Cash Management: Changes in the Gulf Region
Cash management, like most areas of human endeavour, combines both unchanging guiding principles with constant change and innovation. The goals of cash management in the modern era are, as always, to manage cash positions across a number of accounts, either for oneself or one’s customers, ensure the best usage of this cash, provide access to funds at a reasonable cost, and thus allow business to continue in a stable and predictable manner. Although the principles do not change, the circumstances are in constant movement, and in a dynamic area such as the Middle East one must move forward or fall behind.
Probably the most significant change of recent times took place in January this year with the introduction of the Gulf Cooperation Council (GCC) Common Market. This was a leap forward in the integration of the Gulf customs union, extending beyond the previous free movement of goods and services to cover labour, property, education and capital.
These developments in the GCC are often compared to those in the European Union (EU) over the last 40 years. In the early days of the EU, the effect of the Common Market was to considerably increase the level of trading between member countries, which in turn led to an increase in the volume of business for EU banks as more corporates traded cross-border. The increase in the complexity of trading networks led directly to growth in the number of accounts under management, in the levels of service required by corporate customers and hence in the size and complexity of the workload of cash managers.
Following the Common Market, one of the most significant changes on the horizon in the Gulf area is the arrival of the common GCC currency, or Gulf dinar, expected to commence in 2010. Experience from the introduction of the euro suggests that this will have a fundamental impact on financial institutions in the area, opening up new opportunities, enabling significant efficiencies, triggering further transformations and also sharpening competition.
In the EU, the primary effect of the euro was to allow financial institutions to be more efficient in their management of cash, as the issues of foreign exchange (FX) risk inside the eurozone were removed. As banks became accustomed to managing in a single currency, they were able to aggregate accounts, thus simplifying structures and lowering administrative overheads. The success of the euro transformation led subsequently to further efforts to lower artificial barriers to the movement of cash. This gave rise to, among other things, the single euro payments area (SEPA), which enables account transfers within the EU to be transacted at the same cost regardless of borders. SEPA is in its early days, but its impact has been to further lower overheads and to allow simplifications in account management. The effect of this is allowing customers to rationalise their accounts, to be more demanding of their service provider and thus to spur increased competition for their custom.
There is every reason to suppose that the effects of the Gulf dinar will be similar in the GCC. The Gulf is a hub for both the Middle East and the three continents meeting there, with huge amounts of cash passing through the area. Furthermore, with the rapid development and expansion of financial powerhouses such as Dubai, there is the vision and scope to push these developments to their logical conclusion, removing further trade and cash barriers. There is also the ability to execute these aspirations with the development of a local financial IT infrastructure.
Despite the similarity with the EU and euro, clearly the Gulf has its own unique history. The changes to consolidate the Common Market and the move towards the Gulf dinar will require changes in the economies and regulatory environments of the member states.
The success of the EU market was in part due to the already integrated nature of the European market, with around 60% of trade already done inside the zone. The Gulf States by contrast have economies where export out of the area is typically around 70% to 80%, driven largely by oil. The success of the Common Market is likely to depend on, and lead to, a marked diversification in these economies. This diversification will itself also lead to a considerable increase in the workload on, and opportunities for, cash managers and the levels of service demanded.
The success of the euro is in large part due to a tradition of strong regulation in the financial arena and also to a strong central regulatory body that has had the authority, despite occasional rebellions and resistance, to guide the behaviour of constituent countries’ central banks. The GCC and its member countries will need to work on enhancing the powers and authority of regulatory bodies in order to build a solid market and currency. The result of this will be to make cash managers’ jobs more challenging, but also more interesting, once the mundane work of handling the larger volumes has been automated.
These factors create new opportunities for banks in the area but also heighten the risk of being left behind due to greater competitive pressures. This new world can be a catalyst for building a stronger and more profitable business, but demands a commitment to a quality IT infrastructure.
Institutions that attempt to seize the new market opportunities with patched up solutions, or in extreme cases using home-grown spreadsheets, are likely to face problems. Automation is central to handling rising volumes and complexities, reducing the risk of manual entry and re-keying of information. Crucially, it frees up experienced and talented cash managers for the true value-added work of investigating exceptions to ensure service levels are maintained and improved. With less time spent on the menial tasks often required by manually-intensive processing, they can then concentrate on getting the best return on customers’ cash and providing funds at the best cost.
To achieve this, financial institutions in the Middle East will need to ensure a solid technology foundation for their cash management operations based on two key principles: the ability to scale to meet greater volumes and the flexibility to include both local and international processing requirements.
Scalability is essential because volumes will only grow and the solution must be able to grow with them. A bank can then take advantage of the continual decrease in the cost of commodity computing power to deliver matching growth without exploding costs.
Institutions must look for a solution that can fit their own IT environment and business practices, as each customer brings their own unique requirements. To ensure that a cash management solution can be adopted within reasonable budgets and without undue disruption, the solution must be amenable to integration through rich configuration tools.
A further advantage of a truly flexible cash management solution is the ability to both deal with change and variety and fit coherently around basic principles. Some customers will seek strict adherence to Sharia financial principles and a solution must be able to properly enable non-interest-based cash management over a range of mechanisms (perhaps Bai’ al-Inah, Mudarabah or Qard Hassan). Given that much of the rest of the financial world is focused on the use of market interest rates, a solution must combine the two options cleanly together without confusion to enable true cross-border cash management.
Flexibility around business rules and workflows is critical, allowing the introduction of new cash balance types, new transaction types and new calculation procedures depending on these. Furthermore, institutions will need to integrate the solution as simply as possible into their internal source systems, so the solution must map to almost any input data format. This will ensure the solution to keep up with constantly changing message standards, such as the upcoming SWIFT MX real-time cash management messages in November 2008.
Integration with payments and ledger systems is also essential, so outgoing message support must also be flexible. Finally, the solution must support visibility into and control of the business processes, which, given the variation in these processes, means that it must enable institutions to build business-specific screens, analysis screens for managers and create reports either itself or through a third-party application.
The one thing that is certain in the Middle East is change. While some of the future is sketched out, for example the Gulf dinar, much still remains to be set in stone. Therefore, if financial institutions in the region, both local entities and the operations of larger global players, want to ensure future prosperity, it is essential to move with the times. While the pace of change in Middle Eastern cash management is a challenge, it also provides an opportunity to put in place solid foundations for growth. Central to that will be a flexible IT infrastructure and technology that enable an institution both to align with its guiding principles and to adapt to an ever-changing world.