Specialist financing might be the solution to boost the growth of emerging markets (EMs), which see a severe gap between the demand and supply of corporate funding, according to experts.

The recently held sixth annual Falcon Group Dubai forum focused on the emerging market funding landscape, addressing the desire for corporate growth versus global challenges.

The demand for financing across the emerging markets is often attributed to both globalization and south-south trade. Globalization has caused developed market corporates to look outside of their domestic markets and towards emerging market counterparties. Meanwhile, south-south trade (trade between emerging market corporates) has observed a significant increase since the global financial crisis. Both create opportunities for the emerging markets, and thus a demand for funding.

Yet the Falcon forum was keen to highlight that, while significant, these are not the only two drivers of demand for corporate funding across the emerging markets.

“Emerging markets are going to witness a rapid growth in demand for credit for many reasons including, importantly, because their credit intensity of GDP (credit per unit of GDP) will increase,” said Dr Duvvuri Subbarao, former Governor of the Reserve Bank of India – the forum’s keynote speaker. “Infrastructure investment will also contribute to this. India alone is programmed to spend around $1 trillion in the next five years on infrastructure – the linchpin of economic growth.”

Indeed, while costly, the development of infrastructure also facilitates trade and enables corporate growth – thus creating a demand for corporate funding.

And it is not just physical infrastructure that is enabling corporate growth. The advent of technology and development of digital infrastructure was lauded by the Falcon forum as the “next revolution”.

“We’ve gone through various revolutions: canal, steam, electricity, the Internet, and now we are entering the revolution of the ‘Internet of Everything’,” said Den Sullivan, head of Architectures and chief technology officer of the Emerging Markets at Cisco – the forum’s corporate speaker.

Certainly, Cisco predicts that the “Internet of Everything” – the networked connection of people, processes, data, and things – is poised to generate $4.6 trillion in bottom line value for the public sector over the next decade, and $14.4 trillion for the private sector.

Then we have the companies themselves. While the demand for funding clearly comes from corporates striving to expand, it also comes from the large number of small to medium-sized enterprises (SMEs) across the emerging markets – many of which are smaller suppliers in large supply chains – who just want funding to sustain their business models.

“SMEs will be another big source of credit demand,” explained Subbarao. “Even Europe is talking about how SMEs are key to generating jobs.”

“This new world is a promising world – a world more than ever full of opportunities for entrepreneurs,” said former Economics and Finance Minister of France, Alain Madelin.

The supply

Unfortunately for the emerging markets, while the demand for corporate funding is significant, supply is limited.

“You want to grow, but there is a problem: the financing is just not available,” explained Richard Dean – presenter of Dubai Eye’s ‘The Business Breakfast’, and the forum’s moderator.

Dean highlighted his point by discussing the move by HSBC to “shrink and simplify”.

“It is no secret that banks once wanted to be all things to all people,” added Kamel Alzarka, Falcon Group’s chairman and founder, during the forum’s panel debate. “But now taxpayers are not willing to support that. Banks have to retrench and simplify. That seems to be the new model.”

“There has been a decrease in risk appetite from all banks to provide non-vanilla or bespoke structures,” explained Chris Howarth, Falcon’s chief commercial officer. “Pre-crisis, banks were looking to grow their product base, and look to sophistication – as the regulatory framework was more favourable for new products. Now it is difficult for them to justify breaking the mould.”

Finally, global banks are focusing increasingly on domestic markets, and are withdrawing from the emerging markets.

“Banks are retrenching from the globalizing  trend – becoming more ‘national’, and less ‘global’,” said Subbarao.

“Those international banks were looking for aggressive global growth pre-crisis,” added Howarth. “Now they have to retrench and focus on core markets.”

Post-Lehman financial landscape

So what has caused this withdrawal? The financial landscape is still suffering from the impact of the global financial crisis.

First, there are the fines imposed on global banks – making a dent in the capital they have available to lend.

“The global banks have been penalized for their role in the global financial crisis,” said Howarth. “They have been accused of mis-selling a significant number of financial products and manipulating financial markets, including interest rates.”

And, of course, there is regulation.

“One of the fundamental causes of the financial crisis was the ideological shift towards light regulation: the belief that lighter regulation of the financial sector encourages innovation and enhances economic efficiency,” said Subbarao. “As the global community, we have paid, and we are still paying, a heavy price for that flawed understanding of the financial system, and for that misplaced ideology.”

Certainly, learning their lessons from the financial crisis, regulators all over the world are now leaning – perhaps too far – the other way, imposing restrictive regulatory requirements on global banks. Basel III, for instance, asks banks to raise higher and better quality capital.

“Regulators have been putting in place the protections to ensure that if there is another crisis around the corner, the financial system is in a much better position to withstand the impact,” explained Howarth.

While valuable – and some would argue, necessary – such measures mean that, once again, banks have less capital to lend to corporates.

Topping up the supply

The Falcon forum presented a solution, however.

“On the way forward, there will be rewarding opportunities for intelligent, nimble institutions, which can tailor bespoke solutions to clients, manage risk better, and which can cover the last mile in credit delivery,” said Subbarao.

Cue the rise of specialist financiers, which are increasingly stepping-in to fill the gap left by the withdrawal of global banks across the emerging markets – providing the capital banks can’t, and the sophisticated products they won’t.

“We follow the motto ‘Falcon starts where the banks stop’,” explained Alzarka. “We can’t compete with banks – they will always have bigger firepower – but when they are outside of their comfort zone, we can step in.”

Indeed, the model of specialist financiers is not one of competition, but rather collaboration – both with banks and corporates.

“We work with partners, like Falcon, around the world to deliver financial solutions in places where some banks choose not to invest,” highlighted Guy Smith, Director of Cisco Capital.

Such collaboration results in a more diversified financial landscape – a benefit to corporates that has arisen from the financial crisis.

“The great thing about the global financial crisis is that a lot of companies learnt the disadvantage of putting all your eggs in one basket,” described Mark Wyatt, Chief Risk Officer of Falcon Group. “Specialist financiers offer an opportunity to diversify funding sources, which – as the crisis demonstrated – is critical.”

Certainly, the more options, combinations of options, and sources a corporate has access to, the lower the chance that they are left unfunded should another financial crisis occur.

“Supply and demand” is perhaps one of the most fundamental concepts of economics. Yet when it comes to corporate funding, the global banks – even if out of their control – have been unable to deliver. As the speakers at the Falcon Dubai event stressed, however, the rise of specialist financing and the diversification of the financial landscape means there is still hope. – TradeArabia News Service