Bid to take trust to another level

MENA has a long history of trust in both personal and business dealings. ALEXANDER R. MALAKET, president of OPUS Advisory Services International Inc., looks at how it operates in the field of transaction banking

Trust is fundamentally important in high-context cultures, and it is axiomatic that the MENA region has long reflected this reality in both personal and commercial dealings. The long history of relationship-based business, extending to name-lending that until recently was very much an accepted practice, speak to the central role of trust in the region.

This is not to say that conduct is always above reproach – far from it, as illustrated by an anecdote from a senior finance executive in the area who sought to offer credit to his suppliers, and in attempting to conduct appropriate due diligence on one such supplier, was offered his choice of five quite different sets of financials, and invited to choose the one that would best meet his needs!

While international standards of financial assessment and lending are gaining influence, as they are in other markets with historically different practices, it remains the case in the Middle East and North Africa that trust and a firm handshake can do a lot to seal a deal, and that such trust, when it endures a crisis based on the strength of the relationship, is further reinforced.

Trade financiers and transaction bankers in the region will observe that the influence of high-context culture, where the relationship takes a more central role than the contract, has helped the MENA region, as has the influence of Islamic finance and trade finance practices grounded in Shari’a Law, where a “focus on the fundamentals” and a direct link to real-economy commercial activity and trade flows are at the core of banking and finance activity.

Farooq Siddiqi, regional head of transaction banking, Middle East North Africa and Pakistan at Standard Chartered Bank based in Dubai, notes, “The fundamental importance of trust is something that is woven into the cultural and social fabric in the MENA region: this reality has not changed, and particularly, the dynamics of trust between corporates – supplier and distributor, for example – remain as they have long existed. There is, however, a discernible shift in the bank-to-corporate and in the bank-to-bank relationships, influenced in part by a more considered approach to risk management.

“This includes the notion of reputational risk, which has contributed to some level of consolidation of relationships between banks as well as between banks and corporates. The Middle East is, perhaps, unique in that business is primarily between suppliers and distributors, with only limited manufacturing activity: this reality changes the nature of the commercial transaction and the discussion around solutions like supply chain finance, and influences the type of trust that needs to be developed and nurtured.”

Trust, and the intentional focus on trust and relationships, remains fundamentally a strong part of the commercial landscape in the MENA region.

While external influences such as Basel III, and an increased focus on formal disciplines and organisation around risk management activity drive the need for greater due diligence on counterparties, or raise questions that banks and corporates alike must respond to in their commercial undertakings, the suggestion is that the fabric of trust in the region remains healthy.

The enduring role of the majlis – simplistically, the tradition of a public audience hosted by a community leader – provides an illustration of the extent to which long-standing practices remain at the heart of personal and commercial interaction, and affirms the importance of trust, and the high priority around managing reputational risk in the region.

This culturally and socially-centred process is described as providing a strong checks-and-balances type influence and a motivation for private individuals and business leaders alike to act, and to be seen to act, appropriately.

The balance between such traditional perspectives, and the imperative to adopt more “global” practices around due diligence and risk management is in evidence, and may represent a healthy tension to the long-term benefit of the MENA region.

Bankers who comment candidly will acknowledge that there has been a bit of a shift – a degree of risk-aversion, partly brought to the MENA area by the many international banks that operate there, and have been impacted by the global crisis and its consequences. This shift has translated into a “flight to quality” in corporate and FI-to-FI relationships, and a degree of consolidation of such relationships across the region.

Interestingly, some markets – as varied as Taiwan and MENA – are described currently as being “awash” with liquidity in certain areas and with some client segments where, in the case of MENA, traditional trade is in ample supply for the top-end of the market, but where small businesses continue to face the perennial challenge of access to finance, despite relatively healthy levels of liquidity.

Overall, part of the positive liquidity picture can be linked to an environment where trust is well-entrenched. Capital flows and financing capacity are more impacted at the moment by political risk optics and issues than they are by issues at the commercial level.

The trade finance business in the MENA region continues to rely chiefly on traditional trade products, with uptake around supply chain – and new propositions such as the BPO – remaining limited and progressing at a conservative pace. Local businesses are seen to be seeking both funding support and risk mitigation, and where they prioritise risk mitigation requirements, are reported to be looking at banks and insurers/risk mitigators as comparable competitors.

This dynamic may also be driven in part by selectiveness among corporates about the banks they choose to deal with in a post-crisis environment: the issue of trust, where it exists, is doing more than simply impacting existing relationships: it is, as might be expected, motivating a search for options and alternatives.

As noted earlier, the dynamic between corporates, particularly those with long-standing trade relationships, remains strong and solid, with trust playing a fundamental role in having such partnerships survive and thrive through the crisis.

The supplier/distributor type relationship that is most common in the MENA region creates a dialogue that varies from commercial discussions in other markets. Demand for trade finance is driven primarily by growth, any “stress” in the supply chain – such as payment delays and the need for corporates to manage their balance sheets – including specific requirements around monetizing assets and creating capacity to borrow when the need arises.

Larger distributors have done relatively well as a group, while it is reported that some smaller entities diverted funds from commercial activity to real estate and other areas, which did strain confidence for a time.

The corporate-to-bank relationships have also been impacted adversely on some level, with local businesses asking themselves the perennial question that arises in times of crisis: “Can we trust the banks that pulled out of the region and now seek to re-establish some level of presence?”

Discussions in Beirut a couple of years ago raised the point, with some sense of irony, that American and European banks in particular had been attempting to sell complex derivative instruments to Lebanese bankers without real success – largely due to the fact that local bankers felt ill-at-ease with the structures and readily acknowledged that these products were not easily understandable.

While the inevitable “Trust  me, these will be fantastic deals” argument was put forward, along with a dash of condescension, the attending bankers were quite satisfied that they had been properly guided by a focus on the fundamentals of sound banking, and had not misplaced their trust in instruments – and institutions – that ultimately did more harm than good.

Siddiqui further observes, “We have noted a certain polarisation in the FI-to-FI space, with banks clearly rationalising their relationships and focusing on fewer counterparties. The emerging landscape is often shaped by CEO-to-CEO level discussions and the adoption of more strategic approaches to FI relationships.

“Most banks are currently seeking broadly-based FI relationships, reducing their engagement in single-product or single-dimension relationships, and preferring to develop a larger number of ‘touchpoints’ with partner or client FIs. The larger the number of touchpoints, the greater the implied trust.”

The business landscape around trade finance in the MENA region remains disproportionately (relative to other markets) focused on traditional and well-established trade financing instruments and mechanisms, like the much maligned documentary letter of credit. Commentators in the region will note that the market acceptance and uptake around open account trade, and around innovations such as the Bank Payment Obligation, is proceeding, but cautiously.

As with other regions around the globe, MENA is experiencing a variety of conditions still linked to the evolution of international commercial activity and the global crisis, including a shift in trade flows, with greater influence on regional relationships, and a shift in focus towards China and the East, along what has been termed  “The New Silk Road”.

Add to this, the drastic reshaping of the political and country risk realities in the region, arising from the Arab Spring together with political and military tensions, and the fundamental role of trust – both when it is present, and when it is lacking – come clearly and sharply into focus.

In the end, the reality is that the financial sector, globally, faces a certain imperative to rebuild trust among retail and business customers, and should rightfully expect to defend its value proposition and the soundness of its business practices, together with the appropriateness of the approach to relationships at all levels.

Economies today cannot function, and countries cannot prosper, without the contributions of financial institutions, and it is telling that while some senior executives object to additional regulatory pressures and demands arising from the global crisis, others have sought to better express and to defend the positive contributions of banks to the evolution and growth of societies and the international system.

There is a sense, and rightfully so, at these most senior levels, that trust has been damaged and needs to be rebuilt. This reality is reflected to differing degrees in the corporate context, and in the FI-to-FI relationships, in the MENA region and more widely.

Bankers will note that there is significantly more discussion and dialogue about trust, and about, as one executive put it, “taking the trust equation forward” in MENA, and this is all to the good, when coupled with the reported greater focus on sophisticated approaches to due diligence and risk management.

This is good news for the region as well; just as bankers and corporates in MENA are engaging in more formalised risk assessment and management processes, it is very likely that greater focus on supply chains – and the financing of supply chains – will also become part of the dialogue, and, with this, will come a shift in focus from traditional, bilateral importer/exporter focus to what is being seen already in other markets: greater emphasis on multilateral relationship dynamics.

The multilateral, ecosystem-type view of commercial relationships makes the trust discussion arguably even more central to international commerce, and demands even more focus on developing and managing trusted commercial relationships.

Additionally, as in other markets, there is a recognition of the economic value, and the attractive margins and profitability around servicing the SME segment: what has been referred to elsewhere as the “mid-market sweet spot”. In MENA as elsewhere, banks have been discovering the attraction of servicing mid-corporates, as against multinationals that maintain, perhaps, a dozen or more financial service relationships and are adept at playing each off against the other, and at negotiating margins of the thinnest variety.

This shift in focus to the mid-market links directly to issues and considerations connected to trust. As noted earlier, the dynamics of trust at the SME end of the market took a bit of a battering during the crisis, and may require incrementally more effort to fully repair. However, banks are well motivated by the increased attractiveness of this client segment (and companies likewise) and will seek to rebuild any damaged bridges, given the need to assure adequate access to liquidity and appropriate levels of banking support.

While specifics may vary on the basis of circumstances, there can be no doubt that the issue of trust – across all levels of relationships – is an area of increasing focus, both in the realm of public relations and various forms of “messaging”, as well as in the more practical, transactional areas, where business meets relationships.

Trust is at the core of culture, relationships and business in the MENA region, and the discussion to take trust to another level is well underway. n