GCC corporates explore alternatives as bank liquidity dries up

August 2017 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

August 2017 Issue

Corporates in the Middle East are faced with a new reality. The banking landscape has changed beyond recognition, leaving them looking for funding alternatives. The root cause of the change is, of course, the shrinking revenue deposits for Gulf Cooperation Council (GCC) banks caused by the prolonged slide in oil prices.

Although the Organization of the Petroleum Exporting Countries (OPEC) agreed to extend production cuts until early 2018, surging US output is still preventing the oil market from reaching a healthy equilibrium. As a consequence, the banks remain constrained – meaning GCC corporates are facing higher funding costs and lower loan growth.

And, with this drought in bank liquidity unlikely to end anytime soon, the region’s corporates have been turning to alternative financers for their funding needs.

A need for innovation

Certainly, the funding problems appear endemic. Oil exports, which have historically comprised the majority of the GCC region’s revenues, fell over 17 percent between 2012 and 2015. And although most GCC countries maintain substantial savings to cover possible deficits, this sharp decline in revenue has contributed to the region’s need to impose spending cuts – averaging 27 percent across the GCC area – in order to alleviate deficits.

The result has been a freeze on public sector employment, as well as a hike in energy prices. But it has also resulted in a squeeze on bank liquidity – a reflection of the state’s still dominant role in Middle East banking. And this, of course, has led to the retrenchment in bank lending.

Bank lending has not disappeared entirely, although when banks do lend it is likely to be to larger corporates and at a much higher cost. Indeed, interbank rates have gone up significantly in all GCC countries and, given that GCC currencies are pegged to the US dollar, these rates are only set to increase as the US Federal Reserve continues to raise interest rates.

And all of this is taking place against a macroeconomic backdrop of tightening global liquidity. An uncertain global economic outlook – including a slowdown in China and a sclerotic recovery in Europe – has led to both banks and financial institutions adopting a guarded view with respect to investment and lending.

Meanwhile, regulatory constraints in the form of Basel III capital rules and International Financial Reporting Standards (IFRS) 9 have also placed pressure on GCC bank profitability. While such measures are intended to boost bank resilience, they are costly and have implications for volumes, pricing and bank lending structures.

Funding gap for businesses

Yet, despite this concerning landscape, the need for funding remains critical for business – resulting in a gap between demand and supply with respect to lending, whether for working capital, trade or expansion. Indeed, a report by Marmore MENA Intelligence in 2016 estimated that there is close to a $26bn gap in small and medium enterprise (SME) funding in the MENA (Middle East and North Africa) region.

In this environment, companies aiming to achieve positive growth and fund their expansion – or support their day-today operations – need to find a reliable form of financing. And that means looking at innovative solutions.

New platforms have already started to transform the financial services industry in the Middle East, as well as provide businesses with a variety of non-traditional funding options such as crowdfunding. More importantly, they are increasingly providing companies with options to diversify their funding lines.

Unhampered by the same regulatory restraints that regional and global banks face, alternative finance firms are able to fill the funding gap through innovative solutions and sophisticated financing structures. Additionally, by tailoring financing solutions to clients’ needs in the GCC region, alternative finance firms are able to provide corporates with the tools they need to expand into new markets.

Indeed, with the global reach and adaptability these firms provide, corporates often find that specialist financers can accommodate their individual goals to a greater extent than their traditional house banks.

For instance, they can look at financing inventory or supply chains, which allows flexibility in terms of security – meaning the companies that struggled to win financing (especially given the current constraints) can do so when their supply chains or inventory are taken into consideration. Also, specialist financers can be more adaptable with respect to timing – often able to offer financing quickly, or perhaps plug a particular financing gap or circumstance.

Not bank rivals but partners

Although smaller regional bank lenders remain an option for SMEs and companies seeking trade finance, funding limitations will make it difficult to accommodate all demand.

So, specialist financers should not be considered competitors to the banks – global or local. Rather they should be considered partners. Specialist financing can be combined with bank lending to achieve the best of both worlds: the resources of a global bank and the flexibility of a specialist.

Such diversification, through the use of alternative and specialist finance, is one way GCC corporates are achieving security and stability during a time of increased regional volatility. In fact, the Cambridge Centre for Alternative Finance reported that total African and Middle East alternative finance markets grew by 59 percent in 2015 – a figure that is certain to rise in the years ahead.

Emma Clark is head of business development, UK and Europe at Falcon Group. She can be contacted on +44 (0)20 7337 6200 or by email: emma.clark@falcontradecorp.com.

Emma Clark

Falcon Group