Set for Growth

Mritunjay

Are you expecting a noticeable growth of Trade Finance in our region in the coming years?

While the events that have been taking place in the last 3-5 years globally, coupled with the geopolitical issues and various other challenges (regulatory, legal framework etc.) faced in the region, makes it difficult to predict the future. Factors such as digitisation and innovation within the region have outperformed the challenges towards stabilisation and growth. The projection of UAE’s export volumes reaching AED 1.7 trillion ($463 bn) by 2030 (Trade Finance Global May ‘23) is in itself an indication of the region’s growth potential in the coming years. Predictions that exports from the region are set to more than double from 2020 volumes by 2030 (Future of Trade 2030), and with the regional trade volumes between Asia, Africa and the Middle East carrying a projected combined trade volume of AED 53 trillion by 2030 (Zawya), also indicates that the region will not be slowing down in the near future.

Massive infrastructure expansion plans of some of the key countries ex: Saudi Arabia would also contribute to the growth of trade finance in the region in the coming years. Technology innovations such as blockchain and the presence of many fintechs also renders opportunities for the region’s businesses to showcase their deals globally to various lenders, in cases where lenders in the region may not have an appetite, which too, will impact future business positively.

In our view, if not a noticeably significant growth, a steady growth curve is certainly on the cards for the region in the coming years.

In strained times with lacking liquidity or falling stock prices, can financing trade via traditional instruments – letters of credit or promissory notes ease matters?

Traditional instruments have always been the backbone of trade finance. They have given comfort to lenders while structuring trade related facilities irrespective of the economic situation in the region and continue to do so. In times where there is a liquidity crunch, buyers look for extended payments in securing deals with their suppliers while lenders look for the most secured option against which they could release their limited liquidity to sellers. Therefore, the level of security and the acceptance that these instruments provide, would drive the parties involved into considering these options.

Also, given the security and the comfort that these traditional instruments provide to the lenders, financing via the traditional all parties involved with a common platform that offers an automated and streamlined process away from the manual framework, increasing efficiencies and providing transparency, thereby reducing the risk of disputes and frauds. The ability to integrate logistics providers to the platform provides visibility on the movement of

This is obvious since the larger corporates carry a more credit worthy profile, stronger financials, better debtor profile and proven track records in terms of repayment history.

Some of the traditional reasons which restricted SMEs from accessing trade finance services were the nonavailability of strong financials (audited), instruments, even in a liquidity crunch would work out relatively cheaper to the borrowers when compared to other forms of financing options.

Although still in its early stages, there are multiple benefits of adopting this technology in trade finance. It provides goods which is critical in trade finance. The blockchain and distributed ledger technology is also expected to provide enhanced security of the data by way of its decentralised storage mechanism. This digital marketplace is also expected to innovate effective trade solutions in relatively shorter time and significantly reduce costs compared to a traditional trade model.

While there is a case for the adoption of this technology, it is not without challenges. Regulatory issues, legal framework, integration of technology into multiple systems, getting all parties across industries into a single platform are some of the key challenges faced.

Given the challenges we believe that, while there is a valid case for adoption of this technology, it may take more time for it to have widespread acceptance across parties and industries.

The general sentiment is that the larger corporations are always preferred over SMEs when it comes to lending by financial institutions since they have better accessibility to trade finance services.

established payment history, difficulty in providing collateral to meet lenders requirements, issues in meeting with compliance requirements and the lack of awareness, skills and expertise in trade finance products.

This been said, the lenders in the region in the last few years have realised the importance of the SMEs contribution to the region’s economies, starting from providing employment, to efficient supply of goods and services strengthening the regions supply chain dynamics. Lenders are accordingly focussing on the SMEs with customised product offerings, providing a segmented business approach with simplified trade finance service propositions needed for the growth of the SME sector. The segmented approach allows the lenders to identify the needs of the SME sector and suitably structure their offering.

Further, the introduction of fintech’s in the region, providing digital platforms and blockchain technology will enable SMEs to reach a digital market space and connect with buyers, lenders, insurers and logistics providers, who will give them access not only to trade finance services but also to the complete supply chain value proposition.