It is evident that the Middle East is witnessing rapid growth in demand for both supplier finance and receivable finance solutions for the supply chain. While this trend is largely fueled by large corporates, it is the SMEs that remain the main beneficiaries of supplier finance programs. Were it not for this trend, small businesses would find it difficult to secure low-cost finance.
However, the current economic slowdown, liquidity crunch and the often perceived high risk of doing business in the Middle East have acted as a catalyst for non-recourse financing structures. These are largely motivated by the prospect of offloading non-payment risk of the buyer to the financier. This situation poses several challenges for financiers.
To begin with, there is a lack of regulatory framework in the region to govern or support such products. This makes it subject to individual whims, which is never a heartening proposition when it comes to funding. The absence of a regulatory framework also increases legal risk in the form of lack of precedence when it comes to complex financial structures.
That said, while the issue of assignment of receivables is relatively better established in the UAE, this is not the case across the broader region. Lack of credit appetite for such products also remains a problem and is attributable to the fact that this is largely untested in the region.
The Middle East can benefit from more publicly available credible information on counterparties. Despite the fact that several global and regional agencies have set up their operations in the region, there is a dearth of data. Even when it is available, the process of accessing it is either expensive or time consuming. Finally, there is naturally the fraud and flight risk. This is something that is unique to this region and casts a shadow over any credit decision.
Despite all the challenges, I am convinced that technology and blockchain, in particular, will gain increasing relevance in the Middle East once the market matures for new products. The peripheral ecosystem opens up to transparency and connectivity and the concept of marketplace becomes more prevalent compared to today's bilateral product offering. However, until then, blockchain may merely be an enabler rather than a disruptor, bringing efficiency within the existing platforms which is not a bad thing.
There are other trends influencing the supply chain finance, too. Take Internet of Things (IoT), Machine Learning (ML) or Artificial Intelligence (AI), these new technologies will further improve efficiency and play an invaluable role in supply chain finance. For starters, predictive and trend analysis using AI and ML can help the banks in its decision-making process to adjust limits and maturities. Secondly, fraud prevention using AI will also become a game changer.
Additionally, optical character recognition (OCR) for quick digitization of hard copy documents, e-invoicing to eliminate paper invoicing practice, auto reconciliation using AI and ML to reduce operational load and increase efficiency, and finally, self on-boarding tools and user validation techniques will help to authenticate users and mitigate fraud.
Today, several companies in Europe use fintech platforms to manage their supply chain finance requirements. However, it remains a challenge for banks in the Middle East. If we are looking at this from a purely practical point of view, then one can make the argument that the market for supplier finance product needs to mature, as is the case in Europe. This needs to happen before we can reap the full benefits of fintech offerings. However, fintechs do serve a purpose as a faster source of finance for small entities that may not have access to adequate resources to implement a comprehensive supplier finance ecosystem.
If we are to provide our customers a set of viable solutions that solve their problems and address their concern, then the only way forward is banks and fintechs complementing each other rather than competing. The banking and the supply chain industries continue to transform at a rapid pace and embracing technology rather than resisting it, will soon be the reality.
For banks to succeed they will need to design and introduce a new ecosystem which should complement and tackle the shortcomings of some of the challenges discussed above so as to address the customer and market needs.
By Karim H. Labadi, Managing Director, Head of Global Transaction Banking (GTB) at Mashreq Bank