Across the Middle East, financial institutions, fintech companies and regulatory bodies have taken steps over the past couple of years to accelerate a shift towards the use of digital trade solutions.
Both Bahrain and Abu Dhabi have adopted legislation that gives electronic documents the same legal standing as their paper-based counterparts, tackling a key problem facing trade digitisation globally.
At the same time, commercial lenders in the Middle East are increasingly looking to use digital solutions, such as for letters of credit (LCs), in a bid to slash transaction times and drive liquidity further down the supply chain.
In this Industry Perspective, Sean Bowey, head of product for global trade and receivables finance at the Saudi British Bank (SABB), outlines how regulatory action is shaping the digital trade agenda in the Middle East – and why a partnership with trade finance network Contour is set to offer particular benefits to SABB’s clients.
GTR: Is trade finance digitisation gaining pace in the Kingdom of Saudi Arabia and broader Mena region? What has changed over the last five years?
Bowey: As with the rest of the world, digitisation is starting to pick up pace across the Mena region. In the last five years, we have seen emerging technologies such as distributed ledger technology start to be implemented, and we have also seen significant regulatory changes.
Bahrain was the first country to adopt the UNICTRAL Model Law on Electronic Transferable Records (MLETR). That is yet to result in a huge uptick of digital transactions, because you need everything else in place, but there has been a definite shift in momentum.
Abu Dhabi has also adopted MLETR and Saudi Arabia is now looking to do so too. Through our network with HSBC, SABB has been able to offer some market-leading technologies in terms of trade finance portals and digital platforms – and in the last three years, the competition has been catching up fast. When I first got here a few years ago, there was nothing comparable in the market and now we are starting to see the other banks coming up the curve very quickly.
GTR: What digital trade finance tools are meeting the requirements of banks and corporates in the region?
Bowey: In the past, banks built up their own digital platforms, but they are now becoming more flexible in terms of connectivity with third-party platforms: whether a client is choosing a digital application for a specific transaction – for example, guarantees or receivables finance – or whether they are looking for complete trade finance functionality.
We are seeing a lot of interest for the digital LC, such as Contour’s solution, as well as around letter of guarantee solutions. The guarantee is in high demand in the Saudi Arabian market, in a lot of circumstances, given the amount of infrastructure work going on in the kingdom. These types of products are traditionally both heavily paper-based and difficult to manage.
GTR: What levels of interest are you seeing for sharia-compliant digital solutions in the trade finance sector?
Bowey: In Saudi Arabia, at least 70% of our trade finance book is sharia compliant. A lot of clients insist on sharia-compliant financing, right from the governmental level to SMEs. So it is absolutely fundamental that we have an Islamic variant across all our products and digital offerings.
Where that becomes interesting from a digital standpoint is you always need a real, underlying transaction to be generating a profit.
If, for instance, a client is conducting a metals trade, then you have to link this trade to a digital system and, according to the rules of Islamic finance, that transaction has to be committed before you can issue financing. Coordinating those two stages presents quite a challenge for digital and straight-through processing. This is one of the things that we really want to pin down. We think there is a really big opportunity for digitalisation and automation to improve the efficiency in the market.
At the moment, there is not really a dedicated digital sharia-compliant financing solution, rather it is a case of adapting existing solutions like Contour to ensure they are working in a sharia-compliant manner. We can expect real benefits if the industry manages to fully automate the whole process – which is something we are looking at.
GTR: What drove SABB to join Contour and what’s your take on progress to date?
Bowey: Several major banks including SABB shareholder HSBC have backed Contour. For one, that provides us with a committed network of global banks, which is important, because LCs rely on a network. Secondly, we have confidence there are serious trade banks investing in the solution. A couple of emerging players in the fintech space have disappeared recently, perhaps because they lacked that combination of backing and a use case that made them sustainable.
We believe the LC is the best technology use case in trade currently. In many ways, it is the biggest problem statement in trade finance. The product has so many advantages to it in terms of risk mitigation, cashflow and financing opportunities. But paper LCs are also quite cumbersome, heavily structured and reliant on documents. There are huge piles of paper getting pushed around the globe from one corner to the other, which is not exactly sustainable either.
Our first two Saudi Arabian clients had their nodes activated last month, and our first live transaction will take place on the Contour platform in August. This will have a genuine network effect, allowing us to run queries on foreign corporates and ask our clients if they are working with them.
GTR: How will digitisation accelerate growth in trade within the region, and even further afield?
Bowey: Digitisation is not just for the sake of it, it is for the benefits that it brings. This push will eliminate a lot of the risks that exist in our industry, including operational and fraud risks. You’re getting more visibility into confirmed payment triggers, which allows banks to inject liquidity earlier and with more confidence. You can then start to take that down the supply chains, and that’s not necessarily specific to Contour, which is one product and part of the wider picture.
The more digitalisation we have in place, the easier it is for us, as a financial institution, to put liquidity into the system. From a bank perspective, risk is my biggest concern when getting liquidity out there. The greater those risks, the more we charge and the less accessible it is. By accelerating digital trade solutions, we can really work to tackle the trade finance gap in the Mena region.
This article was first published in Global Trade Review.