CashAndTradeMagazine May June Issue9

For Cash and Trade professionals in the Middle East
ISSUE 9
MAY / JUNE 2011
Partnerships could help banks in emerging markets Saudi corporates prosper Banks launch new cash management products
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Letters of Credit still at the core of trade

Global trade now on the rebound Unrest highlights need for greater risk assessment Turkey seeks closer trade ties with MENA
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Contents
India
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Italy
Letter from the editorial director News Round
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Jamaic
12 Risk and trade finance

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18 Supply chain finance techniques

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23 Islamic finance 31 Post crisis banking 35 Global trade survey

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Political events in the MENA region have brought into focus the fundamental importance of sovereign risk in international business, leading to an increased awareness of integrated cash and trade solutions
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38 Cash management in Kuwait

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DEDICATED TO GOING BEYOND YOUR EXPECTATIONS.

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Po Poland
Hani Al Maskati editorial director & Publisher Tony Bush editor Rob Cuthbertson art editor
hani.almaskati@cashandtrademagazine.com
Sheila Roche Commercial director
Compliance - and especially what may be contained in the upcoming Basel III accord - is a chief cause for concern for global trade and trade finance in particular
sheila.roche@cashandtrademagazine.com
Contributors: Maki Vekinis, Mushtak Parker, alexander r. Malaket, Paul Melly, James Gavin, Ian Lewis, Caroline Maginn, Liz salecka P. O. Box 5300 Kingdom of Bahrain Tel: (973) 17628487 / 17620111, Fax: (973) 17624312 all correspondence and queries Cash Management Matters P. O. Box 38215 London nW3 6Wa U.K
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Cash Management Matters United Kingdom Cash Management Matters P. O. Box 38215 London nW3 6Wa U.K www.cashmanagementmatters.com Cash & Trade is printed on behalf of Cash Management Matters (CMM) by dar akhbar al Khaleej Printing & Publishing
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Historically, Kuwaiti bankers are among the best. Whilst that is a source of pride, they are aware that today Kuwait must survive in what has become a highly competitive business arena Cash a n d Tr a de M aY / J U n e 2011 3
For Cash and Trade professionals in the Middle East

Welcome
Letter from the editorial director

www.cashandtrademagazine.com
Cash & Trade is the OnLY magazine for the niche cash and trade flow sector in the arab world. highly prized copies are received on a regular basis by C-suite level executives, Finance directors and Cash & Trade Flow decision makers in the Middle east region. Cash & Trade provides in-depth coverage of all the cash management and trade finance issues facing the financial, technology and corporate sectors today. It combines news, special reports, big name interviews and exclusive industry data uniquely tailored to the issues facing the Middle east.
It is Cash & Trade magazines mission to inform, educate and engage the
regions finance community with relevant expert commentary and thought provoking editorial. Cash & Trade delivers the market intelligence that senior executives require in order to lead their companies and stay abreast of market developments. dear reader, against the odds, trade picked up across many regions in 2010, according to the International Chamber of Commerce (ICC) Trade and Finance Global survey 2011. however, high-pricing meant that traders in many low-income countries still faced difficulties accessing affordable trade finance. Our article on the subject in this issue quotes Pascal Lamy, director-general of the World Trade Organisation, as saying, What is needed now is a more targeted use of resources, focusing on the poorer countries and small-and-medium-sized enterprises around the world. They should not be paying the high price for the repair and re-regulation of the global finance industry. In another discussion on the issue in this edition, alexander Malaket points out just as trade finance has emerged from the still-real economic crisis with greater profile, the importance of risk assessment and mitigation have been effectively highlighted by the realities of unrest within the Mena region. he writes, Trade financiers as well as business leaders, from small-and-medium enterprises to large corporates forgot for a time that effective risk assessment and mitigation are core elements of the value proposition of international trade finance. In the context of so-called traditional trade finance instruments, the textbook distinction between documentary credits (best suited to transactions involving new or unproven trading relationships and/ or high risk markets) and documentary collections (trusted relationships, stable markets) was lost and rendered nearly irrelevant in many parts of the world. While this may have been less the case in the Middle east, it remains true that this trend was widely observed in the two or three years before the eruption of the global crisis, at least in part as an outcome of demands from large retailers seeking to conduct trade on less expensive open account terms. Th is unfortunate disregard for adequate risk assessment and risk management was evident in transactions involving markets that would have otherwise been considered relatively risky; similarly, importers and exporters establishing new trading relationships even in such higher risk markets frequently agreed to conduct business on terms that, effectively, disregarded the realities of risk in international commerce. effectively, risk has always been a reality in the conduct of cross-border business and always will be. In terms of that last point, this is why Letters of Credit are making a comeback. Our Cover story makes it clear that the current political and economic climate in the Middle east has strengthened the need for them and they now look set to continue playing a crucial role in domestic, regional and international transactions despite the global movement towards open account trading. although about 80 per cent of global trade is now open account-based, approximately 70-80 per cent of all Middle eastern trade volumes still rely on LCs, according to statistics published in 2010 by the World Trade Organisation. as a result, LCs have remained a core trade service for local banks and a very lucrative fee-earning business. however, despite this, there is strong belief that local banks should not shy away from the provision of modern-day structured trade fi nance solutions, such as supply chain finance, which could help local companies reduce trade transaction costs and tap into more cost-effective financing. It is always pleasant to end on an upbeat note and, to return to the ICC report mentioned at the start, most respondents to the survey commissioned by the WTO expert Group on Trade Finance to track the developments in the industry agreed that business on the whole has been significantly improving since the fi nal quarter of 2009. On top of that, markets in several advanced economies are quickly returning to normal trading conditions, which is good for everybody.
hani al Maskati editorial director and Publisher.

hani.almaskati@ cashandtrademagazine.com
Contact: Sheila Roche Commercial Director sheila.roche@cashandtrademagazine.com

Cash a n d Tr a de M aY / J U n e 2011 5
News Round
Future looks good for MENA, says IMF
There are long-term opportunities for the Middle east and north africa despite the short-term challenges being faced because of unrest, according to the IMF. It believes that the region will have the chance to lay the foundation for a socially inclusive and more dynamic growth model. But, in the near term, countries face multiple pressures stemming from higher commodity prices and disruptions to economic activity, the IMF said in its april 2011 regional economic Outlook for the Middle east, north africa, afghanistan and Pakistan (MenaP). In the long run, the uprisings could give a boost to the economies in the region by setting a more inclusive growth agenda, improving governance, and providing greater and more equal opportunity for its young and growing population. however, the near-term outlook is challenging, and there is a pressing need to address unemployment and improve social safety nets, Masood ahmed, director of the IMFs Middle east and Central asia department, said at the launch conference of the report in dubai. The immediate challenge facing oil importing countries
6 Cash a n d Tr a de M aY / J U n e 201 1
in the Middle east is to maintain social cohesion and macroeconomic stability in the face of multiple pressures, he added. The report projects overall growth in the MenaP region at 3.9 per cent. But within that picture, the economies of the oil-exporting countries algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, saudi arabia, sudan, the United arab emirates and Yemen - are expected to expand by 4.9 per cent (projections exclude Libya), owing largely to higher oil prices and oil production. The combined external current account balance for regional oil exporters is expected to more than double to $380bn in 2011 (excluding Libya). Overall, these economies are set to expand, with overall real GdP (excluding Libya) projected to grow by 4.9 per cent in 2011. While, for the group as a whole, non-oil GdP growth is projected to remain flat at 3.5 per cent. In the GCC, its said that increased spending will result in an increase in non-oil GdP growth to 5.3 per cent in 2011, from 4.2 per cent in 2010. despite the higher spending, though, fiscal positions will improve, with higher oil revenues more
than offsetting additional public expenditure. notwithstanding this overall positive outlook, the regions oil exporters continue to face challenging structural issues, such as the need for greater diversification of their economies, job creation for their populations, further financial development to support economic growth and improvements in the management of public resources, said the report. It adds that oil importers in the region will face a difficult economic year as they manage both internal and external pressures. The deterioration in the terms of trade resulting from higher food and fuel prices is expected to inflate their import bill by about $15bn, or nearly three per cent of GdP on average, says the IMF report. This will, in turn, translate into either higher inflation or a worsening fiscal balance, depending on the extent of subsidies. For many oil importers, political turmoil is expected to weigh on tourism and investment, which, together with higher funding costs and pressures for higher spending across the region, will add to fiscal pressures. and pressures on macroeconomic and financial stability - if not addressed quickly - could impede the pursuit of a new socially inclusive growth agenda and hamper job creation. To this end, governments that are faced with limited fiscal space will need to consider partially offsetting some of the additional spending in priority areas through cuts elsewhere. as a whole, the report noted that the region had many strengths: a dynamic and young population, vast natural resources, a large regional trading hub, an advantageous geographic position and access to key markets. While the months ahead will be challenging and inevitably marked by setbacks, there is now momentum for change to build upon, ahmed concluded.
Securer messaging for MENA financial services

The Managed secure Messaging service provided by British Telecommunications (BT) is now available to financial institutions in the Middle east. The service allows the financial community to exchange messages securely, reliably and in a non-repudiable manner over BT private networks and the internet for all of its business activities. The service is designed to meet the security requirements of the regions banks, clearing houses and securities depositories as well as corporate treasurers. The service can help cut costs by increasing the automation of message processing, reducing messaging failures and the manual administrative expense of correcting them. By ensuring that a message is secure, tamper-free and delivered in a non-repudiable manner, users can have confidence that messages sent and received remain unchanged and confidential. BTs Managed secure Messaging service is said to be unlike many other messaging services. It records that each message has been sent and received, and informs both parties that it has been delivered correctly. BT-supplied hardware or soft ware gateways at both sending and receiving ends ensure that messages are encrypted, kept secure and intrusion-free. Wael el Kabbany, managing director, BT Middle east and north africa, said, The need for secure, tamper-proof and non-repudiable messaging between parties in fi nancial transactions continues to grow. BTs Managed secure Messaging service enables organisations to reduce their failure rates, reduce the costs of correcting those failures, and increase service levels to their customers.
Wael El Kabbany, managing director, BT Middle East and North Africa
It is a single messaging tool that allows customers to communicate with everyone across their business community. We strongly believe that this new service adds great value to our BT radianz Community. BT has provided customised managed secure messaging services for individual organisations in the fi nancial sector since 1996. each day these services deliver messages, effectively transferring hundreds of billions of pounds, securely, reliably and in a non-repudiable manner with no messages lost.
New chiefs at BNY Mellon

Two new treasury services leadership team appointments have been announced by BnY Mellon. susan skerritt now leads global product management and strategic development, and alan Verschoyle-King was named head of global sales and relationship management. Both will report directly to J. david Cruikshank, chief executive officer of BnY Mellon Treasury services. Formerly head of business strategy, development and investment for BnY Mellons Financial Markets and Treasury services (FMTs) organisation, skerritt replaces al Briand, who assumed duties earlier this year as chief administrative officer for BnY Mellons Corporate Trust business.
Left: Susan Skerritt, Right: Alan VerschoyleKing
Verschoyle-King moves into his new role from his current position as head of BnY Mellon treasury services for eMea. his replacement has not yet been announced, whereas skerritts FMTs responsibilities will be assumed by Jean Wynn, chief administrative officer for FMTs. These appointments reflect our strategic emphasis on integrating treasury services innovations into client solutions
on a truly global basis, said Karen Peetz, vice chairman and chief executive officer of BnY Mellons Financial Markets and Treasury services organisation. susans experience managing innovation projects at the group level is a perfect complement to alans experience managing treasury services delivery in global market spaces. They are outstanding additions to our treasury services leadership team.
News Round
More trade support
Fastest forex newcomer accolade

ads securities, the leading abu dhabi-based brokerage and trade services provider, was named the Fastest newcomer at the Middle east Forex awards 2011. This recognised the significant volumes and client base that the company had built up in the short time since its start-up. Launched by a group of private investors with an initial capital of $400m, ads securities offers a comprehensive set of services and tools designed to help institutional, professional and high-net-worth market participants trade with high efficiency, speed and simplicity.
Backing for energy projects

The Islamic Corporation for the Insurance of Investment & export Credit (ICIeC), a member of the Islamic development Bank (IdB) Group, and the african Trade Insurance agency (aTI), have signed a Memorandum of Understanding (MOU) that aims to provide greater cooperation to provide re-insurance support for trade transactions and projects that benefit exporters and investors conducting business in common member countries in subsaharan africa. The MOU was signed on behalf of ICIeC by dr abdel rahman el-Tayeb Taha, CeO of ICIeC and George Otieno, CeO of aTI, at aTI headquarters in nairobi. Under the terms of the understanding, ICIeC and aTI will re-insure each other on trade transactions and projects supporting their respective member countries. They will also offer political risk and trade credit insurance to enhance business and investment f lows. George Otieno noted, The events in the Middle east and north africa have shown how quickly countries rated as relatively stable can become high risk. aTI welcomes this partnership with ICIeC, which will strengthen insurance protection for african businesses already trading with arab countries as well as those who may be seeking opportunities in that region. In a move that widens its role as a multilateral development bank, the arab Petroleum Investments Corporation (aPICOrP) has signed the accession agreement to the International Finance Corporations (IFC) Master Cooperation agreement (MCa). It is the first arab multilateral development bank to do this. The IFCs Master Cooperation agreement promotes increased collaboration with international financial institutions to help standardise steps that lenders take when co-financing projects with IFC in developing countries. aPICOrP has now been enabled to partner with IFC, a member of the World Bank Group, to co-fi nance developing country energy projects in which arab countries have made investments.
Saudi corporates blossom

strong performance by the petrochemical sector because of higher global prices boosted the combined income of listed companies in saudi arabia by nearly 23 per cent in the fi rst quarter of 2011, according to a saudi investment fi rm. despite the sharp fall in the profits of some firms, the combined earnings of the more than 120 companies trading their shares in saudi arabias Tadawul stock exchange were also up by 13 per cent above the last quarter of 2010. riyadh-based Jadwa Investments described the first quarter of 2011 as a tough period for much of the private sector, which was still struggling to recover from the 2008 global downturn and a severe debt default problem that hit two family businesses in the Gulf Kingdom. In total, listed company net income was 23 per cent up on the first quarter of 2010 and 13 per cent above the final quarter of last year. Petrochemicals was by far the best performing sectorhowever, this was driven by higher prices and generally greater international sales and did not reflect local or regional conditions, said the study. excluding petrochemicals, total earnings were up by just 3.7 per cent in year-on-year terms and were down by 2.3 per cent compared to the previous quarter, the first quarterly decline since the final quarter of 2009, the report showed. Quarterly earnings for the petrochemicals sector as a whole, and for saudi arabian Basic Industries Co. (sabic), the largest company, were at an all-time high owing to a jump in product prices. The study showed most other sectors were impacted negatively by the regional unrest as earnings from six sectors were down in both year-on-year and quarter-on-quarter terms. among those hardest hit were companies exposed to the unrest either by owning manufacturing facilities in affected countries, or by being major exporters to those countries, particularly egypt. several firms in the agriculture and food, building and construction and industrial investment sectors reported a shortfall in revenues and some noted that they were not anticipating a recovery in the short-term. soaring raw material prices were cited by many companies as a key reason for elevated operating costs, which ate into profits, said the report. Global prices of many commodities have surged and some, such as copper, hit all-time highs during the fi rst quarter. higher prices of metals and petrochemical products squeezed the earnings of companies in the industrial investment and building and construction sectors. It said the two largest dairy and food processors reported that rising packaging costs hit earnings and that they were also affected by the greater cost of imported fodder, which in part reflects the surge in global food prices to an all-time high in the fi rst quarter.
Boost for Bank of Beirut

Bank of Beiruts net profit for the first quarter of 2011 rose by 1.38 per cent to $20m as compared to the first quarter of 2010, although assets and customer deposits jumped by 26.86 per cent and 36.11 per cent respectively. roger dagher, chief financial officer of Bank of Beirut, said the remarkable growth of assets during the period was attributed to internal expansion and the acquisition of the australian subsidiary Laiki Bank (australia) Ltd. that was completed in March 2011.
News Round
Will Nagle (CEO) and Kamel Alzarka (chairman) of the Falcon Group in the hotels Lost Chambers area, which includes a window onto the hotels aquarium the largest in the Middle East
Finance: the future

The future of trade and corporate finance was discussed when the Falcon Group held its second annual Trade & Corporate Finance Forum for the regions CeOs and CFOs at dubais atlantis Palm in april. Lord norman Lamont, former UK Chancellor of the exchequer, was the keynote speaker. Other speakers included Fabio scacciavillani, Oman Investment Funds chief economist, and daniel schmand, deutsche Banks managing director and head of trade finance for West europe and Mena. Lord Lamont spoke of Chinas extensive appetite for global natural resources and looked at the problems this posed for other countries. his other focus was the risk of protectionism in which he pointed out the dangers and consequences
that could be posed for the world economy and trade. Fabio scacciavillani spoke about the inflationary pressures in emerging markets, the fiscal crisis in europe and dangers within the recovery in the Us. he also discussed the impacts of the Basel III banking accord on lending and how this may impact the availability of trade finance. he was followed by daniel schmand. he discussed how the crisis and regulatory changes had increased the capital requirements of banks and looked at the implications of Basel II and III on banks offering trade finance. he said that by offering alternative trade finance solutions, providers such as the Falcon Group played a crucial role in emerging market corporate finance. The last speaker was a client of Falcon Group the CFO of a well known regional corporation. he spoke about how the companys funding gap increasingly widened during the global economic crisis due to the fact that traditional funding sources had dried up. This meant that the services provided by Falcon Group were critical in allowing the company to keep trading through the financial crisis of 2007-2009. The forum was closed by Falcon Group chairman Kamel alzarka. The offering of cash management and trade fi nance banking services in saudi arabia is a significant milestone for deutsche Bank and our GTB franchise in the region. We are proud of the contribution we have made in the country to date, and we look forward to further assisting our clients with their fi nancial needs. ashok aram, deutsche Banks CeO for the Middle east north africa region, said, saudi arabia is a key strategic and growth market for our regional and global franchise, and we will continue to invest in it and to deliver the products that our clients require to grow their business.
Saudi overtures to Korea

an even higher level of co-operation between saudi arabia and Korea has been called for by Khalid a. al-Falih, president and CeO of the saudi arabian Oil Company). In addressing the Korean Chamber of Commerce in seoul, he said he would like to see strategic Korean investments in various areas of the saudi arabian economy, including energyrelated fields. In a speech entitled Mutual Benefits, shared Opportunities and enduring relationships, al-Falih said that saudi arabias admiration for the people of Korea had to do with economics but was, at the same time, very human. For more than a generation, he said, we have seen first-hand your work ethic, your fortitude, your ingenuity, and the way in which Koreans meet their responsibilities and honour their commitments. al-Falih said the republic of Korea is now among saudi arabias four largest trading partners. Just as Koreans had helped build saudi arabia, the kingdom had been instrumental in Koreas growth through our reliable supply of petroleum and through our equity stake in the s-Oil Corporation, one of this countrys leading energy enterprises. This year marks the 20th anniversary of that milestone investment - saudi aramcos first in asia. s-Oil is now expanding the capacity of its Ulsan refinery to more than 650,000 barrels per day, making it one of the worlds biggest and most sophisticated refineries, he said. In separate ceremonies, saudi aramco signed memoranda of understanding with the export Import Bank of Korea and the Korea Trade Insurance Corporation to enhance opportunities for the two export credit agencies to participate in financing saudi aramco projects in the future. In the works are new crude-oil production facilities; a 50 per cent increase in global refining capacity; an expansion of the Master Gas systems capacity to more than 15 billion standard cubic feet per day; a worldclass petrochemical project in Jubail; a planned expansion of the Petrorabigh joint venture; new industrial clusters housing other companies engaged in conversion, manufacturing and service activities; and a large number of support and infrastructure initiatives - including pipelines, bulk plants, system upgrades, environmental projects and large buildings. I would like to see Korean companies adopt a forward-looking strategy in which they invest in the ability to service and maintain materials and equipment in saudi arabia, rather than simply supporting us and the Middle east region from over the horizon here in Korea, said al-Falih. Just as this nation provided us with an ideal launching pad from which to grow our presence in north asia, I believe the kingdom can also be an excellent springboard for Korean firms wanting to grow their presence in the fast-growing Middle east region and beyond.
New cash management products

Burgan Bank has announced that it is launching a range of corporate cash management products and services for its corporate banking clients. These include traditional and new commercial banking services. raed al haqhaq, chief banking officer-senior general manager, said, We are delighted to introduce a wide variety of specialised products and services offering cost-effective end-to-end banking solutions that optimise cash f lows in a real business environment for our corporate banking clients. as a further addition to an impressive range of electronic banking services, the new cash management system offers clients a comprehensive view of funds position, resulting in enhanced control and improved liquidity management coupled with comprehensive payment services that could be customised and tailored to the needs of individual businesses , thereby eliminating manual tasks. The new system also allows clients to exercise control over transaction workf lows, users, limits and account administration. The system has high level of security built to international standards.
Fresh services for corporates

deutsche Bank is launching trade finance and corporate cash management services out of its branch in the saudi capital riyadh. They are focused on servicing the banks corporate and institutional clients, and include traditional and new commercial banking services such as international trade finance solutions and cash management, supporting customers at every stage of their business cycles. The bank is committed to offering the best class of fi nancial services and products and it has a dedicated hotline
number for its corporate banking customers. Werner steinmller, deutsche Banks head of Global Transaction Banking (GTB) and member of the group executive committee, said, The expansion of our suite of services in the Kingdom is a testament to our unwavering commitment to the region, and is part of a strategic vision that has long recognised the Middle east, and saudi arabia in particular, as an important part of the global economy and fi nancial sector.
HSBC cuts Middle Eastern workforce

hsBC plans to lay off up to three per cent of its 12,000-strong workforce in the Middle east and north africa as it seeks to cut costs to improve its competitiveness. as part of a standard operational review of the business to ensure our competitiveness, we have identified an opportunity to improve efficiency through a small reduction of headcount, it said in an emailed statement to Zawya dow Jones in response to questions. The layoffs will mostly take place in the banks corporate and retail arms.
Raed Al Haqhaq chief banking officer-senior general manager at Burgan Bank, Kuwait Cash a n d Tr a de M aY / J U n e 2011 11
Risk and trade finance
The return of risk

ALEXANDER R. MALAKET,
CITP, reviews developments in the MENA region regarding the risk dimension of international trade nance.
Alexander R. Malaket
ust as trade fi nance has emerged from the stillreal economic crisis with greater profi le, the importance of risk assessment and mitigation have been effectively highlighted by the realities of the crisis. at the same time, political events in Mena and elsewhere have brought into focus the fundamental importance of sovereign risk in international business Trade financiers as well as business leaders, from small-and-medium enterprises to large corporates forgot for a time that effective risk assessment and mitigation are core elements of the value proposition of international trade finance. In the context of so-called traditional trade finance instruments, the textbook distinction between documentary credits (best suited to transactions involving new or unproven trading relationships and/or high risk markets) and documentary collections (trusted relationships, stable markets) was lost and rendered nearly irrelevant in many parts of the world. While this may have been less the case in the Middle east, it remains true that this trend was widely observed in the two or three years before the eruption of the global crisis, at least in part as an outcome of demands from large retailers seeking to conduct trade on less expensive open account terms. This unfortunate disregard for adequate risk assessment and risk management was evident in transactions involving markets that would have otherwise been considered relatively risky; similarly, importers and exporters establishing new trading relationships even in such higher risk markets frequently agreed to conduct business on
terms that, effectively, disregarded the realities of risk in international commerce. In parallel, the role and value of export credit and insurance agencies were brought into question in many markets across the globe, further diluting the necessary focus on risk assessment and risk mitigation by diminishing the importance of this
Specialists in international trade and international business appreciate that risk is meant to be understood, assessed and appropriately mitigated or optimised
aspect of the activities of export credit agencies (eCas) in international commerce. The critically important and fundamental nature of the role of eCas in enabling and supporting international commerce has been recognised and reinforced as a direct result of the global crisis and, by extension, their ability to contribute to effective risk mitigation in international commerce has been preserved for the foreseeable future. risk has always been and shall always be a reality in the conduct of cross-border business. That truth has once again been recognised.
A View of Risk
specialists in international trade and international business appreciate that risk is meant to be understood, assessed and appropriately mitigated or optimised. risk cannot in general be completely eliminated nor should it be fatalistically ignored. risk is intimately linked to return, and
can serve as an effective de-motivator to potential competitors. This notion of risk optimisation is in no way intended to imply a casual approach to risk analysis and assessment. On the contrary, it follows, by definition, that successful optimisation of risk is the outcome of due diligence, appropriate transparency and skilled, effective analysis,
balanced against expected returns and costs of mitigation. Understanding that financial and commercial transparency continue to evolve in the Middle east as in other parts of the world it is worth considering a similarly evolving view of risk that might apply in a region long recognised for its business acumen and commercial prowess.
plications for trade finance reverberate through the region and beyond. adequate analysis and assessment of mediumterm conditions will be best served by a combination of global view and local, intimate knowledge of the markets under consideration, with the all-important regional view included for good measure.
In addition to illustrating the very real, practical and relevant impact of political and sovereign risk within a particular market, conditions in the Middle east and north africa have demonstrated the way in which political instability can travel across borders in what amounts to an instant fuelled by accelerant communication through social media and other technologies.
Optimised Risk
Optimised with reference to: > Risk Tolerance > Expected / Target Return > Acceptable Mitigation Costs
Risk factors
Commercial Risk
Political / Country Risk

Importer (Buyer / Applicant) Exporter (Seller / Beneficiary)
Issuing Bank
Advising Bank (Confirming Bank)
Bank Risk
a return to fundamentals and banking, financial services and business more broadly has been promoted and championed in many markets across the globe, though it has been argued that the Mena region has remained generally focused on those fundamentals in a disciplined manner. Yet there have been indications of a loss of focus on the risk dimension of international commerce and international trade finance.
sovereign or so-called political risk rejoins bank risk as a key consideration in a well-devised and well-considered risk assessment and mitigation process, in no small part due to the turmoil that has gripped several countries in the Middle east and north africa over the past few months. The very real human, economic and commercial implications of a significant shift in sovereign risk dynamics could not be more clear and the im-
Sovereign, Bank & Commercial Risk
To be clear, there is no value judgment attached to political instability or civil unrest in a given circumstance or a given set of circumstances here merely the observation that such instability generates very clear and very tangible commercial consequences. Those implications touch even short-term trade obligations, generally viewed as relatively secure in times of economic difficulty, and will certainly impact macro-dynamics such as perceptions about the climate for existing in-
vestments (security of assets) as well as planned/ future investment. The bank or financial sector level of the risk discussion has been amply addressed on a global basis in the context of the crisis and recession, with businesses across the Mena region losing confidence, albeit temporarily, in international institutions, and local firms championing the importance of direct client engagement and deep knowledge of the region. The positive impact of
sharia Law on financing in particular trade finance - has been widely recognised, as much for its basis in fundamentals as for a direct linkage to an underlying asset, aside from other merits. an important nuance in markets across the Mena region is the frequently close connection between sovereign and bank risk, due to state or
Commercial risk, typically involving buyer and seller, but, perhaps, also intermediary parties and/or affiliates, is a reality in any business transaction
state-linked ownership of the financial sector a reality that extends well into the commercial relationships through similarly integrated ownership models. One parallel is the relationship of staterun export credit agencies and the impact this has on their own risk profile (effectively equivalent to the risk standing of the country which the eCa serves), as well as their ability to secure funds at favourable rates (on the national credit card), all the while engaging, goes the argument, in business on non-commercial, unsustainable terms. Commercial risk, typically involving buyer and seller, but, perhaps, also intermediary parties and/or affiliates, is a reality in any business transaction, though its risk profile is typically amplified in cross-border transactions where visibility and transparency and an absence of information about counterparties tend to be more important, and often less available than in domestic commercial relationships. Transparency in this context extends beyond the still fundamental issue of financial transparency and reporting, to (appropriate) transparency about commercial operations, and active efforts to manage market expectations through adequate f lows of information a lesson that was illustrated in a high-profile manner several times over the course of the crisis.
The ability to enhance risk, through insurance and guarantee solutions, or through the transfer of risk from one context or party to another, is a long-standing aspect of the value proposition of international trade finance and one which, like the subject of risk, has again regained profile in discussions related to trade finance. Issuing a documentary credit involves credit enhancement/risk transfer to the extent that the issuing banks profile is favourable in comparison to that of the importer providing comfort to an exporter about the higher probability of settlement as agreed. similarly, confirmation of a letter of credit by a confirming entity (typically) in the home country of the exporter represents risk transfer in several respects: a confirmed LC removes, from the exporters point of view, the issue of sovereign or country risk, just as it replaces issuing bank risk with confirming bank risk, and commercial (importer) risk with confirming bank risk, provided all documentary terms and conditions have been fully complied with. More recent trade finance instruments and mechanisms, including various f lavours of supply chain Finance, have incorporated risk mitigation and risk transfer/credit enhancement options in their structures, at times shifting risk between parties in a particular global supply chain. Whether supply chain finance programmes are relatively basic, such as invoice financing, or whether they are comprehensive, multi-party or multi-bank programmes reaching into massive, extended supply chains certain fundamentals around risk management, risk transfer and credit enhancement are being integrated at the transaction and technical platform level. They also remain within the parameters of global supply chain finance programmes. Given the new commercial realities of the moment in international commerce, it is both appropriate and necessary, for new modes of financing to include risk mitigation features and risk transfer options. Both act as an element
Risk Transfer
of the evolving value proposition around trade finance, and as a means of facilitating relatively efficient use of capital through risk transfer and credit enhancement. Just as it is acknowledged that financiers in the Mena region have, by and large, remained in alignment with fundamentals in financing, it is true that a dimension of risk which has been the focus of some attention in certain markets since the crisis (notably the Us.and europe). however, the central role of this particular type of risk has been a well understood for hundreds of years or, perhaps, several thousand in the Middle east. reputational risk the impact of negative association to a financial institution, to a client or counterparty, or a particular international transaction has reached centre-stage in terms of profile in certain organisations. encompassing dimensions such as ethical conduct and technical skill or competence among other factors, it has become an imperative with profile up to the level of the chief executive. In the Middle east, the long-established practice of name lending relies heavily (in some cases, almost entirely) on the notion that reputational risk exerts sufficiently powerful inf luence to assure appropriate and trustworthy commercial behaviour. While this practice has been criticised as lacking robust disciplines linked to credit and risk assessment, and international institutions have been advocating a reduced emphasis on name lending (with some recent developments in the region providing supporting evidence), it is worth noting that there is a convergence of sorts. There appears to have been a shift to more objective risk assessment practices in certain markets in the Mena region, coupled with a parallel broadening in focus to include greater consideration of reputation and reputational risk among financial sector organisations (and their clients) in markets from the americas to europe and beyond.
Reputational Risk
another dimension of risk inexorably gaining profile and priority is related to the use and application of capital in the context of a trade or supply chain finance transaction. While the Mena region is not yet fully engaged in terms of implementing the latest Basel capital reserve requirements - and the nature of those requirements remains the subject of vigorous discussion - it is a foregone conclusion that capital adequacy must become a far more central element of the risk discussion. This should be both within financial institutions as various lines of business compete for financial resources and with clients, in order to engage in proactive, joint efforts to structure trade finance transactions with appropriate focus on the capital implications of the various options available. The risk/capital discussion must evolve into a core element of the dialogue between f inancier and client, and more broadly, across increasingly global and complex supply chains. The Mena region is well-placed to prepare a foundation for such dialogue as part of the implementation and rollout of the BIs requirements eventually approved. such dialogue will be most effective if it engages local financial sector regulators, as well as other parties perhaps less obviously impacted by the evolution of regulatory requirements, including export credit agencies, private sector risk insurers and others with a stake in the optimal functioning of trade and supply chain programmes. Finally, one reality permeates every dimension of the discussion around risk and trade f inance. Parties with an interest in the eff icient enablement of international commerce must engage actively to understand, optimise and communicate appropriately about the risk universe in international trade finance particularly as commercial realities evolve and trade and supply chain finance solutions evolve in consequence. n
Risk & Capital
Supply chain finance techniques
Letters of credit make a comeback

e current political and economic climate in the Middle East has strengthened the need for letters of credit. LIZ SALECKA reports that they now look set to continue playing a crucial role in domestic, regional and international transactions despite the global movement towards open account trading.
LC
LC
LC
LC
LC
LC
The recent turmoil in some of the countries in the region may also be a setback in efforts by corporates to move to open account trading.
lthough about 80 per cent of global trade is now open account-based, approximately 70-80 per cent of all Middle eastern trade volumes still rely on LCs, according to statistics published in 2010 by the World Trade Organisation. as a result, LCs have remained a core trade service for local banks and a very lucrative fee-earning business. however, despite this, there is strong belief that local banks should not shy away from the provision of modern-day structured trade fi nance solutions, such as supply chain fi nance, which could help local companies reduce trade transaction costs and tap into more cost-effective fi nancing. according to suresh Vaidhyanathan, group CFO, Platinum Corporation FZe, certain Middle eastern corporates have shown a growing interest in switching to open account trade. he, nevertheless, points out that in the current environment LCs are likely to prevail as a primary risk mitigation tool for both importers and exporters. disclosure and governance standards in the Middle east are still evolving albeit with an increased focus in recent years, but they are still in their infancy compared to other developed markets. Th is adversely impacts on the rapid growth of open account trade, he explains. The recent turmoil in some of the countries in the region may also be a setback in efforts by corporates to move to open account trading. however, Vaidhyanathan also points out: There has, for sure, been a significant push by corporates to eliminate the need for banking intervention through LCs - and the resultant costs. Th is is more noticeable in the case of long-standing principal-agent relationships that are widely prevalent in the region. similarly, John Wartig, group director-fi nance, al-Futtaim Group, points out that, in todays eco-
nomic climate, LCs are still commonly relied on by Middle eastern corporates when arranging import and export fi nance and also serve as fi nancial guarantees for local payments. In the post-fi nancial crisis period, the world became more aware of counterparty credit risk Suresh Vaidhyanathan, group CFO, Platinum Corporation FZE, - particularly given a contraction in the availability of credit insurance two years ago - and fi nancial guarantees have been commonly relied upon to improve credit risk, he says, pointing out that more robust documentation is now required for all transactions. Middle eastern importers have been exerting pressure on suppliers for extended credit terms, and this is often backed by documentary credits of some sort. Over the past few years, overseas suppliers have been keen to retain letters of credit as a standard requirement as this has allowed them greater access to receivables fi nancing. he adds that a number of al-Futtaim Groups own principal overseas suppliers, such as Toyota and Chrysler, rely on his groups LCs for their own receivables fi nancing programmes. as a major Middle eastern importer, the al-Futtaim Group itself has implemented a range of LC-backed fi nancing structures to boost its own import fi nance lines. While local banks arrange the LCs, international banks step in to provide the funding. These are typically multibank structures, combining a local fi nancial guarantor and an overseas liquidity provider, explains Wartig. The usefulness
Multibank structures
Supply chain finance techniques
The automated LC
local banks are generally betterplaced to provide end-to-end cash management solutions
of these structures includes the dollarisation of working capital lines, lower costs, as well as the fact that these are typically term loans and, therefore, good from a liJohn Wartig, group directorfinance, Al-Futtaim Group quidity management point of view. however, he points out that, while local banks have accommodated such structures, they have not yet taken steps forward to provide such import fi nance facilities themselves either on their own or in conjunction with overseas banking partners. We have mainly brought import fi nancing structures to them, rather than having been presented with such structures by them as a package deal using their overseas correspondent banks or trade fi nance partners, he says. Wartig, nevertheless, believes that local banks should seek to capitalise on the provision of structured trade fi nance solutions, despite global banks stronger international networks. Trade fi nance should present local banks with a meaningful opportunity to grow a relatively profitable business area under Basel II given the more favourable capital treatment for trade fi nance, he says. Global banks have a distinct advantage both in terms of being able to provide multi-currency trade fi nance, as well as end-to-end supply chain fi nance across borders. however, local banks are generally better-placed to provide end-to-end cash management solutions, which, for us, includes elements of trade fi nance. he adds that whereas some local banks have found it difficult to offer structured fi nance solutions, having been held back by liquidity constraints, there is a movement in this direction at present. some of them are now coming up with alternative structures such as the provision of working capital lines, which are not LC-based. They are coming up with new products, which were not there
a year ago, to provide alternative types of funding to corporates, he says. Vaidhyanathan also believes that local banks should take steps to offer structured trade fi nance solutions, which can add value to corporates trade transactions whilst also reducing their costs. Local banks need to adopt better methods of capturing the cream of trade fi nance business, particularly cross-border business that is today being dominated by international banks, he says, pointing out that otherwise global banks will lead in the provision of structured trade fi nancing and benefit from growth in cross-border trade. however, he, too, admits: Global banks are in a strategically strong position to facilitate international trade between importers and exporters through their widely entrenched presence and localised knowledge of complex terrains. First Gulf Bank is one local bank that is currently actively designing a range of structured trade fi nance products and solutions for launch in the near future. George abraham, executive vice president, group head of corporate banking at First Gulf Bank, acknowledges that LCs still represent a vital, core trade business. Letters of credits form an integral part of the fee-based revenue generated by local banks, he says. Volumes on open account trade have marginally progressed in the Middle east, but are still a far call in comparison with other international markets. This clearly signifies that LCs are a preferred mode and will continue to exist in the comGeorge Abraham, executive ing future. vice president, group head however, he recognises that local of corporate banking at First Gulf Bank banks, such as First Gulf Bank, need
Structured solutions
LC
LC
LC
Despite the international movement to open account trade, this has brought with it concerns over the information and guarantees provided to banks when offering finance to local exporters. One solution being marketed to resolve this issue globally is SWIFTs Bank Payment Obligation (BPO), which serves a similar payment guarantee role to traditional, paper-based LCs but in an automated way. The instrument, which secures an unconditional undertaking to pay from an importers bank, can be transmitted electronically over SWIFTs Trade Services Utility (TSU) between TSU member banks. According to First Gulf Banks George Abraham, the BPO could eventually make its mark in the Middle East. But he notes that, as it is still in its infancy, it is unlikely to spearhead an immediate movement away from paper-based LCs. The Bank Payment Obligation is in a very nascent stage and has just been introduced in the region, he says. The offering will need to be accepted and implemented by the member banks, which may take a long time. Thus in the near future, we do not expect any changes to the present system of letters of credit.
to become more dynamic and adapt to the everchanging needs of the global and local economy. While the risk-averse companies would still prefer the secured letter of credit mode, other cost-sensitive organisations may switch to other alternate modes, he says. he also believes that many local banks will follow First Gulf Banks example, and that their local knowledge and relationships could put them at an advantage to global banks when offering structured trade finance solutions.
Banks in the Middle east are gearing up to facilitate structured trade and supply chain solutions. These solutions will eventually need to be customised to cater to the specific needs of this region. Global banks have the geographic strength of network, which might aid them in business acquisition. however local banks such as First Gulf Bank have their own distinct advantages and can be more flexible so as to be in line with local cultural and economic dimensions within the governing framework. n
Islamic finance
Turkey draws closer to MENA

e Turkish economy has now re-aligned itself more closely to the regional markets in the GCC and MENA countries. MUSHTAK PARKER reports in detail on the new outlook
Mushtak Parker
hichever party wins the Turkish general election in June this year, one thing remains certain. Turkeys participation banking sector will continue its steady progress and, in the process, further consolidate the sector as the third major component in the Turkish financial system after the depository (conventional commercial deposit-taking) banks and the development and investment banks. Participation banking is the Turkish euphemism for interest-free profit-and-loss-sharing banking - in other words Islamic banking. Its importance is underlined by the fact that it has f lourished since its establishment in 1983 by a special decree introduced by the military regime of President Kenan evren, and more recently it has undergone a successful transformation that has seen it become part of the mainstream banking industry following its licensing, regulation and supervision under
the same provisions of the general 2007 Turkish Banking act (amended). Perhaps equally importantly, Turkish participation banking has been unassumingly innovating cash management and trade finance products that in many respects are unique in global finance, let alone Islamic finance. These include cash management and savings products backed by physical gold; the worlds first Islamic exchange traded funds (eTFs), including one which is gold-based; the use of sukuk al-Ijarah to raise funds from the international markets, especially in the Gulf Cooperation Council (GCC) region to finance crossborder trade and expansion of Turkish corporates and for balance sheet purposes; and the proactive use of syndicated Commodity Murabaha loans from the international markets. While the ruling aK (Justice Party) of Prime Minister recep Tayyip erdogan seems to be comCash a n d Tr a de M aY / J U n e 2011 23
Islamic finance
The global financial crisis, EU policy towards Turkish membership ambitions and the pro-democracy protests sweeping the MENA region have all contributed to the policy shift
fortably ahead in the polls, a fundamental realignment of Turkish politics is highly unlikely given the disarray of the opposition parties and their outmoded leadership and manifestos, and the fact that in general the erdogan government has successfully managed the Turkish economy over the past decade. during that time the Turkish economy grew from being the 26th largest in the world in 2002 to the 16th largest this year. erdogans policies have also seen the Turkish economy re-aligning more closely to the regional markets in the GCC and Mena countries through a shift in foreign outlook, which is now based on the concepts of a dynamic equilibrium and strategic depth. These concepts balance the policy masterminded by its urbane architect, foreign minister ahmet davutoglu, between its international obligations as in its membership of naTO; its european Union membership ambitions, which have over the past few years been resisted by a near Islamophobic opposition from France, Germany, The netherlands, austria, Finland, Greece and Cyprus; and its newfound rapprochement with the Mena countries, especially the GCC, syria, Iraq and Iran, and with neighbouring powers such as russia. In some respects the global financial crisis, eU policy towards Turkish membership ambitions and the pro-democracy protests sweeping the Mena region have all contributed to the policy shift. Its impact in Turkish trade demographics (and indirectly to the further development of the participation banking sector) could not be starker. Before the crisis in 2008, according to Fatih Bula, head of the International Financial Institutions department, Trkiye Finans Participation Bank, total Turkish exports reached Us$132bn, of which the largest share were to the industrialised markets especially eU countries such as Germany, austria and the UK. after the crisis, total Turkish exports slumped by 22.6 per cent to Us$102.1bn in 2009, of which exports to the eU-27 countries fell sharply by 25.8 per cent to Us$47bn. In contrast, Turkish exports to Mena countries, especially to the GCC region, and other african nations have witnessed dramatic increases of up to 20 per cent. This shift in the Turkish trade profile has opened new and consolidated established synergies with the Mena region. Three of the four Turkish participation banks have got majority GCC ownership interests Turkiye Finans is largely owned by national Commercial Bank of saudi arabia; Kuveyt Turk Participation Bank (KTPB) is majority owned by Kuwait Finance house, one of the largest Islamic banks in the world; and albaraka Turk Participation Bank (aTPB) is a subsidiary of the Bahrain-based albaraka Banking Group. The fourth, asya Particpation Bank (aPB), also has close ties with the GCC and has set up a joint venture with the Islamic Corporation for the development of the Private sector (ICd), the private sector funding arm of the Islamic development Bank Group (IdB), called Tamweel africa, which invests in financial institutions, leasing entities and extends lines of credit to finance trade in subsaharan africa. equally significantly, even Turkish conventional banks are now targeting the GCC as a regional hub. several are setting up offices in the dubai International Financial Centre (dIFC). We also plan to promote our dubai subsidiary, explains Ufuk Uyan, CeO of Kuveyt Turk Participation Bank, because there are a lot of trade f lows going through dubai nowadays. The dutch authorities are creating big problems for Turkish conventional banks. They dont want them to extend credits and are putting various restrictions on their business activities. several of the Turkish banks have decided to move to dubai dIFC. europe-wise it is not easy for Turkish banks, although Turkey has long-standing trade ties with europe. While Turkish bankers agree that 2011 will be a volatile year for the Turkish banking sector as a whole because of the elections and regional developments, Ufuk Uyan remains adamant that 2010 was a perfect year for Kuveyt Turk in particular and in general for the participation banks in Turkey. The growth of the participation banking sector was double that of the conventional sector. KTPB has now become one of the Top 10 banks in Turkey and in 2010 our balance sheet growth was about 50 per cent compared with 2009. By the end of this year we plan to have 180 local branches. We also have a branch in Bahrain since 2002; in Germany; a representative office in Kazakhstan; and a full subsidiary in dubai at the dIFC. We also have plans to go to northern Iraq and open a branch in erbil; and some other locations in the region, which have not been finalised as yet, he explained. This confidence is further underlined by the latest data for the four participation banks for the year ending 31 december 2010 released in april 2011 by the Participation Banks association of Turkey (TKKB).
Even Turkish conventional banks are now targeting the GCC as a regional hub
according to Osman akyuz, secretary general of TKKB and the former general manager of aTPB, total assets of participation banks in FY2010 increased by 25 per cent on 2009 reaching Us$28.1bn; deposits increased by 22 per cent to reach Us$21.9bn, of which 66 per cent was in Turkish lira and 34 per cent in foreign currencies; financing allocated by the participation banks grew by 25 per cent to reach Us$20.8bn; total shareholders equity increased by 19 per cent to Us$3.5bn; net income increased by four per cent to reach Us$491.6m; and the number of branches and number of staff of participation banks totalled 607 and 12,694 respectively growing at a year-onyear rate of eight per cent. similarly, the market share of participation banks assets is 4.31 per cent; of participation deposits is 5.4 per cent; and of participation financing six per cent. The financing-to-deposit ratio of participation banks in 2010 was 96 per cent compared with 83 per cent for the conventional banking sector in Turkey. In terms of non-performing loans, participation banks also fared better. The nPL for participation banks in 2010 was TL341 million or 0.34 per cent compared with TL379 million or 0.47 per cent in 2009. The current market share of participation banks of the total banking market in Turkey is a mere six per cent, although Ufuk Uyan is confident that a target of between 10 per cent to 12 per cent market share is achievable over the next few years. however,
Ufuk Uyan, CEO of Kuveyt Turk Participation Bank
Islamic finance
There are huge opportunities in Turkey underpinned by massive latent demand for products such as trade finance, syndicated loans, Sukuk, Tawarruq (Islamic cash management) and investment funds
from a global perspective where Islamic banking has a 38 per cent market share in saudi arabia, a 40 per cent market share in Brunei, and a 22 per cent market share in Malaysia, the participation banking sector has still a long way to go to reach the above market penetration. however, this points to huge opportunities in Turkey underpinned by massive latent demand for products such as trade finance, syndicated loans, sukuk, Tawarruq (Islamic cash management) and investment funds. not surprisingly, there are two new applications with the Turkish banking authorities from GCC promoters for licences to launch participation banks in Turkey. KTPB in recent months has pioneered an exchange-traded fund (eTF) backed by physical gold; gold-based current and term accounts; the purchase of gold coins through aTMs; and has launched the first cooperate sukuk in Turkey (a Us$100m sukuk al-Ijara). The bank is also planning a second Us$500m sukuk later this year. Turkiye Finans pioneered the first Participation eTF in the world; it has launched several mutual funds; and a spate of gold-backed current and savings accounts. albaraka Turk Participation Bank is also finalising its debut sukuk issuance; has pioneered products such as the Barakat Card aimed at the small and rural farming community; and a franchise and business card. The backbone of Turkish participation financing is commodity Murabaha, especially to smalland-medium-enterprises (sMes). Turkey has one of the largest international trade volumes among the IdB Member Countries, totalling Us$334bn in 2008 alone. Given the short-term nature of participation deposits, there is a mismatch with medium-and-longer-term financing liabilities. as such Turkish participation banks are forced to raise Islamic financing through lines of credit provided by entities such as the IdB, the ICd and the dubai-based Islamic Trade Finance Corporation (ITFC), the dedicated trade finance entity of the IdsB Group, and through the international syndicated Murabaha market. as part of its Member Country Partnership strategy (MCPs), a new initiative launched by the IdB in 2010 to identify, target, allocate, imple26 Cash a n d Tr a de M aY / J U n e 201 1
Head office of Kuveyt Turk Participation Bank
ment and evaluate its financing more efficiently in member countries, the IdB published a pilot MCPs report on Turkey for 2010-2013 recently. The report emphasised that lines of trade financing extended by ITFC through domestic banks has proved to be an efficient way to do business with sMes, and that ITFC is looking to expand this business to include Turkish conventional banks. The disbursement level and the developmental impact under the line of financing operations, explained the report, are higher compared to the direct operations. Other multilateral financial institutions active in Turkey follow a similar approach where they reach the sMes through the local banks via line of trade financing operations or through confirming Letters of Credit. ITFC has been collaborating with public and private conventional banks for establishing new lines beside the well established co-operation with Turk eximbank and the four participation banks, which have already utilised several facilities and are interested in renewing the lines. however, one potential impediment is the line of trade financing documentation of the ITFC, which is not acceptable to some of the conventional and participation banks because some of the articles are not in line with local laws and regulations. The IdB is already working with the Turkish government to streamline the legal documentation and to develop a simpler legal framework for a 2-step Murabaha agreement that would be acceptable to the Turkish banks. On the other hand, Turkish banks are probably the most active in the international Murabaha syndication market. The latest to access the market is asya Bank, which raised Us$300m through a Murabaha syndicated loan in March 2011. This was the largest single such facility extended to a Turkish bank, and asya Bank s third foray into this market in the last two years. In 2010, asya Bank closed another Us$255m Murabaha syndicated facility, which was subscribed by 26 international banks. asya Banks general manager, abdullah elik, was spot on when he emphasised that the latest facility is a sign of the trust international markets have in the Turkish economy and his bank. Indeed,
Going forward, more recently exciting new avenues are emerging for Turkish banks to raise participation funds from the international markets
because of the huge appetite from the market, the Murabaha facility was upsized from the original Us$150m to Us$300m. The facility actually comprised two tranches: Us$171m and eUrO94.5m. Once again, a record 26 international financial institutions participated in the syndication, including standard Chartered Bank in the UK, aBC Islamic Bank in Bahrain, noor Islamic Bank in dubai, national Bank of abu dhabi, as well as 22 others from the United states, europe, Turkey, Pakistan and other Middle east and north africa countries. The pricing for the 1-Year Murabaha facility is LIBOr (London Interbank Offered rate) and eUrIBOr (euro Interbank Offered rate) plus 1.5 per cent. Going forward, more recently exciting new avenues are emerging for Turkish banks to raise participation funds from the international markets. This is in the sukuk market. hitherto, the lack of sukuk legislation has meant that Turkish banks have been forced to venture offshore to raise medium-to-long-term funds to finance some of their activities, instead of deposits, which are largely short-term. KTFP started with the first corporate sukuk a Us$100m issuance and, according to Ufuk Uyan of KTPB, the bank plans to go to the market later this year to raise Us$500m through a sukuk issuance, but on a longer tenor, maybe through a 5-year issuance, thus underlining KTPBs confidence in
Islamic finance
The market should be in a position to absorb any corporate Sukuk issuances. There are many companies with a lot of good assets
a healthy market appetite for Turkish risk and Islamic investments there. KTPB uses the funds raised for balance sheet purposes to finance trade and projects. But to sabri Ulus, vice president, Trkiye Finans Participation Bank, an emerging Islamic finance market, like Turkey, may just be what the global sukuk industry needs to sustain growth. Turkish sukuk originations could appeal to yieldhungry investors in the GCC, asia and europe because Turkish investments tend to pay relatively attractive spreads in comparison to Gulf and european spreads. In fact, market sentiment has been boosted by developments in sukuk legislation in Turkey. almost unnoticed, the Turkish national assembly in ankara passed the Finance Bill 2011 this February. It includes tax neutrality measures for sukuk alIjara (leasing certificates) thus paving the way for a spate of corporate sukuk issuances in the country. Murat haholu, head of the surveillance Group, corporate finance department, Capital Markets Board of Turkey, confirmed that the tax neutrality measures for the sukuk al-Ijara were published in the Official Gazette in February 2011, which he emphasised is an important development in the participation banking sector in the country. There is a major problem for Participation Banks in terms of long-term borrowing requirements. The conventional banks can borrow through bond issues on a 3-years or 5-years basis
and the taxation side was cleared a long time ago. The same is needed for the Participation Banks and there is only one way this can be done which is the sukuk route. recently, the government covered the tax neutrality issues for sukuk al-Ijara, but for other sukuk products there is a need for legislation development, maintained Uyan. he agrees that the amendments to the law in terms of tax neutrality for sukuk al-Ijara will enable Turkish corporates to issue sukuk. Corporates need financing and a good way could be to raise funds through project and other sukuk. The change in the law is a good step forward. But the market should be in a position to absorb any corporate sukuk issuances. There are many companies with a lot of good assets. The new law would allow Turkish participations banks to borrow for longer tenors instead of the current short-term 3-years. In this way sukuk origination can help finance the growth of the Turkish economy especially investment in industry. not surprisingly, the market is expecting Turkey to develop into a sizeable sukuk origination destination over the next few years. as such, Turkish participation banks are increasingly exploring the possibilities of raising funds through a sukuk issuance, albeit dependent on the quality and volume of available Ijara assets that can be securitised. despite the huge improvements in the Turkish banking sector over the last decade or so through improvements in prudential regulations and su-
pervision, the IdB contends that more needs to be done to enhance the banking sectors efficiency and that there is a significant financing gap to cover financing of foreign trade. The financing bottlenecks include the limited availability of longterm finance, sub-optimal allocation of resources as ref lected in the high share of FdI (foreign direct investment) in non-exporting activities and limited mergers, acquisitions, and restructuring of sMes. These bottlenecks are due to the lack of depth of the financial system and the inadequacy of the countrys financial infrastructure. Turkey is one of the major beneficiaries of IdB financing to date, and has received financing totalling Us$4.6bn, of which trade financing accounts for Us$3.5bn. This figure represents a staggering 10 per cent of total gross trade financing approved by the IdB. Following the establishment of ITFC two years ago, the annual approval level for trade financing in favour of Turkish companies and banks rose from Us$50m to Us$200m. IdB/ITFC trade financing disbursement in Turkey until a few years ago was limited to Letters of Credit, but more recently the two entities started to implement documentary collection
as an alternative method of disbursement. The limitation on the source of supply by allowing only imported goods is also being overcome, albeit most of the trade finance clients of ITFC in Turkey procure their goods from domestic sources instead of imports. as such, ITFC has started to provide
Turkey is one of the major beneficiaries of IDB financing to date, and has received financing totalling US$4.6bn
financing for purchasing from free trade zones within Turkey, and lines of financing that can be used for pre-export purposes. according to the MCPs report on Turkey, the ITFC is keen to scale up its trade finance operation to Us$250m over the next two years. The corporation will continue to build on the ongoing operations, mainly intervening by providing lines of trade financing through local banks. In this respect, ITFCs co-operation with the Turk exim Bank and the four participation banks
Central Bank of the Republic of Turkey USD/TRY FX Rates for -Dec- : . ; -Dec- :,
Islamic finance
Post crisis banking
is set to increase. If the legal issues related to trade financing documentation are resolved, ITFC envisages pursuing and developing business opportunities with intermediary banks, including Ziraat Bankasi, Vakif bank and halkbank, where an sMe financing scheme would be developed in conjunction with the Treasury and KOsGeB, the Turkish trade promotion agency. another encouraging development of IdB perception of Turkish market risk is that ITFC is prepared to extend lines of financing to secondtier companies on a secured basis and the top-tier companies on an unsecured basis. The corporation also plans to lead Murabaha syndications for mobilising resources for large Turkish entities.
In terms of cash management, Turkish participation banks are pioneering gold-backed products
another possible intervention from ITFC would be in the structured commodity trade finance area, where it would consider structuring export/import financing transactions in favour of co-operatives and companies in the agricultural and food sectors. another IdB entity targeting business in Turkey is the Islamic Corporation for the Insurance of export Credit and Investment (ICIeC). The total amount of business insured by ICIeC for Turkish exports, according to the report, has reached Us$674m, while business insured for Turkish imports amounted to Us$201m. The main services that ICIeC provides are medium-term export credit insurance, investment insurance and insurance of Letters of Credit in favour of banks and reinsurance for Turk exim Bank in addition to short-term credit insurance for non-clients of Turk exim Bank. These services are channeled through ICIeCs local agents in Turkey, aktif Bank and PGlobal advisory services; through Turk exim Bank; Turkish banks in general; and major international and local brokers in Turkey. ICIeC sees good potential for the Insurance of Letters of Credit to be confirmed by Turkish
Banks, a product that enables Turkish Banks to enhance their confirmation capacities on banks from importing countries and to extend their confirmation business to more countries. In terms of cash management, Turkish participation banks are pioneering gold-backed products. KTPB, for instance, is very active in gold accounts. any client who wishes to invest in gold come to our branch and deposit Turkish liras or Us dollars and convert them into dollar-equivalent grams of gold. The client can thus at anytime redeem the deposit either in the form of physical gold or in dollars equivalent to the price of gold at the time. This is for the current account. For the term account, we swap the gold into dollars and invest the dollars and the return is distributed to gold account holders in the same format, explained KTPBs Ufuk Uyan. Gold investments are culturally acceptable in Turkey. Before and during the years of the financial crisis many Turks preferred to keep their gold at home under the mattress. KTPBs gold-based accounts are also fully shariah-compliant, and the product has even been exported for offering in the Malaysian and the GCC markets, especially Kuwait and Bahrain. KTPB is a member of the Istanbul Gold exchange, so we keep the physical gold at the exchange. We are one of the top three banks active in the exchange. Indeed, to attract institutional gold investors, KTPB also launched the GoldPlus exchange traded fund (eTF), which is listed on the Istanbul stock exchange and has been traded since august 2010. although the size is small we expect it to increase. The pension funds and the insurance companies have to keep some of their investments in the form of gold, so that they can invest directly without losing on the buy-and-sell exchanges differences, added Uyan. at the same time, KTPB is probably the only bank in the world where you can draw gold coins through its aTMs. These coins are certified by the Istanbul Gold exchange and the refineries. This is unique for any bank. If you go to one of our aTMs and want to buy gold coins you can just pay through your debit card or cash and you will get the gold coin/s, said Uyan. n
e pressures of the post-crisis environment are signalling a return to a more traditional localised banking model. DOMINIC BROOM managing director and head of market development for BNY Mellon Treasury Services EMEA, discusses how a new approach to localglobal bank partnership can help banks in emerging markets overcome the hurdles presented by this shi .
Dominic Broom
Trade finance: a return to relationship banking

he many challenges presented by the global credit crisis mean that international trade and by extension trade fi nance has reached a tipping point. The fi rst of these challenges is the growing threat to supply-chain management. The universal drying up of credit lines has resulted in confl ict between suppliers and buyers: the former increasingly requiring payment in advance/on demand, while the latter are calling for more relaxed payment terms. rather than being a mere supply-chain headache, any situation that could result in the failure of a key supplier would especially in these days of just-in-time inventory be a supply-chain disaster. Todays weak link is tomorrows broken chain. Of course, this tension on the supply-chain is not helped by the overall increased focus on credit and transactional risk profi les, and the resulting atmosphere of extreme caution. The absence of market liquidity and the type of political and economic unrest that we have seen in the Middle east is leading to an uptick in the use of traditional trade instruments, such as the time-honoured letter of credit (LC).
While the LC has long fulfi lled good and important work for local and emerging banks, many lack the resources to manage corporate credit risk, information channels and transaction processing effectively and efficiently particularly as the burden of regulation increases. Indeed compliance - and particularly the upcoming Basel III accord - is a chief cause for concern for global trade and trade fi nance in particular. as admirable as its aims are to increase the quality and quantity of capital, strengthen liquidity standards and discourage excessive risk-taking there are potential downsides. specific concerns abound over the yet-to-befinalised decisions surrounding the minimum required ratio of tier-one capital to risk-weighted assets and the off-balance-sheet treatment of trade finance. One of the consequences of these decisions could be that customers are forced to shoulder the burden of business becoming more expensive, which could prove to be the final nail in the coffin for struggling small-medium sized enterprises, which form the backbone of international commerce.
Post crisis banking
he many challenges presented by the global credit crisis mean that international trade and by extension trade finance has reached a tipping point. The first of these challenges is the growing threat to supply-chain management. The universal drying up of credit lines has resulted in conflict between suppliers and buyers: the former increasingly requiring payment in advance/on demand, while the latter are calling for more relaxed payment terms. rather than being a mere supply-chain headache, any situation that could result in the failure of a key supplier would especially in these days of just-in-time inventory be a supply-chain disaster. Todays weak link is tomorrows broken chain. Of course, this tension on the supply-chain is not helped by the overall increased focus on credit and transactional risk profiles, and the resulting
finalised decisions surrounding the minimum required ratio of tier-one capital to risk-weighted assets and the off-balance-sheet treatment of trade finance. One of the consequences of these decisions could be that customers are forced to shoulder the burden of business becoming more expensive, which could prove to be the final nail in the coffin for struggling small-medium sized enterprises, which form the backbone of international commerce. Yet despite this seemingly negative outlook, the future for trade and trade finance is far from doom and gloom. Trade continues even in times of turmoil, and trade finance has the ability to adapt to economic, political and regulatory pressures. Certainly the difficulties of the current situation, rather than being the direct consequence of the downturn, are the end result of a gradual process that has mirrored the changing trends in trade flows and payment terms. The evolution of trade has witnessed the LCs fall from grace and its subsequent return as well as the step-by-step displacement of local banks from what was becoming an increasingly international game. In order to examine these developments, let us begin at the beginning. historically, and largely in recognition of the fact that global trade has its roots at local company level, local banks played the crucial role of relationship manager and, by definition, assessor of local risk. Given their unrivalled knowledge of their corporate clients and domestic markets, this made perfect sense. In addition, the vast majority of exporters were keen to use local banks for the issuance of documents in order to be sure that the consigned LC the trade instrument of choice was valid and in many cases to support their working capital finance needs. Local banks were, therefore, key players in trade, and could count on a secure and predictable revenue-stream from document-issuance, checking and financing. Then the tides turned. The increasing globalisation of commercial networks led to the rise to prominence of open account (Oa) settlement namely payment terms that are not backed by bank-issued
Any situation that could result in the failure of a key supplier would especially in these days of justin-time inventory be a supplychain disaster. Todays weak link is tomorrows broken chain
Changes in trade flows
The increasing globalisation of commercial networks led to the rise to prominence of open account (OA) settlement namely payment terms that are not backed by bank-issued LCs
atmosphere of extreme caution. The absence of market liquidity and the type of political and economic unrest that we have seen in the Middle east is leading to an uptick in the use of traditional trade instruments, such as the time-honoured letter of credit (LC). While the LC has long fulfilled good and important work for local and emerging banks, many lack the resources to manage corporate credit risk, information channels and transaction processing effectively and efficiently particularly as the burden of regulation increases. Indeed compliance - and particularly the upcoming Basel III accord - is a chief cause for concern for global trade and trade finance in particular. as admirable as its aims are to increase the quality and quantity of capital, strengthen liquidity standards and discourage excessive risk-taking there are potential downsides. specific concerns abound over the yet-to-be32 Cash a n d Tr a de M aY / J U n e 201 1
Post crisis banking
Global trade survey
Certainly, local-global partnership is conducive to creating strong networks, which in turn are the best way to deliver greater value for end-clients
LCs. The efficiency and convenience of Oa trading, which was stipulation-free and required no thirdparty involvement or fee, meant its popularity grew rapidly among trusted counterparties, swift ly making it the settlement term of choice especially as any risk was perceived to be off-set by free-flowing market liquidity. such a shift in payment terms acted as a catalyst for a head-office style transaction banking model that favoured the making of lending decisions on an industrialised/global basis. as a result many local banks had - other than where the transfer of money was concerned - largely been removed from the global trade arena. Th is proved to be bad news for several reasons. The displacement of local banks led to their becoming disengaged from their domestic client base, thus rendering many of them incapable of accurately assessing the risk of their domestic corporates, and leaving many corporates without local access to the trade fi nance solutions they needed. Of course, the absence of market liquidity means that we have now come full circle. a growing lack of trust and aversion to risk means that the traditional trade instruments are making a comeback and the value of the market knowledge and long-established corporate connections possessed by local banks is increasingly recognised and respected. These factors, combined with the retrenchment of some of the global players following the crisis, has resulted in a return to the localised, close relationship banking model of days gone by. Yet this growing emphasis on the importance of the local is something of a double-edged sword for local banks. While it unquestionably works to their advantage by putting them back where they belong, the majority lack the necessary capabilities to resume this role in the closely monitored postcredit crunch environment. Given the heavy demands of regulation, and the
Working together
working capital constraints that the majority of organisations now face, many local banks simply lack both the fiscal and staff resources to invest in proprietary state-of-the-art risk-management and transaction processing systems. With in-house development out of the question, one option available to local banks is to enter into a partnership with a global provider of trade fi nance and supply-chain management solutions. Yet such partnerships can take many forms, and it is crucial to get the right one if it is to be successful and deliver real value. For example, traditional partnership models, such as outsourcing, are often not all they appear to be, and can result in more negatives than positives from the local bank perspective. While outsourcing can provide the end-to-end trade processing platforms that are needed, it usually offers little or no flexibility to allow local banks to offer tailored, market-specific solutions, or compete with the global players that operate in their home markets. Outsourcing also creates inherent conf lict, which makes some smaller institutions understandably wary. regardless of the contractual agreement between the two parties involved, a local bank that gives a larger provider access to all areas of its domestic corporate business runs the potential risk of eventually losing that business to its so-called partner. Traditional outsourcing also rarely delivers a real exchange of value up and down the supply chain, so end users are frequently short changed in terms of service delivery. It is for these reasons that BnY Mellon advocates a non-compete, client-centric collaborative approach to local-global bank trade fi nance partnerships. One such approach, which is also more strategic in nature than conventional outsourcing, is the manufacturer-distributor model.
Global trade bounces back

World trade has a spring in its step again, according to an international banking survey. But affordable trade finance is still a problem
The collaborative ecosystem
lobal trade f lows rebounded across many regions in 2010, according to the International Chamber of Commerce (ICC) Trade and Finance Global survey 2011, but high-pricing meant that traders in many low-income countries still faced difficulties accessing affordable trade finance. representatives from 210 banks in 94 countries responded to the survey, which asked for their opinion, as well as statistics, on the current trade fi nance landscape in their respective countries. Th is survey, the fourth consecutive ICC poll of its kind,
Global trade survey
Some regions, especially Africa, continued to have stressed markets, and the cost of trade finance also remained high in many parts of Asia and Latin America
lobal trade f lows rebounded across many regions in 2010, according to the International Chamber of Commerce (ICC) Trade and Finance Global survey 2011, but high-pricing meant that traders in many low-income countries still faced difficulties accessing affordable trade finance. representatives from 210 banks in 94 countries responded to the survey, which asked for their opinion, as well as statistics, on the current trade finance landscape in their respective countries. This survey, the fourth consecutive ICC poll of its kind, registered 30 per cent more responses than in the previous year. recovery worldwide has been driven by increased trade in north america, europe and asia, as well as between asia and the rest of the world, according to the survey. Other regions, especially africa, continued to have stressed markets, and the cost of trade finance also remained high in many parts of asia and Latin america. Traders in many low-income countries still have considerable difficulty accessing trade finance at an affordable cost, particularly for import finance. One positive development is that the average price for letters of credit in large emerging economies fell from 150-250 basis points in 2009 to 70-150 basis points in 2010. What is needed now is a more targeted use of resources, focusing on the poorer countries and small-and-medium-sized enterprises around the world, said Pascal Lamy, director-general of the World Trade Organisation (WTO). They should not be paying the high price for the repair and reregulation of the global finance industry. Most respondents, however, agreed in the survey commissioned by the WTO expert Group on Trade Finance to track the developments in the industry that business on the whole has been significantly improving since the final quarter of 2009. Markets in several advanced economies are quickly returning to normal trading conditions, both in terms of liquidity and the availability of trade finance. The
acceptance of risk and pricing has also become more favourable. The 2003-2010 sWIFT trade traffic figures, which were provided to ICC on an exclusive basis, confirm that, overall, the downward trend in volumes experienced in 2008 and 2009 is now over. There were a total of 42.9 million transactions registered in 2010, representing a 5.81 per cent increase over 2009 volumes, which stood at 40.5 million (rounded). results have been uneven across regions, according to sWIFT. asia-Pacific continues to register far greater volumes for sent (import) messages. also, the regions with the largest volumes asia-Pacific, europe-eurozone and north america showed larger fluctuations than those with smaller volumes. africa showed the highest growth between 2009 and 2010, at 21.2 per cent, followed by asia-Pacific with 10.1 per cent and Central and Latin america with 9.7 per cent. however, it was the large volume of transactions in asia that drove the upswing in sWIFT traffic, rather than africa, where volumes were small. respondents also said they witnessed an increasing demand for bank-intermediated letters of credit, which are particularly favoured by traders and producers in developing countries with weak institutions. survey respondents were concerned about the impact of new regulatory initiatives, in particular the new requirements of the Basel Committee on Banking supervision document - known as Basel III - on the financing of international trade. There has been concern that a one-size-fits-all approach to regulation could threaten trade finance in emerging markets dependant on trade. Banks argue that rules set by bank regulators impose capital requirements on trade finance and are disproportionately high considering the relative safety of these mechanisms. The rules, they say, force them to lock up funds that could otherwise be used to support trade. The survey revealed that respondents are not only wary of these regulations, but also do not
have a clear understanding of them. When asked the question do you anticipate that the Basel III requirements will cause your bank to re-assess its trade finance strategy and products? - 34 per cent indicated that the new regulatory regime would make their financial institution reconsider its trade finance strategy. at the same time, 57 per cent per cent of respondents answered that they were lacking sufficient information on the new regulations. The regulators should step up their engagement
with the industry and seek feedback to ensure that the regulations are on track to achieving what they are intended to accomplish, said ICC banking commission chairman Kah Chye Tan. ICC research has shown that, contrary to the beliefs underpinning new regulations, trade finance is low risk and self-liquidating in nature. In 2010, ICC developed the International Trade Credit (Loss) register for collecting performance data in trade finance. This specifically examined the default risk of trade finance instruments between
Cash management in Kuwait
Kuwaiti bankers engage the future

Kuwaiti bankers are among the most astute in the region. That is why they are gearing up in terms of technical capabilities and service standards. PAUL MELLY reports
inance is at the heart of Kuwaiti life. The country has been a pioneer in business, developing banks, investment houses and a stock market long before most regional neighbours. But while past history is a justified source of national pride, today Kuwait must survive in the highly competitive Gulf business arena, where dubai, Bahrain, doha and riyadh have all carved out major roles in the financial services industry. and the crisis of 2008-2009 which rocked several well-regarded Kuwaiti institutions to the core was a brutal reminder of the need to ensure that both internal systems and official regulation remains up to date and rigorous. recovery is now well underway, and the government is overhauling supervisory structures, but regional competitive pressures remain; as business rebounds, Kuwaits bankers know that the battle for market share will remain intense. Technical capabilities and service standards matter more than ever. This was the context in which Burgan Bank, one of the countrys leading financial institutions, decided to launch a new cash management product last autumn, as the recovery in business and thus in demand for banking services gathered pace. The aim was to offer corporate customers a service that would optimise cashflow and enable them to make the best use of their revenues. The new system offers clients a comprehensive view of their funding position. Th is enables companies to tighten the control of their fi nances and make the most of the liquidity they hold. Burgan Bank has complemented this with the a full range of payment services that eliminate many manual tasks
and can be customised to meet the needs of individual business clients. Moreover, the system allows a customer company to set the pace at which transactions are processed, control which staff can use the cash management scheme and set appropriate limits on the size of transactions. and, of course, the IT systems help with account administration etc; the service incorporates a high AbdulWahab Al-Roshood, director level of security, set at international of the treasury department at standards. Kuwait Finance House But Burgan Bank is certainly not the only Kuwaiti institution to have recognised the need to offer modern cash management services. national Bank of Kuwait (nBK) one of the strongest banks in the Middle east has also developed a strong range of products, as have a number of other leading local players.
As business rebounds, Kuwaits bankers know that the battle for market share will remain intense
and competition in the Kuwaiti market has intensified over recent years with the entry of major foreign names such as BnP Paribas, hsBC and Citibank. The latter is one of the few foreign banks with a full wholesale banking presence in Kuwait. Our cash management business is part of the Global Transaction services division, which
Kuwait Liberation Tower
Kuwaits financial infrastructure is also being upgraded to meet the needs of a modern economy and investment culture
specia lises in intermediating working capital f lows of corporate and public sector institution, explain sanjay sethi managing director of treasury and trade solutions for the Middle east and Pakistan and regional head of cash manNadeem Saleh, director of global agement and nadeem saleh, transaction services for Kuwait director of global transaction services for Kuwait. he says that cash management is an integral part of the corporate service package offered by all banks. For foreign banks, it is a sustainable and predictable source of revenue, which also creates cross selling opportunities linked to credit products. This business is all the more important as it brings corporates cash flows through the banking system and thus mitigates credit risk. The cash management business at Citibank broadly includes a range of payment products, receivables management solutions, a suite of liquidity management and investment offerings including pooling and target balancing and sophisticated award-winning banking platforms... that offer secure online transacting capabilities, explain sethi and saleh. additional recent cash management products also include our wholesale cards business and platforms such as TreasuryVision which provides treasurers with a global view of their cash balances, debt and investment positions for timely and accurate decision making. Many businesses continue to rely on traditional cash management techniques, explains abdulWahab al-roshood, director of the treasury department at Kuwait Finance house (KFh), which is one of the worlds largest Islamic banks. Kuwaiti institutions usually seek basic requirements in the cash management sector, such as competitive returns and minimal risks, in addition to being able to liquidise the cash if required, not to mention being able to mortgage investment instruments if the need for financing arises. however, sethi and saleh report that there is also a growing demand for more sophisticated
services as companies expand their international activity and seek to streamline their money flows. as corporates expand in their size or geographic reach, or implement cost-cutting measures, the immediate fi rst step is to implement a standardised banking platform and manage their payments and receivables across multiple countries using a standardised process. The next step is to streamline the payables cycle by moving all payments to suppliers and staff to a particular date in the month, so as to make cash flow demands more predictable. and, fi nally, as the processing of receivables and payables gets optimised, corporate treasurers start looking for enhanced yields on their excess balances thus created. and Kuwaits financial infrastructure is also being upgraded to meet the needs of a modern economy and investment culture. Cheque clearing is still a manual process, but many other services are now largely electronic. Kuwait has one of the most developed infrastructures in the region, since Kuwaitis are merchants by nature, says al-roshood. he cites the speed with which profits are deposited after they have been announced as an example of the efficiency of the payment and transfer systems. KFh itself, as one of the major institutions, has an advanced e-payment system that has won awards from Citibank two years running. In addition, Kuwaiti banks systems are considered to be among the most developed in the region and, indeed, the world. They offer a base for cash management, which is evident by the speed in which profits are deposited once Sanjay Sethi managing they are announced. For example, director of treasury and trade Kuwait has recently witnessed the solutions for the Middle East largest money transfer and deposit and Pakistan and regional during the amiri grant that inhead of cash management
cluded about 1,200,000 bank accounts with a slight margin of error. KFh is known for having an advanced e-payment system that allowed it to receive an award in this field for two consecutive years from Citi Bank Group. Kuwait has always been eager to take initiatives to develop its financial and technical systems and has banks that seek constant development in that field, such as KFh, which uses accurate and secure technology. This technology surpasses its counterparts in other international banks, which is evident by the low number of hacking attempts compared to international banks, says alroshood. The most prominent threats facing e-banking are repetitive hacking attempts using advanced technology; such threats are dangerous because they directly impact the reputation of the banking sector. at national level, Kuwaits clearing systems are going through an evolutionary phase, report sethi and saleh. The Central Bank of Kuwait (CBK) rolled out their rTGs platform in 2004. The system is known as KassIP, which stands for Kuwaits automated settlement system for Inter-participant Payments; it allows for continuous processing and settlement on a transaction-by-transaction basis for domestic transfers and, as there is no limit or floor on transactions, this system also processes lowvalue payments. In addition, deferred net settlements usually of low-value, high-volume obligations such as POs, aTM and cheque clearing transactions also go through the same settlement system. The CBK is also studying the possibility of introducing sWIFTnet Fileact - which would allow for bulk transfer of payment files between banks through the sWIFT network. It is aimed at streamlining the process of salary transfers.
Hacking threats
In some ways, Kuwait has been a leader in financial inclusivity and bringing everyone under the banking umbrella
TAJARA MONITOR
In its reports, CMM analyses the relative importance of corporate banking and trends and market-shares Assets TajaraCorporate banking remains the no 1 busin as an informative Monitor is intended of banks corporate assets, liabilities, income, ess segment in of referencetermstotalasset contrexisting practitioners in the market expenses and trade contingent liabilities. It also for ibution, accounting for 40 per centtoolbank of assets. and new entrants alike. Its ndings serve to inform compares each quarter to its equivalent in the Sourcpreceding year, and analyses available data on e: CMM the corporates choice of banks to support their analysis of individual bank trade needs as well as indicating banks strategies reports interim and export letters of credit both by geography import with regard to corporate business and trade in and industry. particular. The objective is to track overall banking sector This research, aimed at creating transparency in the performance in relation to corporate banking and trade nance market place is carried out by CMM, trade. Currently, it tracks the performance of the Tajara Monitor publishers of Cash & Trade magazine. It is updated 12 Saudi Banks that are licensed entities with the quarterly throughout the year and anticipates a fullSaudi Arabian Monetary Agency (SAMA). Tajara Monitor is a new publication in the eld of trade nance in the MENA region. It is the rst ever to look in depth at the trade nance market place in the Kingdom of Saudi Arabia (KSA). year report for 2010 released after annual reports are published by the banks in Saudi Arabia.
Progress - and tasks to come

Sanjay Sethi and Nadeem Saleh, of Citibank, explain how in some respects Kuwait is particularly well advanced, whilst in others there is still progress to be made. In some ways, Kuwait has been a leader in fi nancial inclusivity and bringing everyone under the banking umbrella. The new labour law that came into force in February 2010 has made it mandatory for every person working in Kuwait to receive money using an account. This law has been transformational, as it has widely entitled a major segment - that was historically unbanked - to receive banking services. This, however, will add more pressure on banks complying with the law to offer their banking services to this low-revenue generating segment in a cost-effective manner. Generally, the payment system in Kuwait has made notable progress since the 2004 Financial System Stability Assessment on Kuwait by the International Monetary Fund (IMF). While systems like KASSIP have been a welcome addition to Kuwaits clearing infrastructure, there is a lot of effort to launch SWIFT-based systems to handle larger volumes and file-based transactions. While most of the countries in the region have evolved with clear laws on electronic and internet banking, with digital identity and signatures, Kuwait has been lagging behind in creating clear legislation to encourage automation and electronic forms of interaction, as some of its peer group countries have done. Kuwait adopted the International Bank Account Number (IBAN) in January 2011, making it the second Gulf Co-operation Council country after Saudi Arabia to do so. IBAN is an international standard for identifying bank
accounts across national borders with a minimal of risk of propagating transcription errors. Kuwait also hosts the Shared Electronic Banking Services Company (KNET), which offers an array of electronic money transmission and disbursement services, including managing Kuwaits ATM Banking Network, POS services, Payment Gateway to facilitate e-commerce and e-government initiatives, in addition to engagement with other GCC switches through GCC Net. The CBK plans to introduce electronic cheque clearing, which will ensure that images of cheques are exchanged electronically to speed up clearing and reduce manual handoffs and errors in the clearing process by banks. We are also noticing an increasing effort by the government to move towards non-cash payment methods through introducing the Smart Civil ID, which, ultimately, will be used as a means of payment. While the foreign banks have well-understood and well-structured cash management businesses, many of the large local banks are still going through the process of creating or building their cash management units. In addition, modern cash management also 26-31 tajar repor t Creati Publis requires complex Modifion date and secure banking plat- Editorher 05/27/09 cation date July Output date Art Direct forms that allow the bank to reach31,102010customer Subed or a 10:00 PM 08/01/ itor automatically and helps customers increase efficiency and automation in their interaction with the bank. In Kuwait, while some local banks are in the process of building out their capabilities, others have not managed to create the technology infrastructure to a sufficient level to launch their offerings on a larger scale. Credit-based relationships still dominate the banking practice.
ill prime business Corporate banking stthe trade finance marketin

which will be rele trade partner. This full-year report for 2010, year and anticipates the published by the banks in Saudi Arabia. are after annual reports
Overall corporate asset levels shrank from SARs 536bn in Q1 2009 to SAR Under the prudent super s 523bn this quar ter but vision of SAMA, banks banks commitment to corp remained well prov ision ed and capitalised again orates rema st and broad ly resilient in spite sparency strong further cred it deter iorat tranincreasedined sions ion. M of its aim to and part of for credit lossescreate report, preprovied by ranged from 13.30 per cent Tota l capital ratios OLIn E MAG Inn, CM As CAr par impairments. for Saud up to 151 per cent for Alinm place, CMM publishes this will be updated quarterly throughoutathe . i British Bank Bank research ased
ts, CMM analyses the relan the full quarterly repor s orate bank ing and trend tive importance of corp s corporate assets, liabiland market-shares of bank ities and trade contingent liabil ities, income, expenses e). are included in this articl (some examples of which orting data and compares The report refers to supp ding year. alent in the prece each quar ter to its equiv rt data on import and expo It also analyses available geography and industry. letters of credit both by ll bankof the report is to track overa The objective relation to corporate bank ing sector performance in of we track the performance ing and trade. Currently, sed entities with the licen the 12 Saudi Banks that are
Agency (SAMA). Saudi Arabian Monetary bank ing rema ined In broad terms, corporate i ent to bank s within Saud a prime business segm as a percentage of assets, Arabia; whet her measured net income. Trade continues liabilities, operating or s, bank s servi ng corporate to be a lead product to excess of 50 per cent of total equating as it does to in itment to the banks comm corporate assets. Overall, over Q1 2009. Even durtrade increased in Q1 2010 t tightening trade liquidity ing these times of credi during s grew. If trends prevailing prov ided by bank over the rest of the year the first quar ter cont inue a robust year in 2010. trade will have
The annual Tajara Monitor reveals The trends in trade ows themselves, including the geography and industry composition of imports and exports The trends in imports and exports nanced by banks in the KSA
Source: CMM analysis of individual bank interim reports
Proof Reader Production Manager Adver tising Manager Picture Editor
C&T.indb 27
CASh A n D TR A DE J U LY / AUGU ST 2010 27
The level of the individual KSA banks commitments to corporate banking and trade as a whole
01/08/2010 11:09
The respective market share of KSA banks and earnings from corporate banking and trade.
Source: CMM analysis of individual bank interim reports
If you would like to know more and/or wish to receive the Tajara Monitor, please email as follows editor@cashandtrademagazine.com
2010 DE J U LY / AUGU ST 26 CASh A n D TR A 26-31 tajar repor t 26 Creation date Modification date Publisher Editor Art Director Subeditor
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05/27/09 July 31, 2010 10:00 PM 08/01/10
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For Cash and Trade professionals in the Middle East

MAY / JUNE 2011

Letters of Credit still at the core of trade

Letter from the editorial director News Round

12 Risk and trade finance

18 Supply chain finance techniques

23 Islamic finance 31 Post crisis banking 35 Global trade survey

38 Cash management in Kuwait

DEDICATED TO GOING BEYOND YOUR EXPECTATIONS.

Sheila Roche Commercial director

For Cash and Trade professionals in the Middle East

Letter from the editorial director

hani al Maskati editorial director and Publisher.

Contact: Sheila Roche Commercial Director sheila.roche@cashandtrademagazine.com

Future looks good for MENA, says IMF

Securer messaging for MENA financial services

New chiefs at BNY Mellon

More trade support

Fastest forex newcomer accolade

Backing for energy projects

Saudi corporates blossom

Boost for Bank of Beirut

Finance: the future

Saudi overtures to Korea

New cash management products

Fresh services for corporates

HSBC cuts Middle Eastern workforce

Risk and trade finance

The return of risk

Risk and trade finance

Political / Country Risk

Advising Bank (Confirming Bank)

Sovereign, Bank & Commercial Risk

Risk and trade finance

Risk & Capital

Supply chain finance techniques

Letters of credit make a comeback

Supply chain finance techniques

Turkey draws closer to MENA

Ufuk Uyan, CEO of Kuveyt Turk Participation Bank

Head office of Kuveyt Turk Participation Bank

Post crisis banking

Trade finance: a return to relationship banking

Post crisis banking

Changes in trade flows

Post crisis banking

Global trade survey

Global trade bounces back

The collaborative ecosystem

Global trade survey

Cash management in Kuwait

Kuwaiti bankers engage the future

Cash management in Kuwait

Kuwait Liberation Tower

Cash management in Kuwait

Progress - and tasks to come

ill prime business Corporate banking stthe trade finance marketin

Proof Reader Production Manager Adver tising Manager Picture Editor

CASh A n D TR A DE J U LY / AUGU ST 2010 27

05/27/09 July 31, 2010 10:00 PM 08/01/10

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