The present extraordinary circumstances have called for an extraordinary response across the globe. The trade finance industry – not known for its ability to swiftly enact change – has had to rapidly adapt. But what changes have banks in the Middle East been making to keep trade flowing? BNY Mellon Treasury Services’s Bana Akkad Azhari, Head of Relationship Management MEA & CIS, and Joon Kim, Global Head of Trade Finance Product and Portfolio Management, explore:
The ongoing pandemic has brought significant disruption to trade across all corners of the globe, with the industry facing a number of profound challenges. Despite strong mitigation measures implemented across the Middle East and Africa (MEA) region, the IMF forecasts that all MEA economies, with the exception of Egypt, will contract in 2020 1. The economic contraction in the region is being driven by a series of simultaneous shocks linked to the pandemic, including a drop in domestic and external demand, the disruption of production, a fall in consumer and investor confidence, and tightening of financial conditions. In addition, as a commodity-centric region, MEA is also being affected by commodity pricing volatility, including a drop in oil prices of over 50%2, which has created added areas of concern and which banks are reviewing.
As countries in the MEA region continue to navigate this challenging environment, what action are banks taking to mitigate the impact on trade? Traditionally a paper-intensive industry, trade finance has had to implement digital solutions that can accommodate a work from home environment. So, while the short-term ramifications are challenging, it is also having the positive effect of bringing the digitalisation agenda to the fore and paving the way for a more agile, digital future for global trade.
Responses from banks have been necessarily swift in the MEA region. To offset the impact of the disruption, and to ensure trade flow and balance sheets remain optimal, banks have initiated business continuity plans (BCPs) – a series of preventative measures to safeguard against any potential short- or long-term risks. As the situation surrounding the pandemic has evolved – with some individual nations now even looking to begin easing their lockdown restrictions – so too have these underlying BCPs. It is this continuous evaluation that lies at the core of any effective bank response.
Before the pandemic, banks in the MEA region may have been content with a certain threshold of return. But now, as the trade industry grapples with economic turbulence, and with risk factors on the rise, the considerations that underly these decisions have changed. Certain countries are now at greater risk of recession and many financial institutions and corporations have been left with a higher likelihood of rating downgrades – all of which needs to be factored in. What’s more, there is an increased risk of fraud due to the shifting, unfamiliar conditions, and local banks have implemented heightened security measures and focused primarily on supporting and doing business with their core clients.
Creating a digital norm
For a number of years many banks have been working intensely with the overarching aim of optimising transactions through technology – including blockchain initiatives and artificial intelligence capabilities – to deliver solutions that allow the paper element to be reduced. With the processing of trade credit requiring the exchange of 36 original documents and 240 copies on average, there is significant scope for efficiencies to be introduced3. Nevertheless, an element of resistance has persisted in the industry, with many continuing to favour traditional methods.
Today, in the midst of the pandemic – with MEA countries introducing social distancing guidelines, work from home requirements and travel restrictions – logistical obstacles are proving to be a barrier to trade. This has become most apparent in situations where original documents must be sent back and forth multiple times among multiples parties.
As such, there has been a united effort to discover ways to keep trade flowing. Many banks within MEA have been identifying opportunities to safely digitalise the paper elements across the supply chain. What’s more, these efforts are being widely accepted within the industry, with participants increasingly recognising the value that digital solutions present.
So far, considerable progress has been made. The International Chamber of Commerce issued a study that collected the rapid response measures being implemented by trade finance banks in Asia, Europe, the Americas and the MEA region. 71% of respondents report implementation of measures that support customers and expand their digital channels. Some adjustments to workflows made by banks in the MEA region include the greater use of email, the use of electronic signature solutions and the use of scanned documents and paperless approvals, such as digitalised cover letters for export collections4. Regulatory guidance and advice have been critical to the facilitation of digital practices in the MEA region. As an example, a proactive approach has been taken by the Bank of Algeria, which has issued advice to member banks regarding use of electronic documentation5.
Looking to the future
While the pandemic has placed short-term strains on the flow of trade in the MEA region, it has also had the positive effect of pushing the industry toward digital solutions in place of paper. It is important to recognise that while this is only an incremental shift, attitudes are beginning to evolve as industry professionals experience the efficiency and value that digital progress can bring. This is a valuable step in the right direction – one that promises to propel trade finance into a new era after the pandemic has passed.
• The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.