Corporate Treasury Management in the Middle East
Mid-market companies were the hardest hit by restrictions placed on the availability of funding, because larger corporates had contingency plans in place while smaller ones didn’t. The corporate sector is now coming out of recession, paticularly in United Arab Emirates (UAE), where industrial output and trading activity have strongly come back. However, banks are still conservative in their approach to lending, so trade and supply chain finance has continued to play a very important role in the provision of financing.
There has been a significant growth in factoring volumes since 2008, and industry trends indicate this is likely to continue.
There is demand for converged cash and trade solutions in several companies, and there is growing awareness of it as a source of liquidity, as the need to effectively manage working capital throughout the supply chain is driving much of the need for integrated cash and trade solutions.
The movement towards open account trading and the need for improved risk management are also playing a part. There is an increased focus on the risk management of working capital, and this has led to more attention being placed on the integration of cash and trade, as this discipline can enhance the risk management process.
The strongest demand for converged solutions is seen coming from mid-market companies, which typically have smaller treasury departments and fewer people responsible for managing relationships with financial institutions. These companies are looking to manage the human resources they allocate to managing cash and trade more effectively, and also want to drive efficiencies in the way they work.
They are increasingly looking for a wide range of banking services in a single proposition – a comprehensive solution that enables them to view all their bank services and make transactions via one single screen. They are looking for one working capital management solution, which can also provide visibility into trade conducted on an open account basis and manage accounts receivable (A/R) and accounts payable (A/P) with suppliers.
It has been common practice for larger corporates to have separate departments within their organisations responsible for managing relationships and accounts with banks in relation to trade, treasury and liquidity. Large corporates have also tended to use a larger number of banks.
However, changing business needs are driving the integration of these separate functions. In some companies there is growing recognition that this business model is in need of unification, and banks can help them move towards the use of common channels and products to enable them to share expertise across the spectrum. In many corporates, change is inevitable, as they come under pressure to rationalise. In others, the need for change may be felt to be lesser and they may be comfortable with the existing model.
Movement towards using one channel for bank services is also in line with corporates’ and small and medium-sized enterprises’ (SMEs) increased adoption of enterprise resource planning (ERP) systems, which are being used to unify and automate a number of corporate functions.
Many local banks are now cross-selling cash and trade products, and they are cross-training their cash and sales teams so they can talk to customers about a combined cash and trade proposition. They are restructuring the way these products are bought and sold.
Local banks are well placed to offer converged solutions to SMEs because they have always placed a much stronger and consistent focus on mid-market clients and SMEs as a customer base than foreign banks, which tend to focus on multinationals and larger corporates. It is these segments, in particular, that are looking for greater efficiencies in cash and trade.
However, it needs to be recognised that some banks follow the older model of offering cash and trade solutions separately, and that they need to place a greater emphasis on the creation of truly integrated solutions. Having a single bank channel for cash and trade may not make the converged proposition come true, although this is often a first step. For some local banks greater product development work is required so that they can offer a total proposition. Both single channel and product development are in progress across banks in the marketplace.