Correspondent banking key to trading in Middle East

The Middle East offers limitless trading opportunities; the key to making the most of them lies in correspondent banking

 
Author: Ralph Nitzgen
November 29, 2013

Exciting things are happening in the Middle East. The region is due to invest heavily in infrastructure projects over the next decade. It is also one of the world’s fastest growing consumer markets – showcased by the world’s largest shopping mall being located in Dubai. And it continues to grow as a trading hub, located conveniently between Europe and Asia.

Statistics are beginning to demonstrate a realisation of Middle Eastern promise. WTO statistics showed that – while UAE foreign trade decreased by 20 percent from 2008 to 2009 – by last year, turnover had risen to over $520bn, well above the pre-crisis figure of $416bn.

[W]ith Asia showing signs of growth fatigue, the Middle East is becoming everybody’s favourite region

Many European firms are searching for opportunities in the aftermath of the eurozone crisis. And with Asia showing signs of growth fatigue, the Middle East is becoming everybody’s favourite region. That said, economic uncertainty remains – and mixed with concerns regarding political violence and general upheaval – many corporates are understandably cautious. It is in marrying the concerns with the real opportunities that brings correspondent banking networks to the fore.

Import sector opportunities
Infrastructure developments are certain to fuel trade. Qatar is a particular hotspot in this respect. An estimated $100bn in infrastructure projects, such as the Doha Bay crossing and the Doha Metro system have been commissioned.

In order to take advantage, European corporates must leverage their expertise, as they are unlikely to win a straight cost-competition with major Asian constructors. This means specialisation, although in this respect opportunities abound. For example, it was a German concrete-pump maker, Putzmeister Holding, that pumped concrete to new heights in the construction of the Burj Khalifa in Dubai, the world’s tallest skyscraper.
By using specialised knowledge and long-established reputations, European companies can win significant involvement in these major projects.

In fact, the same attributes can be applied in other sectors. The consumer market in the Middle East, for instance, is experiencing some of the fastest growth in the world.

One example is Dutch retailer SPAR, which is taking advantage of the increasing popularity of convenience stores in the Middle East. It opened its first shop in the UAE in 2011, and is now looking to expand across the region.

With such vibrant growth and activity, opportunities seem boundless. Yet this potentially vast trading corridor between Europe and the Middle East has its blockages – with payment risk being a concern. As a result of the 2008 crisis, letters of credit (LCs) re-emerged as the mitigant of choice for alleviating the spike in credit risk concerns.

LCs usually require local bank involvement, which demonstrates the importance of a strong international banking network. During the financial crisis, it was correspondent banking that came up trumps, because many global banks retreated towards their home market, leaving constraints in trade funding and risk mitigation. Local banks became vital, both for local corporates and their international trading partners. For instance, when it came to securing the handling of trade flows – despite a spike in perceived risks during the crisis – local banks proved that their knowledge of local companies was critical to keeping trade flowing.

Breaking down the barriers
Correspondent banking relationships between Middle Eastern banks and international financial institutions offer more than simply LC issuance and confirmation. A new collaborative correspondent banking model is emerging that combines local knowledge and on-the-ground presence of regional banks with the global transaction expertise and IT platforms of the international banks.

Such a system can reassure European corporates that – through collaboration – their bank has a thorough understanding of the risks of local trading norms and regulations, as well as the capacity to use this knowledge to support trading requirements.