Strengthening cross-border trade

The rising levels of transaction banking sophistication throughout the MENA region coincide with an increasing corporate focus on how to better manage risk and working capital throughout the supply chain. SRIRAM IYER, regional head of global transaction banking at Deutsche Bank, discusses the role financial supply solutions can play in facilitating trade against the backdrop of these developments

While the spectrum of trade finance solutions and products is yet to be fully exploited in many of MENA’s economies, there is  steadily growing recognition of the potential financial supply chain (FSC) solutions have to improve efficiency, risk mitigation and working capital management throughout the supply chain.

When effectively employed and implemented, FSC solutions can improve working capital by easing access to liquidity, and enhance risk mitigation by increasing the transparency and flow of transaction data between trade counterparties. Most importantly, FSC programmes can be implemented with minimal cost and disruption to existing systems and processes. As a result, the profile of FSC programmes is rising throughout MENA.

The growing interest in these solutions comes on the back of increasing calls from the region’s  economies for ever more sophisticated solutions that encompass cash and trade integration and electronic end-to-end transaction processing capabilities. The importance of supply chain sustainability, which depends on funds being available when and where necessary and the ability to overcome risk, is a key issue for all corporates.

FSC programmes are designed to address such concerns in a fashion best suited to the requirements of the trade counterparties in question – whether they are large, sophisticated corporates operating on a cross-border basis or small local operators.

Cost and efficiency gains

Although FSC solutions are a relatively new development in MENA, they are fairly well established – at least at a fundamental level – in other markets, such as the United States and Asia. The importance of FSC solutions in keeping cross-border trade flowing despite ongoing challenges has been highlighted by the global financial crisis of 2008.

Adverse effects of the downturn include a diminished number of financial players and ongoing capital market turbulence – not to mention restricted access to bank-supplied credit lines for many trade entities. FSC programmes can overcome those hurdles by reducing corporate dependency on debt, which is their primary function. Their ancillary benefits, however, are equally worthy – particularly for a region at a turning point in terms of banking sophistication.

Additional advantages of FSC solutions include greater operational efficiency and improved end-to-end supply chain visibility. These benefits may be of particular interest to MENA-based companies who are increasingly leaning towards more advanced technology solutions following increased exposure to international banking trends and technologies.

Enhanced visibility is of vital importance and ties in with the growing trends for the convergence of cash and trade – also geared towards enhancing risk and working capital management – and greater transaction processing efficiency. As supply chains become longer and more complex, efficiency is a key factor that depends not only on technology capability, but also the ability to plan for all eventualities and increased counterparty cooperation and communication.

Certainly, fiscal crises are not the only hurdles that trade must overcome. While the knock-on effects of an economic downturn may be the most obvious, the supply chain stresses caused by natural disasters and socio-political unrest can disrupt business. Adequate preparation and planning to prevent such disruption is simply not possible without end-to-end transaction visibility and increased counterparty communication, which is dependent on the sharing of transaction data.

FSC solutions, in facilitating the flow of data and information between trade partners, can significantly improve counterparty relations and risk mitigation. When combined with enhanced working capital management, the end result is a solid foundation for international trade. As trade patterns shift – the increasing trade flows between MENA and Asia being a prime example of this – a strong basis capable of supporting new trade routes and connections is vital.

The broader picture

As trade networks expand and develop to incorporate new markets and players it is imperative that FSC programmes, if they are to be reliable sources of liquidity, cater to the varying working capital needs of companies and markets.

One way in which such programmes address working capital requirements is through the extension of working capital cycles – and this can be achieved through financial arbitrage, which works to the favour of both large and small trade entities.

To give an example, a buyer may seek to improve working capital management by increasing days payable outstanding and simplifying payments procedures. This could mean that buyers have 60 days rather than 45 in which to pay their suppliers.  In exchange for such extended – and streamlined – payment terms, smaller suppliers can leverage the credit-worthiness of their larger trading partners (known as “anchor” corporates) to obtain more favourable credit terms than they could in a bi-lateral situation.

Not only does this boost working capital for both players – thus increasing their financial strength and stability – but can also improve both counterparty relations and overall supply chain strength and security. Arbitrage techniques are, therefore, expected to be more commonly used as their workings and benefits become more widely understood and appreciated.

Of course, as working capital needs vary between corporates and economies, so too must FSC solutions – and this is where the complexities lie. The MENA region has markets in various stages of development constituting numerous levels of awareness and sophistication.

In order to be successful, therefore, FSC programmes must be structured – and the implementation process tailored – to suit the varying levels of sophistication of different types of trading partners. This should be supported by experience and expertise in the formation of credit structures and strong levels of customer service and local market understanding.

Many local banks, even the forward-thinking institutions that have begun to explore this space, will find that this is too tall an order. As a result the regional development and roll-out of FSC solutions is most likely to be led by international trade banks – such as Deutsche Bank – because they are able to combine capability, geographic reach and an extensive network. Such organisations are likely to also have an established track record of structuring, implementing and investing in FSC programmes.

The advantages quintessential to global providers result in market-leading FSC solutions and a harmonised standard of service, which makes for a consistent user experience with clear responsibility and accountability for service delivery. This forms the basis of long-term bank-client relationships – crucial to success in turbulent times.

FSC solutions are, however, not without their challenges. Though an experienced solutions provider can manage the process and provide much needed guidance, companies should bear in mind that optimal solutions must meet the needs of each of the trading partners involved, and reconciling requirements across differing legal structures and accounting issues is rarely straightforward.

Despite such difficulties, the ability of such solutions to improve supply chain strength and stability means that MENA’s corporates should continue to focus on FSC solutions. By improving risk and working capital management, and increasing visibility throughout the supply chain, FSC solutions are set to be a key component in the growth of the region’s trade development and sophistication.