Regional financing has always been dominated by the traditional lending practice as higher oil prices have allowed the governments to build sizeable petrodollar surpluses until 2014. Hence, banks were the primary source of lending for both the public and private sector within the region.

However,since mid-2014, the persistent decline in oil prices has changed the dynamics of the regional economies.

The current situation is different from the global financial crisis because lower oil prices are putting strain on government revenues, while spending continues to meet the long term objectives of regional governments. In order to align with the changing environment, the governments have taken appropriate measures, such as introducing reforms and cutting subsidies to boost non-oil revenues. These plans will have material impact on the broader economies in the long term but does not address the immediate concern, which is tightening liquidity and financing the burgeoning deficits across the region.

Lower oil revenues meant decline in government deposits in the local banking system, which has reduced the appetite of banks to lend and meet the needs of the region since the start of 2015. This is also evident from the subdued growth in the deposit base, increasing cost of funding and rising loan to deposit ratio of the regional banks, all of these leading to worsening banking indicators and rising credit risk across the GCC. As a result, the region has witnessed the emergence of alternative financing avenues, which has only grown in the past two years, both in the number of market

participants as well as the sophistication of offerings. For example, the government and larger corporates have resorted to the debt markets, while the medium and smaller players have witnessed a rise in alternative channels such as private equity (PE), private debt, FinTech venture capital, etc to support their expansion plans. Most recently, FinTech companies have started making a mark on the regional financial services industry, which have emerged as a potential ‘game-changer’ for regional SMEs that find it difficult to obtain financing from traditional channels.

The debt market has gained traction in the past 18 months and is gradually becoming an important source of funding for both the public and private sector, especially regional governments. Although the debt market is not something new for the region, it remained largely untapped as local funding was generally led by banks, which was easier, faster, cost effective and flush with liquidity. In the GCC, 39 bonds and 20 sukuks worth $42.7 billion (Dh156.7 billion) have been issued until October 2016. Additionally, NBAD expects new bonds and sukuks to the tune of $32 billion to be further issued before the end of 2016 on the back of the tightening liquidity situation, taking the cumulative issuance to $74.7 billion, a rise of 130% from that in 2014. In the wider Mena region, the total number of bonds issued more than doubled to $88.8 billion in 2015, primarily led by government and government-related entities. Issues by banks totaled $13.5 billion in 2015 compared to $12.2 billion during 2014. In terms of the share of total issuance, sovereign bonds accounted for 85per cent of total issues in 2015 compared to 66 per cent in 2014, whereas the share of corporate bonds dropped from 30% in 2014 to 14 per cent in 2015. However, corporate bond issuances are likely to pick up pace in the following years as the rapid rise in sovereign debt provides benchmark for pricing the bonds and yields, which was lacking in the past few years.

The reasons for the surge in debt issuances are multi-fold; firstly, the cost of funding has remained favourable in a low interest rate environment globally;and secondly, it provides stability as the durations can be aligned according to the requirements, especially during periods of uncertainty and volatility.

Given the traction in the debt market, the regional capital market authorities were quick in standardising regulations, which was often criticised for being slow and being a long drawn out process with embedded costs of issuing such debt instruments. However, the new regulatory framework is not only going to standardise bond issuances but also boost confidence among the private sector as it is likely to speed up the process and reduce costs.

The implementation of the new UAE Bankruptcy Law in 2017 will also be a much-needed boost to the local debt environment and will ensure a more robust system in line with international funding structures and across all types of companies whether they are SMEs or international entities.

The availability of funding for the SMEs from traditional avenues have always remained low and difficult to obtain, mainly due to the lack of support from the government and issues with the credit worthiness of such companies. However, the emergence of non-traditional lending avenues such as PE players and more recently Fintech companies, amongst others, have revolutionised the overall financial services industry. Most of the PE funds within the region have focused across the SMEs ranging from healthcare to IT, infrastructure and real estate. However, the rise of Fintech in the funding space has emerged as a game changer for SMEs, offering innovative tailor-made products, such as marketplace lending, crowd funding, and tech-enabled payments, especially when lending from traditional banks was tiring and futile.

In conclusion, regional financing activity is undergoing a paradigm shift as it is evolving from conventional lending to becoming more dynamic and sophisticated with the emergence of new products. More importantly, governments raising funds through international markets will be channelised through the banks, which will also help in improving liquidity and the ability to lend to other economic sectors. Further, the availability of alternative lending avenues for SMEs will also be critical in supporting the broader economy.

— Shailesh Dash, Founder and CEO, Al Masah Capital