankers, and the anticipation of importers and exporters across the globe.

In fact, the observation of a senior banker some years ago – that we were

one major crisis away from a rush back to L/Cs – has proved to be correct, given the increase in usage of documentary credits during the current crisis. Numer-ous previously solid 4nancial institutions were forced to reassure the market on the validity of their instruments and, in some cases, to seek con4rmations of the credits from correspondent banks willing to take on the 4nancial exposure.

Just before the crisis, it became in-creasingly common to hear concerns that trade 4nance was becoming more like cash management, and cash man-agement becoming increasingly similar to trade 4nance. Trade, the argument goes, is shi=ing its emphasis from risk mitigation to 4nancial settlement in the context of open account transactions. Meanwhile, cash management is ap-proaching trade 4nance in that its reach is increasingly cross-border, as bank cli-ents of all sizes engage in international commerce.

Although we expect the shi= to new product solutions to re-engage a=er the crisis begins to reverse in earnest, the signs that the global economy has bot-tomed out remain tentative and inconsist-ent. Trade will, despite recent forecasts of slower growth, remain an important force in the re-ignition of the global eco-nomic engine; this reality will ensure the

momentum of product development and innovation in trade 4nance continues.

Financial and economic crises will un-doubtedly in7uence the next round of in-novation. New solutions in open account, supply chain 4nance and pre-shipment 4nance, will include renewed focus on the risk mitigation dimension of trade 4nance, an area that had, until recently, faded into the background. Additionally, the provi-sion of information (on shipment status, 4nancial 7ows, or indeed any aspect of a transaction) will come to the forefront.

6e unparalleled involvement of gov-ernments through export credit agen-cies, and the global 4nancial community through IFIs (International Financial Institutions) provides a stark illustration of the degree to which the global trade 4nance map has been redrawn. 6e en-gagement of ECAs and IFIs – previously decried as market-distorting government

The current worldcrisis has reinforced the attractiveness of trade finance as a line of business

The business of trade 4nance has been through one of the most dynamic, innovative periods in its evolution as

technology has emerged to ful4l its early promise. At the same time, bankers and trade 4nanciers have actively sought to develop and deploy new business solu-tions in response to the needs of clients across the globe.

Just as these developments have been

gaining momentum, trade 4nance 4nds itself at the centre of the global econom-ic crisis, both as an illustration of the breadth of the crisis and as a key element of its eventual resolution.

Global sourcing patterns have changed signi4cantly over the past decade, with China becoming a major manufacturer and supplier, and global retailers such as Wal-Mart, Carrefour and Zara ex-

ercising increasing in7uence on their supply chains. 6ese changing realities were closely followed by a shi= from tra-ditional trade 4nance products to open account and supply chain-related solu-tions. 6ese tend to be less complex and costly for customers (also less secure) but, perhaps more critically, signi4cantly less pro4table for trade 4nance providers. The shift to open account and supply-

A Chinese textile worker. The primary engines of the global economy – China and the US – are banking on a speedy return to buoyant international trading


interference, has been largely welcomed by global 4nancial markets, and even by the most ardent proponents of free-market economics.

6e focus on Islamic 4nance is likely to continue to expand, among regional 4nancial institutions and the global play-ers who had begun to explore this area as a potential line of business prior to the crisis.

Operationally, trade 4nance has also shown signs of evolution. Trade bank op-erations have, in Cash & Trade’s view, long been under-valued and underestimated by 4nancial institutions, and by the market, largely the failure of trade specialists in communicating the value contributed by operations teams in the trade 4nance equation.

6e question of a lack of transactional skill among front-line relationship manag-ers must also be addressed.

6e shi=ing landscape of banking, in-cluding trade 4nance, which includes large mergers and an exit of numerous institutions from the trade business, will only partially mitigate this challenge.

Long training cycles (typically three to 4ve years) persist due to the ine5cient ‘learn on the job’ approach adopted by many operations managers. 6is combines with the ageing nature of the trade opera-tions labour pool worldwide, and the lack of new entrants into the trade back o5ce, to create an ongoing resource issue. 6e shortage has been widely acknowledged as an area of concern across the globe, from the Americas and Europe to trade power-houses in Asia and the Middle East.

6e situation may have been mitigated to some degree by ongoing 4nancial sec-

tor consolidation and the exit of some institutions from the international arena. However, over the longer term, the skills and resource issue will remain on the horizon. Even the advances in automat-ing certain aspects of documentary op-erations will not su5ciently o:set the re-source issue. Markets seeking to establish or maintain a serious capability in trade will look to access these increasingly rare resources.

Until recently, human capital manage-ment and maintenance were identi4ed as the most critical challenges faced by trade bank executives. 6e experience in the GCC region is typical: unstable sta:-ing and resourcing in banking, includ-ing trade 4nance, coupled with regular, signi4cant increases in salary scales as 4nancial institutions scrambled to retain sta: at all levels, or sought to hire them away from competing institutions.

On a global level, including in key mar-kets across the Middle East, the cost of maintaining an operational capability in trade 4nance remains a critical question for senior managers. In addition to high 4xed costs related to sta5ng, the escalat-ing costs of implementing and maintain-ing trade-related technology are o=en a ‘make-or-break’ factor in management decisions.

6e question of how best to handle trade operations has been part of the landscape for over 12 years; operational centralisation, followed by a wave of out-sourcing arrangements, with a few play-ers succeeding in developing a business around trade processing. 6e outsourcing question will remain central to the future of trade bank operations.

Trade bank clients have seen their business and the competitive landscape reshaped over the last two to three years, and again over the course of the current economic crisis.

Sourcing patterns have changed ir-revocably, with international exporters increasingly engaged in import activities to source components or inputs to pro-duction, and foreign investment linking increasingly closely with trade activities. 6is idea of closely related import, export and investment activity has been referred to as ‘integrative trade’.

For markets such as Dubai and Hong Kong, long skilled in re-export activities, this concept is perhaps not so new. How-ever, its implications across the globe are signi4cant, and have reshaped expecta-tions in the trade 4nance sector.

Trade bank clients, from SMEs to cor-porate multinationals, continue to require each of the four major solutions provided by trade 4nance specialists: payment fa-cilitation, risk mitigation, 4nancing and the provision of timely (and increasingly detailed) information.

As business shi=ed to open account, the risk mitigation element was de-em-phasised. However, recent events have brought this dimension to the forefront of the trade 4nance value proposition. Additionally, the provision of information – about a particular shipment or about payment status, for example – has become increasingly valued. Clients, from SMEs to large corporates, are looking for near just-in-time information about every aspect of their trade activities, to the point that multi-bank systems have gained traction over the past 1, months.

Much in the way that customer ex-pectations in the area of cash manage-ment have evolved to raise the demands on service providers, clients engaged in international trade are seeking greater value: enhanced expertise and advisory support, more e:ective technology, and faster response in areas ranging from credit approvals to document-checking, to transaction settlement.

6e global 4nancial crisis, triggered by toxic mortgage assets primarily in the United States, was exacerbated by a sud-

den mistrust among banks relative to the magnitudes of potential exposure. 6is dynamic sent a chill through the inter-bank lending markets, with disastrous e:ects. 6at fast-developing and harsh reality had the e:ect of raising the cost of trade 4nance, reducing its availability and global reach, and ultimately, contrib-uted to the evaporation of pre-shipment 4nancing.

6e global shipping industry continues to su:er as a result, with container ship-ping costs reduced by 0%8, volumes from Asia reduced by over 3%8 and key ports such as Singapore experiencing unprec-edented congestion as ships wait, empty, for the possibility of a cost-covering trip west.

Trade clients, from emerging market SMEs to US and European-based multi-nationals, are experiencing unprecedented tightness in the trade credit markets de-spite the intervention of ECAs and IFIs;

banks with credit line availability and risk appetite have been able to earn premium pricing, and business in general faces ten-sion between the tough realities of domes-tic markets and the lure of international trade as one option to sustain revenues and operations.

Irrespective of the harsh current reali-ties, businesses across the globe are look-ing at this crisis as temporary, even as they acknowledge it may have transformational and irreversible consequences. 6e key for providers is to meet the challenges, while continuing to position themselves for the inevitable return to normalcy – whatever shape that normalcy might take in the end.

Regulatory and compliance issues have come to the forefront in international business and trade, especially since the spectacular corporate failures at World-Com, Enron and elsewhere, and also in the context of tighter anti-terrorism

measures.Regulations which require bankers

to ‘Know your Client’ (KYC), have been extended to a more stringent requirement dubbed KYCC, or ‘Know your Client’s Client’, with the e:ect, for example, that a Dutch bank must conduct due diligence on a new trader in Antwerp, but also ex-tend that due diligence to the trader’s cus-tomer in West Africa. Similarly, 4nan-

American and European financial institutions have been working hard to develop Islamic finance capabilities

Customer expectations in the area of cash management have evolved to raise the demands on service providers

View Point

The world’s shipping industry is one of the many sectors hard hit by the economic downturn


crease the e5ciency and throughput of transaction processing in trade banks, the current situation is perhaps better characterised as two-pronged: technol-ogy continues to support banks’ business models, as banks and providers invest in technology to ensure they remain engaged (are re-intermediated) with clients. At the same time, technology has facilitated unparalleled transparency and immediacy of information about every aspect of a trade transaction, and indeed, about every dimension of a client’s global portfolio of business.

An adequate technology platform is no longer a competitive advantage or dif-ferentiator, but rather a basic requirement for any institution which purports to be a credible trade 4nance provider.

Companies such as TradeBeam and its Global Trade Management model, which covers everything from logistics to com-pliance to 4nancing, or TradeCard, one of the early pioneers in the replacement of paper-based trade with electronic docu-mentation and event-triggered decision-making, continue to stretch the bounda-ries in terms of application of technology to trade 4nance.

Technology providers that previously focused on payments solutions are now active in the trade 4nance space; other organisations such as Bolero, a UK-head-quartered 4rm 4rst established with the active participation of SWIFT (which still retains a small equity stake in the com-pany) has been developing and deploying a multi-banking solution sought by more and more trade bank clients.

Innovative business models and part-nerships are increasingly common in the trade 4nance landscape. From the groundbreaking combination of JPMor-gan Chase Vastera to the evolving col-laborative model developed by SWIFT as the Trade Services Utility (TSU), these alliances will only grow in breadth, variety and scope over the coming years.

Technology in trade 4nance has 4nally reached a certain maturity: it has enabled the beginnings of a transformational peri-od in the industry, as its serves both trade 4nance providers and ultimate customers. Global trade is set to slow for the 4rst time in decades. 6e 4nancial crisis that has engulfed the globe includes a shortage of trade 4nance, the depths of which are un-clear, even as some providers reap record pro4ts. With a 9$2%bn injection targeted at trade 4nance and with the primary engines of the global economy (the United States and China) both profoundly in need of a healthy global trading environment, trade 4nance will retain signi4cant pro4le among policymakers, bank executives and corporate leaders.

Trade will be one of the forces to pull the global economy out of its current tail-

spin, and trade 4nance, as a business, can take the opportunity to do two things simultaneously: demonstrate the e:ective and valuable functions of its traditional instruments and solutions, while concur-rently innovating to position for the post-crisis economic and commercial order.

While traditional leaders such as the US, the UK, Europe and parts of Asia suf-fer the crisis and work to recover – some-times by retrenching domestically – other markets such as Canada and the Middle East, by virtue of some unique features of their respective trade and 4nancial environments, can extend their in7uence beyond its current state.

Similarly, 4nancial institutions in the Middle East, particularly those governed under principles of Islamic 4nance and Shari’a Law, have attracted positive at-tention from various quarters, as a direct result of the relative health of the 4nancial sector in the region.

Success in 4nding opportunity in the current crisis will create a competitive advantage that will last well into the re-covery phase. It is from the ashes of the current turbulence that a new economic environment will rise. ■

cial institutions governed by the KYCC standard will require high transparency about business dealings across the globe, including in the Middle East.

Islamic 4nance principles, with their close engagement between bank and client, the partnership and shared investment element of certain transactions, and the common practice of having a bank take title to goods being 4nanced, provide a

sound basis for higher levels of trans-parency in a trade transaction. In fact, this close engagement and relationship connection between client and banker is one pillar upon which 4nancial insti-tutions governed under Shari’a Law are supported.

As the international 4nancial situation continues to dominate discussion across the world, the fundamental importance of the global regulatory regime is strikingly illustrated by calls for a wholesale rede-sign of the economic system, a rethink-ing of international institutions such as the World Bank and the IMF. Even the long-anticipated Basel II requirements, championed by the Bank for International Settlements (BIS) have been brought into question by the crisis.

6e regulatory environment related to trade and trade 4nance is very much on a path of greater stringency, from anti-money laundering measures, to automated monitoring of OFAC (US O5ce of Foreign

Assets Control) restrictions, to intelligence agencies si=ing through international 4nancial transactions facilitated through the SWIFT network – every dimension of trade, from the 7ow of goods to the 7ow of money, is subject to tighter controls.

Regulations are here to stay – in fact, to expand – and all parties, from corporates to service providers, have the choice of act-ing proactively to help shape the emerging regimes, as well as their responses to the changing regulatory environment.

6e technology dimension of interna-tional trade and trade 4nance is central to the context within which clients and serv-ice providers operate. Since early attempts to ‘dematerialise’ trade documentation in the 100%s, to more recent e:orts to provide full-scale, technology-enabled ‘Global Trade Management’ solutions, technology has been increasingly in7uential in shap-ing business models and value proposi-tions related to trade and trade 4nance.

While early technology served to in-

An adequate technology platform is no longer a competitive advantage but a basic requirement for any institution to be a credible trade finance provider

View Point

Success in finding opportunity in the current crisis will create a competitive advantage that will last well into the recovery phase

The fundamental importance of the global regulatory regime is strikingly illustrated by calls for a wholesale rethinking of international institutions such as the World Bank (Robert Zoellick, president of the World Bank, above) and the IMF

While leaders such as the US, Europe and Asia su"er, other markets such as Canada and the Middle East, by virtue of some unique features, can extend their influence


Training

Turning the tables on financial turbulence

Now is a key time to invest in the skills of sta", not only to mitigate risk but also to achieve a competitive advantage

6e importance of raising the bar in challenging times by DEREK ENNIS of Coastline Solutions.

According to recent 4gures from the World Trade Organisation (WTO) global trade is set to decline by

around 08 in $%%0 compared to last year. We have all read about the causes – from falling demand to the tightening of credit lines and a general loss of con4dence.

But in these difficult times, what does this mean to those involved in the finance of trade? What action or precautions need to be taken by banks, importers, exporters, freight forward-ers and every other specialist involved

in the 4nance and international trade?6e key point is that the risk of not be-

ing paid for shipped goods is increasing. 6is is precisely why the demand for tradi-tional trade 4nance products is increasing. Exporters are no longer as comfortable selling on open account because, even if they have a trusting relationship with the buyer, they do not want to take the risk that the buyer will be out of business before payment is made, or that the delay in receiving a payment will adversely af-fect their own cash 7ow.

training, travel and associated expenses. Companies do not want the additional overheads associated with seminars, spe-cialist courses and conferences. So how is it possible to develop sta: and at the same time control costs?

6e answer lies in technology. 6ere is no longer a need to spend large sums on travel and expenses, everything can be done at the employees’ own o5ce work-station. 6e internet allows training to be brought to the sta: rather than taking sta: to the training.

Early computer-based training was essentially the presentation of books on screen, with the trainee 7ipping from page to page, but things have moved on a long way from this. Using modern graphical programming and the power of the inter-net it is now possible to deliver rich inter-active training anywhere in the world.

In fact, online training o:ers signi4-cant advantages over face-to-face training. One of the key bene4ts is consistency. You are assured that every learner is hearing exactly the same message, and consistent guidelines are given to all.

If you can be sure of the quality of the content, you are guaranteed the message is not being lost in delivery.

And because each trainee is in control of his or her own training, with the op-portunity to revisit sections at will, each has the ability to set their own pace of learning, rather than pace themselves to the average of a group.

Contemporary online training also allows interaction with course leaders and other trainees through chat rooms, web conferences and other communica-tions possibilities o:ered over the internet. Complex simulations can be created to

CASE STUDY

Coastline Solutions, an Irish company, has worked with the International Chamber of Commerce in delivering training to the trade/finance world for the past 10 years. Coastline o"ers a range of trade/finance training courses specifically aimed at the sta" of banks, exporters, importers and associated professions, in how to handle trade finance documents correctly and proficiently. Current modules available include Letters of Credit (Basic and

Advanced), Documentary Collections, Standbys and Guarantees, and new o"erings are in the pipeline. In recent times over 10,000 people in more than 100 countries have used these courses to increase their professional skills. Coastline’s ‘UpSkill 600’ course was probably the most popular training course in the world in preparing sta" for the introduction of the UCP 600 Rules on customs and practice documentation and is still widely used as a reference resource.

place the trainee in lifelike environments which allow for the practise of what they have learned in a protective environment, without any real risk or exposure.

Now is a key time to invest in sta: skills, not only to mitigate risk but also to achieve a competitive advantage over rivals. In di5cult times customers are much more discerning. If you can show

your sta: are well trained and more capa-ble of delivering the best quality of service, you will win the business and there is no reason why this investment should break the bank. By investing wisely in modern technology, it is possible to make your employees the best in their business with-in a budget that is tailored to the current market conditions. ■

Because of this, buyers and sellers are turning to the banks for Guarantees, Let-ters of Credit, and other traditional prod-ucts to provide security of payment.

But it is important to remember that while this takes much of the risk away from the trader, the risk of non-payment is now carried by the banks.

Another risk factor to sellers lies in the commodities markets. In an era of falling commodity prices, some buyers are happy to get out of commitments to pay for goods if the same commodities can be sourced elsewhere at better prices. In these situations, it can be in the buyer’s interest that trade documents are non-compliant, so that payments linked to the contracts are not made. But if the nomi-nated bank pays the seller and the issuing bank refuses the documents, then it is the nominated bank that loses out.

In the good times, documents are presented to banks, and sellers get paid. But these days everyone is watching the detail far more closely. In such times, it becomes vital that compliant documents be presented, and equally important that the banks examine the documents care-fully and correctly.

6e sellers’ skills in preparing docu-ments, and the banks’ skills in examining documents are vital.

In an environment of intense scru-tiny, trade 4nance sta: (both in export-ing companies and in banks) must be equipped with the skills to do their jobs correctly.

It is more important than ever to in-vest in sta: development and training for employees to attain the necessary skills. But with revenues and profits falling, one of the 4rst things to be cut is o=en

Highly trained trade finance sta" who can be relied on to deliver a quality service can be pivotal in winning new business – and it won’t break the bank

Investing wisely in sta" training is key to opening the door to new opportunities


6e Middle East has only recently begun to feel the impact of the global downturn in earnest but, writes ROBERT WATSHAM of global headhunters, Odgers Berndtson, the region is well placed to take advantage of the upturn when it arrives.

Human Capital

Financial talent means the future looks bright

The Middle East’s economies continue to register growth – although there is little sign of the business expansion

and “frenzied trade activity” being hailed just 1% months ago. Almost three 4nancial quarters went by before the Gulf States realised the global economic slowdown had hit them and was about to impact on their businesses.

As a headhunter who specialises in the world of global transaction banking, including the overall MENA region, it has been interesting to watch optimism turn to pessimism over an 1, month pe-riod. However, one thing sets the region apart from the rest of the world: a busi-ness mentality – “realism and determina-tion” as described by one leading Gulf banker – that suggests it will trade out of the recession.

With oil at 912% per barrel a year ago, the Gulf Cooperation Council (GCC) states were anticipating continued eco-nomic growth. But the region is always cautious and expansion was planned care-fully across certain sectors. China and India, meanwhile, were buying raw goods at an unprecedented rate with Dubai rep-resenting the hub of the trade process. However, all suddenly went quiet as oil prices dropped to around 92% per barrel.

Dubai su:ered an overnight realign-ment: property prices went into freefall; unemployment increased sharply; ex-patriates began to pack up their lifestyles and move on. Fortunately, the Central Bank of the United Arab Emirates was

quick to guarantee bank deposits and interbank lending, as well as shoring up liquidity by injecting much needed capital into the 4nancial system. Large private equity 4rms publicly breathed a collective sigh of relief, while quietly calculating multibillion dollar paper losses. Many Ultra High Net Worth families felt, maybe for the 4rst time, the unhealthy draught of a recession.

Recent months have seen turmoil in the Kuwait Stock Exchange, and the coun-try has also witnessed the recapitalisation of Gulf Bank. 6e situation prompted the government to step in to support the economy with a 4nancial stability law, introduced to assist Kuwait overcome the e:ects of the global 4nancial crisis. On a more positive note, yesterday’s enemy is tomorrow’s friend; Iraq sits to Kuwait’s northern border and is oil rich – the pickings are potentially enormous if this small state can make friends with its big-ger northern neighbour.

Saudi Arabia now has a seat at the top table of G+ states. However, it has not been immune to the deepening global recession. Indeed, at the time of writing, a major

Riyadh chosen as the host city for a new GCC Central Bank. Whilst some coun-tries actively oppose any union, the signs overall are looking good as Gulf o5cials challenge the global 4nancial downturn giving added impetus to e:orts to improve monetary policy. 6is has thrown the need for a common currency into focus. 6e premier transaction banks have been in the region for a number of years. Sev-eral have located key personnel in the main countries, whilst others have quietly hired senior business managers who know the entry points to success.

Technology is being leveraged to allow clients (both corporates and 4nancial institutions) to handle cash management and trade 4nance more e5ciently around the region. Risk management and compli-ance is high on the agenda. And borrowers are increasingly turning to export credit agency (ECA) 4nancing to underpin new or stalled infrastructure projects.

Correctly priced trade related deals – back to the trading mentality of the region

– may well be the catalyst that unlocks the source and supply of much needed funding.

From a headhunter’s perspective, these are not entirely happy times. However, the war for talent is still ongoing. 6e market is turning and banks must not look just at what is available in the bargain basements on the street.

When an economy goes into reverse, it exposes those who cannot implement a strategy for recovery. Well-run 4nancial institutions now need to invest in people for the future – those who can help the MENA region evolve as a 4nancial base for global and regional companies as they set up or expand.

In short, financial integration will work in the GCC states and the region will recover – maybe quicker than certain other more mature markets. Business con4dence is fragile, but there are signs it is slowly returning.

6e region has learned from the mis-takes of others and is experiencing a sub-stantial correction. But that correction will be followed by a bounce back. 6e Middle East is an area that is always quick to take advantage of potential opportunities. ■

THE ODGERS BERNDTSON GROUP has 2% o5ces in $3 countries across the globe, providing a worldwide Executive Search capability with more depth, 7air and reach than any other 4rm.Its reputation at the top of the search profession is over 3% years old. It 4nds the very best people for top positions and is the leading UK executive recruitment business with the most extensive national and international reach.Odgers Berndtson was the 4rst of the major executive search consultancies to establish a presence in the Gulf, opening its o5ce within Dubai’s DIFC in October $%%3. Robert Watsham joined Odgers Berndtson in $%%3 and runs a dedicated Wholesale & Transaction banking practice. He has been successful in completing high pro4le mandates around the world for some of the leading global banks.

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holding company has defaulted, leaving the banks and rating agencies adjusting their estimates downwards. With the col-lapse of oil prices sending the Kingdom into de4cit, the Saudi Arabian Monetary Authority has had to oversee an injection of capital into several of the country’s banks. Whilst some of the lessons learned from Dubai’s building boom have been passed on, the stimulus of building four economic cities in the sand may take longer than planned to be realised. How-ever, the underlying reasons are sound: to diversify the kingdom’s reliance on hydrocarbons and related industries; and to safeguard jobs and housing for a grow-ing population.

Bahrain, meanwhile, has continued to try and attract new institutions to the kingdom and is well situated as a global Islamic banking hub. It is, however, fac-ing the same challenges as the entire Gulf, with inward investment drying up and major infrastructure projects being put on hold. Two of the island’s major banks have su:ered from their wholesale bank-

ing structures and have given notice of a push into the consumer 4nance world.

So where does that leave the global transaction banking sector? Falling inter-est rates have had a negative impact, but it is still growing and achieving increased visibility at board level, both in-house and with global clients who need to know where their cash is and how it is being managed. It is now a highly professional

business, with a far larger part to play at this stage of a 4nancial crisis and with scarce liquidity. An interesting develop-ment in the market has seen the Asso-ciation of Corporate Treasurers set up a branch in the Middle East designed to speed up professionalisation of the busi-ness.

Monetary union and the single Gulf currency are high on many agendas, with

One thing sets the region apart: a business mentality that suggests it is likely to trade out of the recession

Well-run financial institutions now need to invest for the future in people who can help

the MENA region evolve as a financial base for global and regional companies


Analysis

If ‘cash is king’, given the global 4nancial turmoil of the past 1, months, then so too is the need to cut costs. Many banks

in the GCC which cater to corporates in the region are being squeezed, just at a time when they need to innovate and ex-pand to ensure the loyalty of their clients and to meet tougher regulatory require-ments. Outsourcing their cash manage-ment and trade 4nance activities to spe-cialist providers may be one solution.

“Mid-tier banks are caught in that per-fect storm,” comments Michael Burkie, Market Development Manager for Europe, the Middle East and Africa (EMEA) at the Bank of New York Mellon. 6ey are caught between the need for regulatory compli-ance and the lack of capital, facing ‘stress-tests,’ he told Cash & Trade. “6ey have to divert funds from capital expansion for the front o5ce, new branches, product development, technology to building up their capital. Yet if they can’t expand, their margins will drop.”

While the concerns of traditional cor-porate treasurers are “the nuts and bolts of banking,” he says that some banks have decided that “cash management and trade 4nance activities are support functions for their core business, rather than an inte-gral part” of what they o:er. Both proc-esses, Burkie adds, “depend on a costly and closely monitored infrastructure.” Because many banks are experiencing

“sub-optional returns” on these activities, “they are concluding that these functions are ideal for outsourcing to specialist pro-viders.” Such a move, he says, would also

“allow mid-tier banks to bene4t from the economies of scale realised by the global banks.”

At present, investment in a state-of-the-

art cash management and trade 4nance system is extremely expensive, in terms of both development and operational costs. Average start-up costs for a full range of functions, including liquidity, payments, the supply chain, imports and exports in a real-time and multi-currency environ-ment, can total some 9$%%m. 6is includes the initial costs of technology, personnel and membership in the worldwide 4nan-cial telecommunications network, SWIFT. Disaster recovery systems, together with back-up energy supplies and telecoms providers, can add even more.

Monthly running costs of up to 9*%%,%%% “are not unheard of,” observes Burkie. Still more overheads, and/or ini-tial capital outlays, may be involved if the system needs to be updated. So, too, if it needs to respond to changes in the banking environment to take account of advances in technology or the need to comply with new multinational regulatory guidelines or additional anti-money-laun-dering procedures. “Given this,” Burkie maintains, the “proprietary working capi-tal transaction services that banks o:er to corporate clients may simply not be feasible for many at present, even though

such a service is increasingly vital to meet the demands of corporates.”

So, what’s the answer? Investing in new technology platforms or in new cash management products may be advisable. But for those banks which need a full processing service, it may be necessary to turn to the large global providers, such as Citicorp, Deutsche Bank, J.P. Morgan Chase or HSBC or, as Burkie argues, to a specialist provider.

For mid-tier banks, a provider such as BNY Mellon, State Street Corporation or Chicago-based Northern Trust, may be more cost-e:ective, other bankers agree. 6ese three, they add, have the advantage that they are long established world lead-ers, and highly respected, in their 4elds, which include custodial, securities and asset services.

Perhaps even more importantly, as other industry analysts and bankers have pointed out, is the fact that these three “do not compete” with their corporate bank clients. Unlike the global banks which o=en have branches in the very cities and regional 4nancial centres in which their corporate banking customers are also operating, these specialists tend to operate in the GCC and in other parts of Europe, the Middle East and Africa through rep-resentative o5ces which concentrate on their corporate clients.

If these providers already service se-curities and assets, “why not payments?” asks Burkie. 6is doesn’t have to do with technology or product,” he emphasises. “It is simply cost-serving. It is the operating cost model. It helps it to change.”

If requested, the specialist service pro-vider can also undertake all the back-o5ce functions typically performed by

the corporate banks, such as multiple currency payments and trade document checking, as well as all other trade-related operations and custody management. 6is eliminates any potential competitive risks that might be incurred should these vital operations be turned over to a more gen-eralised global bank which, as a result, would gain access to a corporate banks’ vital information on their own corporate clients.

So what are the cost bene4ts of using a specialist provider, a mid-tier bank might ask. Burkie is quick to respond. “6e proc-ess not only relieves the outsourcing bank of the steep initial costs, it also turns a high, 4xed cost into a much lower variable cost.” 6e business “can then be budgeted almost on a pay-as-you-use basis,” he adds, or on a “pay-as-your corporate-clients-use basis.”

6is will help with any challenges that may arise as a result of limited credit fa-cilities, Burkie notes. “It also gives the outsourcing bank greater control and 7exibility over the services it o:ers to its corporate clients, as well as better man-aging its revenue/expense ratio.” Once the outsourcing agreement is in place, he adds, “any further future expenses, such as new payment channels and regulatory adaptations also become the responsibil-ity of the specialist service provider. 6is frees the outsourcing bank from potential future transaction risk, as well as system

Outsourcing for Corporate Banks

Bahrain’s banking sector has the highest Tier 1 capital-to-assets ratio in the Middle East, according to figures compiled by The Banker and Cash & Trade. In 2008 the country scored an aggregate ratio of 17.96%, compared to 14.8% in 2007.This placed them ahead of second-ranking UAE, whose combined ratio stood at 14.32%, down by 1.63%. Saudi Arabia came in third, with a 2008 figure of 12.56%, followed by Kuwait with 11.41% and Egypt with 6.16%.Although Arab banks, including those in the GCC, have not been immune from the e"ects of the global financial crisis, banks in both Bahrain and in Egypt managed to increase their Tier 1 capital, a sharp contrast to the situation prevailing in the banking sectors of the US and Europe. In Bahrain’s case, the increase amounted to more than 3%, an impressive figure in the current international climate. Overall, banks in the GCC and in

Egypt have ratios well above the Basel II requirements.In terms of the ratio of pre-tax profits to capital, Egypt scored the highest in 2008, with a figure of 25.92%, up almost 1% on 2007. Kuwait came in second, with a ratio of 21.69%, although this was down by more than three per cent compared to 2007. A slightly larger fall occurred in Saudi Arabia, where the 2008 ratio amounted to 17.15%, followed by the UAE with 14.68%, down almost four percentage points.In absolute terms, National Commercial Bank and Riyad Bank led the list of the Arab World’s top 20 for Tier 1 capital, with $6.7bn and $6.1bn respectively, followed by Emirates NBD with $5.6 billion. This put them just ahead of the Kuwait Finance House and Al Rajhi Bank. Virtually all of the top 20 came from the GCC, except for Amman-based Arab Bank, whose Tier 1 capital in 2008 reached $4.6bn.

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The process relieves the outsourcing bank of the steep initial costs, and turns a high, fixed cost into a much lower variable cost

inoperability concerns.”Unlike many other US banks and 4-

nancial institutions, BNY Mellon, State Street and Northern Trust have quietly gone about their business, operating in the conservative and prudent way that they have for more than 1%% years or, in the case of BNY Mellon, $$2 years. It may not be glamourous, but it is cost-e:ective,

and enduring. For corporate banks in the GCC, the fact that all three have opened up representative o5ces in Abu Dhabi and/or Dubai, as well as in the case of BNY Mellon Cairo, Beirut and Istanbul, promises a potential collaboration across borders that could bene4t both the GCC and other mid-tier banks in the Middle East and North Africa. ■

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Bahrain banks lead in capital/asset ratios

BY PAMELA ANN SMITH


Training


The Internet, new technology, trade moving East globalisation and then, the 4nancial crisis too! Corporate

treasurers have seen it all and many are still reeling from the implications. But one consequence is that they are increasingly taking centre stage in their organisations, and their views are being heard at board level a=er years of relatively benign ne-glect.

Corporations and their shareholders, as well as the owners of many privately-held companies, are increasingly realising that steady, reliable revenue streams, even more than pro4t and loss, are the key to stability and survival in the future, and will be vital when the time comes to take advantage of an international recovery, or to increase market share and geographic sweep. Electronic banking and the In-ternet have given, or can give, corporate and company clients more freedom from traditional banking practices. 6e rise of industry specialists in payments and cash management, supply chain and trade 4nance, as well as o:erings from non-banks, provides many more potential choices.

But most importantly, the lines be-tween cash management and trade 4nance have become increasingly blurred. “6e move away from cash and trade silos has been driven by the needs of clients,” com-ments Marilyn Spearing, head of trade 4nance and cash management corporates at Deutsche Bank. “6e role of corporate treasurers within organisations has devel-oped and treasury has become the centre of risk and working capital management.” 6is, she says, means that banks must develop integrated solutions for managing the 4nancial supply chain and transac-tion banking in general which can o:er corporations a variety of services, from

trade risk mitigation and working capital management to systems integration and the streamlining of all related processes.

While much of the Gulf and the wider Middle East has escaped the worst ef-fects of the 4nancial crisis and subsequent economic recessions that have hit the US, Europe and Japan, many banks in the region have been a:ected by what has happened in the international credit and debt markets. As a result, new lending to their corporate clients and to wealthy individuals is slowing. Many local and regional companies face a di5cult time raising funds, or renewing loans, particu-larly given the relative lack of developed capital markets in many parts of the GCC and MENA.

6is helps to explain why treasurers and their counterparts in many Arab-owned businesses are beginning to realise that liquidity cannot be taken for granted. Others, along with their counterparts in the US, Europe and Japan, who have been adversely a:ected by the global slowdown, may actually see liquidity as their single most important concern when it comes to managing their cash positions.

Still others are 4nding that in a time of global 4nancial turmoil, foreign exchange risk is their number one worry, especially given the huge volatility that the world’s leading currencies have experienced in the past 1, months. And they are not alone:

such dramatic ups and downs in currency pairs have given bankers in the region sleepless nights, too. Corporates and com-panies in the region are also confronting counterparty risk, putting this near the top of their new agendas. In addition to their fear of a supplier going bust, they must now be concerned about whether their bank will remain solvent.

Still other risks are becoming more prominent, too, such as interest rate risk, commodity risk and the changing regulatory environment. More and more concern is being expressed about trans-parency, including the ability to track payments and to communicate e:ectively with banking partners. Treasurers and their sta: need greater 4nancial informa-tion, on a regional and global basis, as well as better tools and skills to make accurate cash forecasts.

“Clients will want to play a far more active role in their cash management,” ob-serves Charlie Corbett, Economics Editor for the London-based 4nancial monthly, !e Banker. Technology has allowed cus-tomers more control over their 4nances, but the economic downturn has awakened them to the need to monitor their risk exposure and counterparty situation ever more closely.”

So what should corporate treasurers be expecting when it comes to their banking partners, specialist or non-bank provid-ers?

First and foremost, when it comes to payments, corporates need to unlock the liquidity in their working capital and pur-sue e5ciencies that will help to reduce costs. “You can no longer say ‘a payment is a payment is a payment,’” maintains Rajesh Mehta, treasury and trade solu-tions head for Europe, the Middle East and Africa (EMEA) at Citi, still one of the

Corporate treasurers move centre stage: how best to manage cash and leverage it?

largest global banks in cash management despite its recent re-organisation. “6e economic environment requires banks to extend the payments value chain into corporates’ 4nancial supply chains . We have to extend the e5ciency of payments beyond the settlement of the transaction into the commercial relationship itself.” In addition to supplier 4nancing, he says that “procure-to-pay” and electronic invoicing are all services that can add value to a company’s payments process.

Francesco Vanni d’Archira4, Citi’s glo-bal head of treasury and trade solutions, also points out the importance of reducing costs in a way that bene4ts both the com-pany and the bank. “If we can enable our clients to reduce days sales outstanding by 1$ 8 and lengthen days payable by 1$ 8 an entirely achievable expectation we can liberate 91 trillion in cash and potentially double our cash management business by enabling our clients to manage their working capital just a little bit better.” His 4gures are based on the fact that of Citi’s <%,%%% cash management clients around the world, *,%%% are the largest multi-nationals or public sector organisations.

Using a number of banks is also a rap-idly growing trend in cash management. “6e importance of counterparty risk and the need for contingency is leading to payments being split up between pro-viders in some cases,” con4rms Spearing of Deutsche Bank. Her views are shared by Andrew Long, head of global trans-action banking at HSBC. “In truth,” he says, “corporates have mostly focused on a multi-regional strategy as they are aware that no bank can really cover every region properly. 6e di:erence,” he adds, “is that they are asking if more than one bank in each region makes most sense from a risk concentration perspective.”

But aside from diversifying banking partners, corporates may also 4nd it ad-vantageous to look more closely at SWIFT, the global 4nancial telecommunications network, as well as at new developments in technology. “6e concept of a mono bank, with responsibility for global cash management, looks too risky for corporate treasurers in the market environment of the foreseeable future,” Stéphane de la

Corporates have mostly focused on a multi-regional strategy as they are aware that no bank can really cover every region properly

Citi, still one of the largest global banks in cash management despite its recent re-organisation.

Fouchardière, head of SWIFT develop-ment and business at BNP Paribas, told the international 4nancial monthly, Eu-romoney. “6e alternative is a strategy that utilises new technologies such as Swi=-Net, which enables more straightforward business-to-bank connectivity, and a new approach based on 7exibility, modularity and regional services.”

Spearing concurs. “6e need for visibil-ity and control does not militate against splitting up payments between di:erent providers, given current technology,” she explains. “Ten years ago, it was essential to work with one bank if e5ciency and visibility were a priority. Now the same results can be obtained even with diversi-4cation, not least through SWIFT.” 6eir communications network, she adds, “al-lows corporates to move between banks at the 7ick of a switch and is likely to become more attractive given current circum-stances.”

Corporates and companies might also want to consider, in these relatively straightened times, the extent to which they can leverage their spending on cash management, trade 4nance and other services with their partner banks, ob-serves Euromoney’s Laurence Neville. “While resilience of systems, network, service excellence and innovation remain important, the crisis has shown relation-ship management and the link from trans-action banking to the rest of the bank to be crucial,” maintains Spearing. What that means in practice, comments Neville, “is that lending by banks is now essential to gain cash management business.”

For the largest corporates, that implies a crucial change, observes Alex Caviezel, head of treasury services, EMEA, at JP Morgan. Historically, they have seen their lending relationships separate from cash management, because they could access the capital markets for their fund-ing needs. Except for short-term working capital, he adds, they generally focussed on getting the best deal [from a bank] for cash management. Given the ever-growing linkage between the two, corporations and companies need to consider how banks treat their clients in terms of both rela-tionships overall and in terms of product

o:erings. A bank which can devote an individual or a team to the client, and which operates a co-ordinated approach has much to o:er in this new climate, Neville points out.

“6ose banks which can link com-mercial activity, such as working capital management, FX, risk management and short-dated investments are able to of-fer a holistic view to treasurers,” says JP Morgan’s Caviezel. “6ose banks that fail to adapt to the altered cash management landscape will undoubtedly usher in a future of unhappy customers, loss of busi-ness and unwanted attention from regu-lators,” maintains Corbett. “Ultimately, those banks that pay su5cient attention to what their clients want will succeed.”

For corporates, companies and banks operating in the GCC, the choice of how to proceed with cash management and trade 4nance in the future will undoubt-edly be conditional on developments in the region as a whole and in the wider world in general. But one thing seems certain: just as there will be more costs, and more di5cult choices, there will also be new opportunities to make the most of revenues and cash 7ow, as well as better ways to ensure 4nancial stability and the reduction of risk. ■

Analysis


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SWIFT, the Society for Worldwide Interbank Financial Telecommunications, has revolutionised the way banks and corporations communicate with each other. In this exclusive interview for Cash & Trade, SWIFT's Regional Head, MENA, Sido Bestani, speaks frankly about how the global 4nancial crisis has a:ected his organisation and explains what measures it is taking to provide for the needs of customers in the Middle East and North Africa.

SWIFT – a communication revolution

Corporate treasurers are looking to diversify their risk, especially given the financial turmoil of the past 18 months. What can they do to achieve this?Some of their banks are using secure means of communications in emails or in certain applications. But others are using channels which are not secure, which are not standard. 6at's where we come in.SWIFT provides communications between companies and the bank in a secure and standardised network. It provides the means for these corporates to get real-time availability of their cash, of their funds, through something which is also more secure, instead of using email or faxes which are not really secure. Because of this crisis, some large corporations here in the Middle East are looking to reduce this corporation risk and to have better means of communications with their banks.

Some of the most important global banks in cash management, such as Citicorp and RBS, have fallen on hard times. How has this a"ected demand by corporations and large companies for global transaction banking?What SWIFT is providing is a means of communications which will allow

secure and more standardised ways of communicating. So the 4nancial crisis does a:ect us. Our SWIFT tra5c, which is where we get our revenue, is decreasing.

It is decreasing?Absolutely. Growth for the past ten or 12 years has been around 1% or 12 8 a year, but for the 4rst time in SWIFT's history, because of the crisis, SWIFT tra5c has decreased. Last year it fell by 2 8. 6is is the 4rst time we have had a decrease. So it does have an impact, but that's not only focussed on what's going on with Citi and RBS. It is the general 4nancial crisis.

To get back to corporate treasurers, because of all the turmoil, obviously they feel they have to diversify their risk as much as possible. If, for example, they've been depending for their cash management or trade finance services on one particularly big bank, say Deutsche Bank or JP Morgan, how can they diversify their risk? Can SWIFT help them by enabling them to deal with more than one bank?SWIFT is not in the business of saying which corporates need to work with which bank. 6at is their own business.

What we provide is a pipeline, a standard and secure pipeline. Most of the large corporations usually use multi-banks. 6ey have a relationship with two, three, four or even $% banks. 6at is how they diversify and reduce their risk. What we have seen is that you can minimise your risk by using a pipeline which is common to all these banks and which allows you to have something secure. SWIFT is secure and standardised, and this obviously will help to avoid manual processing, increase automation and straight-through processing (STP), etc.Banks using the same pipeline can add services to their corporate customers and also increase the automation rate, STP, etc. In other words, it is automated from one end to the other. STP means, for example, that if you send a fax, you have to process it manually, with a human being. You have to process the instruction manually. Whereas if you are using a standard, if you are a bank, and you receive a message which is a standard, that message can be processed by a machine, by a back-o5ce application. It can do what is necessary. 6erefore you are reducing your risk. So some of these banks can bene4t by using SWIFT as a common pipeline for their corporate customers.

You are talking here about for the larger corporates. As you know, in the Middle East, aside from many large holding companies, there are a lot of smaller, privately-owned family firms, as well as smaller banks. Some of these may have a relationship with several banks, but many may not. How can SWIFT help these firms?6at's a good point. Indeed, there is a di:erence between, let's say, the Western and European market and the one in the Middle East. But in the Middle East, too, you still have some large corporates for whom it makes sense to use SWIFT for all the reasons I've just mentioned, ie. to go for something more secure and more standardised. 6ese large corporates, whether family

owned, or whether they are like Aramco, RasGas, the Kuwait Petroleum Company or Qatar Telecom, etc. may have a relationship with local banks, but also with international banks. For these corporates, it makes sense to think about SWIFT connectivity.Today we have, more or less, $% corporates in the Middle East which are connected to SWIFT. Two or three years ago we had only around 4ve. So the ball is rolling. 6ere is interest growing in the region, and also for some of the local large banks to have SWIFT as a pipeline.

You say 'the local, large banks.' Are you talking about those which are international like, for example, HSBC? Or are you talking about banks like

the National Bank of Abu Dhabi or other indigenous banks? I'm talking about the local large ones, banks like the Emirates National Bank of Dubai, the National Bank of Abu Dhabi, Emirates Bank, Qatar National Bank, the large ones in Saudi Arabia, like Al Rajhi bank. These are large banks that provide services to the large corporates. Therefore it makes sense for them to provide the SWIFT pipeline.What we have been doing for the past two to three years since we opened the o5ce in Dubai is to raise this awareness among the banks, the local banks, and then, with their help, to raise this awareness among the large corporates…. Because the bene4t is mainly for the large corporates. 6e good thing is that


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the ball is rolling. At the same time, because of the 4nancial crisis, some of them are thinking about having SWIFT as something mandatory, so that they can reduce both their operational risk and their overall risk.

Technology is advancing rapidly, particularly in cash management and trade finance. I know that SWIFT provides software to banks which is proprietary. What kind of technology or software are you able to provide specifically for Middle Eastern clients?All the products and services which are available at SWIFT are available to the $%, countries that we serve.

It is the same from one country to another. What we mainly provide is a secure network. 6is is why SWIFT is known throughout the world, for the more than ,,%%% 4nancial institutions that are connected. It is also about the standards and the key messages. You have $2% types of messages, or standards, that cover payments. which allows you to go for automation, for increasing STP.

What type of messages?6ese are standard messages which can be integrated into back-o5ce applications. We have three types of messages in the payments area, in the treasury area, in the securities area and

in the trade area. It is really broad so that the institutions can use it. 6is is the basis of SWIFT.At the same time, SWIFT is trying to provide more support to its communities, because you need to remember that SWIFT is a co-operative. It is owned by the users. 6ey are the shareholders.

You are based in Belgium. And you have more than 8,000 banks?We have more than ,,%%% 4nancial institutions. Among these you have banks, but you also have other 4nancial institutions like asset managers, broker-dealers, custodians, administration, etc. Overall, it is actually ,,,%% 4nancial institutions in $%, countries.

You mentioned that now that you are based in Dubai, you are looking at how the regional market operates?Yes. 6is is one of the reasons that we opened the local o5ce. SWIFT is a small company, with just $,%%% people working for it. At the same time, we are providing our service to more than ,,%%% 4nancial institutions. So by opening local entities, we try to be closer to these institutions, to make them aware of what is going on in SWIFT, and to provide them with the right support. At the same, we give time to making sure that they are using or that they can bene4t from the existing SWIFT intrastructure, that they can leverage it, perhaps by introducing corporate connectivity, but also through other projects that we have in the pipeline, like workers' remittances. 6is is something which is on the SWIFT agenda, to provide the community with a way to automate these type of payments, which are very much present in the region. We provide also other tools, like matching tools, like tools for the foreign exchange market…di:erent types of tools which might not be applicable for all institutions, but will be for some. We just want to make sure that they are aware of it and that they can get the most out of SWIFT's services. ■

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Documents

Cash and Trade Mag-Issue 1