Cash Management - The Middle East Perspective
“A banker is a person who lends you his umbrella when the sun shines and takes it back the minute it starts raining.” – Anon.
Bankers and banks have become much more sophisticated in lending techniques, funding arrangements, working capital finances, trade finance and the ever-mysterious cash management.
Cash management has traditionally been a mystery – both to the bankers and to the customers as to what it encompasses, what it does not do, what it does, what it cannot cover, what are the perceptions and what are not, etc.
When I began my career in banking through different countries and banking institutions some 25 years ago, the phrase ‘cash management’ meant the traditional cash counter in a bank branch where the customers lined up all day, trying to get a cheque encashed or to deposit the earnings in cash. It was always (and possibly still is) cash, which was managing the customer and the bank, and the efforts of bankers and customers to manage cash were more an exercise in distress than an exercise of direction.
From the traditional days of cash deposits and withdrawals, companies and banks started looking into different areas of managing the corporate cash: how to collect, when to collect, where to deploy, how to deploy, what are the risks and what are the returns, and what are the balances between liquidity, safety and return.
The traditional cash management methods simply meant collection of cash or cash equivalents was with the customers (as it still is with majority of customers) and banks have come to play merely an agent role in the whole collection process.
As times have grown, the businesses across locations, countries and continents grew into multi-unit or multi-location businesses, generating revenues and incurring costs in different locations, many times in different currencies across locations. This made the life of corporate accountants very miserable (it was never easy at the best of times), whose working life earlier was just to add and subtract the cash and borrowings across the locations. Then there was a realisation that it makes sense to centralise or pool the cash resources and costs, so that centralised care for the resources could be achieved, thus giving birth to centralised or global treasuries that manage a complex variety of cash and trade and treasury/FX positions, sitting in a single location. The growth of communication methods has hastened the process of centralisation and cash management, which was just a matter of plusses and minuses until then, slowly started to grow into the hitherto unheard of proportions and directions.
While the financial world adapts to changing business structures, no business or country shall be left generally far behind in the race to riches. While each country and segment runs the rat race, in relation to its competitors or the changing financial situations or solutions in the world, it is not far behind that other countries can also follow suit, sometimes at astonishing speeds. Many times those who are late into the race can go on to become the pacesetters in a certain field. I remember the famous proverb: “the early bird catches the worm,” but please do not forget the later synonym that says: ” the early worm is the bird’s prey.”
The Middle East region, which includes countries like UAE, Oman and Qatar, has kept pace with the growth in such business ambitions and cash management is also not to be left out of this race to riches, as businesses continually explore opportunities to make more money, more profits and reduce costs.
The excellent growth climate in countries like UAE, fuelled by ambitions and visions of the rulers and the business community, has resulted in opportunities, growth of infrastructure, access to international and other funds through opening up and freehold real estates, trading environments, the presence of more ‘free zones’, creating a healthy and open competition for the survival and growth of the fittest, etc.
Middle East, especially the UAE, has recently seen an influx of many multi-national companies (MNCs) setting up their regional offices, treasury offices, marketing offices, etc. in UAE and managing the global operations. To attract such MNCs into the region, financial and general free zones plus offshore financial centres have sprung up everywhere with the intentions of inviting the best of MNCs to come and have their shops opened in these countries. The absence of tax regimes has added to the attraction in these markets.
These companies typically need 24 hour Internet access, sweeping and pooling of funds and balances across banks and branches, competitive FX and deposit rates, competitive temporary overnight overdraft interest rates and credit interest on overnight floats.
The ideal location of Gulf Cooperation Council (GCC) countries in the global map, the growth of communication, infrastructure, Internet, etc. have led to the explosive growth of such companies in the region.
GCC is predominantly dominated by a number of local corporates or companies or family owned businesses, which are typically owned by large local/national families of businessmen. Most of these families have very successful and historic track records and have been associates/local representatives/agents for most of multi national brands from all over the world. The local regulations for a sponsor from a national has been a great aid in ensuring that the multinationals tie up with these local corporates for mutual success of business lines. While the MNC does the production, transport, marketing support, service association, etc., the Local Corporate typically takes the local marketing and sales realization risk, like any MNC agency. This combination of MNCs and local corporates has worked very well historically in the GCC with the result that there is a successful association of MNC brands and families in the GCC.
In many of these countries, the lack of restrictions such as taxes, financial regulations to publish books of accounts and audit, etc. have made the operations of such corporates mostly family driven.
Recently, and especially in the last four to five years, GCC business families have started expanding into other countries in the region and also into countries in East and North Africa and other parts of the world, where investments in assets and business yields good and long-term returns for the business houses. In other words, the local corporates have been the opposite of the MNCs coming and operating into the GCC, and typically such local corporates are slowly growing and reaching the sizes of MNCs, albeit the growth into other competitive countries like Singapore, UK, other parts of Europe and the US have been very limited or generally non-existent.
GCC has been historically characterised by a host of mid-sized trading companies, thanks to the general economic growth, healthy competition, absence of taxes and rules regime and a general absence of governmental red tape. Today, people of most GCC nationalities could come and start a business in any of the Free Zones in their own name, or if they choose to partner a national, they can start the business anywhere in these countries, with very limited capital and resources. The laws and business conditions have been very conducive for the mushrooming growth of such mid-sized companies, which have thrived, in the general economic upswing in the Middle East.
While it is extremely difficult to list out the number of these companies, it is generally felt among banking community that the number of mid-sized corporates or companies (along with the small and medium enterprises (SMEs)) might currently be in the region of 15,000 numbers in UAE alone. This brings an exciting opportunity for smart entrepreneurs who thrive on such opportunities as also for smart bankers who have built a portfolio of such assets and relationships.
On the cash management front, such small companies do not have many demands except that they require immediate and urgent funds clearance, remittances for payments, overnight float interest, good interest rates for deposits, etc. Many of them are also computer or Internet savvy and would be happy to use such online services to transact with their banks.
SMEs have been the sleeping giants in the GCC business world, but they have now woken up to be a mid-sized monster. While banks are repeatedly facing the ever-decreasing margins (be it in interest rates, commissions, charges or any form of income to the bank) in the MNC and large corporate segments, it is the SME that has come as the boon for the dwindling revenues of banks. SMEs have been the ideal examples for the usual risk philosophy of ‘higher the risk, higher the return’. SME segment today offers the highest interest rates and margins in terms of lending – sometimes as high as 600 to 800 basis points over LIBOR/DIBOR, not to mention the amount of charges and commission. The risks of such SMEs have been mastered by many banks to offer an excellent basket of spread-out lending while keeping an eye on high margins.
These SMEs will be the lifeline of banks in the next six to 10 years, and I personally believe that among the corporate income of banks, SMEs will represent the largest amount of this income. They could represent 70-80% in four to five years from now. This is an educated guess on what may happen, based on what is happening today.
By and large, through a combination of advanced or lower end IT systems, manual processes and controls, banks in GCC have been able to offer the following types of cash management services and products.
Account services generally denote the nature of various account services offered by banks towards all the customer segments, such as:
On corporate cash management in the GCC, V.P. Nagarajan, executive director at Emirates Trading Agency – Ascon Group, says: “Corporate cash management is an important tool of corporate finance today and, as days pass by, cash management will be the centre point around which the functions of finance will revolve. If we have a financial crystal ball and look into the future, we can visualise a corporate cash manager juggling his financial resources across the world in a computer the size of his palm. At the press of a button, he will be traveling over the notional financial super highway (which should take about a few seconds to reach the other parts of the globe and the universe) for a virtual reality decision across. Some of the easier decisions in those days will be there will no physical currencies (saves a lot of printing and paper expenses), no multiple branches of banks (all of them will be operating from internet or computer driven global centres), and still there will be the cash management sales bankers who will come and try to sell what they do not have.”
Hopefully corporate cash management will see a world of change as we move forward.