Trade financing and SMEs in the UAE: emerging trends and challenges

The availability of funding for the trade finance activities of small-to-medium enterprises (SMEs) has generally grown over the years. In the post-financial crisis period, especially in the last two to three years, there has been liquidity coming into the system to support SMEs. With bank liquidity improving, we have also seen the pricing for credit getting rationalised.

Credit availability in the market place prior to the 2008 global financial crisis was focused on the public sector and real estate. As the financial sector emerged from the crisis, banks have been actively looking to diversify their financing portfolios — especially as the Central Bank of the UAE has imposed caps on both public sector and real estate exposures.

Banks also saw that several SMEs, especially those that have business models that are export-oriented, were relatively less affected by the financial crisis as they had the opportunity to divert business into other markets when the UAE market had slowed down.

A significant push was also made to develop this sector by the government with the Khalifa Fund in Abu Dhabi and Dubai’s SME programmes aimed at developing small businesses. Government decision-makers realise that SMEs are a significant source of employment and economic growth in the UAE and the SME sector is firmly on the national policy-making agenda.

At Noor Bank, we initiated a detailed market study for the SME sector in 2012. The business branded Noor Trade was launched in 2013 and has gone on to become a recognisable and trusted brand in the market in a short span of time. The launch of this business has been complemented by the continued development of products to service the trade and working capital needs of our customers. For example, we started working with credit insurers and developed Sharia-compliant risk mitigation structures that are not commonly used in the Islamic banking space.

This is not to say there have not been challenges in linking trade finance and SMEs. However, the challenges are not very different for both Islamic and conventional banks. They revolve around issues of credit assessment and risk management, especially for trading companies. In Dubai we see a large cluster of businesses, including those in the SME space, which are increasingly spreading their activities across various geographies — trading with people in the subcontinent, with Africa and even the Far East. The Commonwealth of Independent States (CIS), comprising nations from the former Soviet region, is also developing as an interesting market for a lot of traders in our region.

For domestic banks such as ourselves, the challenge lies in our ability to understand these markets, evaluate the risks that our clients are taking when trading in these markets, and in the process becoming comfortable around them. In facing up to these challenges, we see banks putting in more and more capacity and making an effort to better understand their clients, who are doing business in different markets.

Most of our clients have performed well over the last two years, but 2015 comes with its own set of challenges. Headwinds in the form of lower oil and commodity prices, a strong UAE dirham impacting exporters, muted economic growth in several key trading markets and other headwinds have bought home a lot of the risks that SMEs have to be cognisant of.

Banks such as Noor, who are in this business over the long term, have to work with their clients to help them mitigate risks in their business.

Bank financing solutions are now available for smaller companies that are less structured and are more credit-based rather than transaction-based. As companies grow and do inter-regional trade, they are in need of more transaction financing. For that, banks have started to offer different trade finance structures. As the companies grow, we have the ability to bring in credit-insured structures to help them and ourselves (banks) free off some of the risk to credit insurance companies. Going even bigger, there’s the ability to syndicate risk across various banks.

Consequently, as regional economies continue to develop post crisis, we are seeing an appetite among SMEs for more and more sophisticated funding arrangements, including credit insurance. Previously relatively under used, it is picking up fast as a means to mitigate some of the credit risk. Another example is the Dubai Multi Commodities Centre (DMCC) Tradeflow Platform. Noor Bank was one of the first users of the platform, and it is enabling banks to create products for warehouse financing and inventory financing on a partial-recourse, or non-recourse basis. It enables our customers to move risk off their balance sheet and do more.

Being able to mitigate country risk and take buyer risk into account in some of the challenging markets are among the other emerging trends that banks are looking at. Noor Bank has also been involved with the Dubai government in exploring the possibility of setting up a Sharia-compliant Emirates Exim Bank, the focus of which will be to open up not only the risk appetite, but the capacity for taking on risks in some of the countries where banks find it challenging.

These are interesting times for Islamic banks, which wish to diversify their offerings and move into the trade finance sphere. As Islamic economies develop and intra-Islamic economy trade grows, the demand for Sharia-compliant trade finance will grow too.

For customers it is about capacity building, developing innovative products and freeing up balance sheets. For Islamic banks that wish to take advantage of the opportunities that will emerge, it is about understanding customer’s (that is, SME) needs, developing cross-border knowledge to mitigate risk and creating innovative financing solutions that will be attractive to the SMEs.

Credit: The writer is Head of Corporate Banking, Noor Bank. The views expressed in the column are the writer’s own and do not reflect that of the newspaper.