As the economies in the Middle East set to recover post pandemic, a renewed interest have been brewing to support SMEs, primarily since they were the one who were hit the most as their revenues dropped with the lockdown and so was the source of financing. SMEs play a key role in every economy across the world, generating large employment base and value added contribution across different trade sectors and industries. SMEs in the Middle East contributes to over 60% of private employment.
As 2021 kicks off with the large vaccination drive across the world, for bringing in as many population inoculated as possible, governments across the region have renewed their focus on bringing back SMEs to life. One of such initiative was from Abu Dhabi, where the government had pledged AED 6 billion to support SMEs across different sectors through supply chain finance (SCF) initiative. The first stage of the plan aims to enhance liquidity among SMEs in the healthcare sector. Banks and other sectors will also benefit in the ensuing stages of the initiative. A similar initiative can be seen in Saudi Arabia where Ministry of Finance pledged SAR 50 billion and three Kingdoms largest banks have started a supply chain financing facility that will enable contractors to secure funds owed to them faster.
For several businesses in the larger economies, supply chain and financing of it, has always been a lifeline in delivery of the service. However, with the outbreak and economic slowdown, liquidity crunch and often considered a high risk sector, acted as a catalyst for non-recourse financing structures. SMEs in the Middle East were no exceptions.
For several years, in the Middle East all international flows have been on LC’s (letter of credit) and confirmed LCs. Several corporates also traded on an open account through documentary collections. Having said that, supply chain financing have become increasingly popular lately and almost every bank in the Middle East either have their version of SCF proposition or are planning to have one. In addition to change in the trade finance landscape post pandemic, what is also compelling for the banks to look beyond traditional trade finance instruments, is being compliant to Basel III, as per which, it pushes the financial institutions to increase the amount of capital to hold against the certain assets.
The adoption of SCF in the Middle East has been relatively slow for the past few years since its introduction in 2008-2009 post financial recession. However, post COVID 19 pandemic, SCF has been looked with an enormous potential across different sectors as there are some of the key trends which are shaping future of supply chain financing in the Middle East.
Pre pandemic, one of the most discussed topics on digitization was difficulties of moving Trade Finance to digital documentation. With shutting down economies and major impact on global trade, financial institutions had no option but to digitize significant portion of trade finance operations which included SCF. Supply chain finance is also known as supplier financing or reverse factoring. The pandemic had tipped the balance in favour of the real change which was being discussed for very long but unfortunately not prioritised which resulted in a static and disconnected buyer-supplier collaboration points across supply chain.
Financial institutions have realised that proactive approach to using technology puts them in a strong position and by adopting some of the latest technology including blockchain, would allow them to bringing efficiency to their current process, which remained manual across fragmented systems for decades. Blockchain has already made a significant relevance in the Middle East as the market matures. There are other trends like OCR (optical character recognition), Machine Learning (ML) and Artificial Intelligence (AI) influencing the supply chain finance too in reduced risk, lend more efficiently, and connect customers to the suppliers.
Digitalisation has also brought new actors, such as non-banks and fintechs who are playing an increasingly crucial role in the sector by providing greater choice to companies, beyond traditional bank finance. Data analytics and platform services by fintechs are enabling the processing of data and delivery of funds highly automated, thereby increasing productivity and efficiency for all the parties involved.
With more focus on SCF as a mainstream financing tool for achieving balance-sheet efficiency and enhancing working capital across different industries, corporates in the Middle East have started engaging with their banking partner to become part of the ecosystem and achieve a win-win strategy.