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Interview- Finance Monthly magazine, April 2015

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Interview- Finance Monthly magazine, April 2015

  1. 1. Abrar Ahmed, Head of Trade Finance, Crown Agents Bank, talks about the challenges and opportunities for trade finance in emerging markets, such as sub-Saharan Africa, working with Global Trade Facilitation Programmes and managing long-term relationships with importers, correspondent banks and exporters Abrar Ahmed, Crown Agents Bank SPOTLIGHT ON... Trade Finance and performance guarantees, counter-guarantee issuance, invoice discounting, bills discounting, documentary collections, forfaiting, etc. What additional assistance is Crown Agents Bank providing in terms of support of exports into the developing countries? Our parent Crown Agents is an international supply chain specialist and, with support from Crown Agents Bank, it has supplied capital equipment on medium term credit (5-10 years) under Export Credit Agency schemes to countries in sub-Saharan Africa and the Caribbean for many years. With over 180 years of experience of supplying goods and services with an annual spend in excess of US$1 billion (€940 million); Crown Agents understand how to achieve the best price at the right quality and at the right time. Transactions financed have included a water treatmentplant,fruitjuiceprocessingequipment, tug boats, fire engines, refuse compactors, cotton ginning equipment and buses. Crown Agents and Crown Agents Bank can offer a complete supply and finance package in one contract covering capital equipment, shipment, insurance and finance. This is particularly relevant where equipment needs to be sourced from multiple manufacturers in various countries where, individually, they may not qualify for finance under Export Credit Agency schemes. In 2014, Crown Agents Bank was one of 20 banks appointed to a panel of banks approved by UK Export Finance (UKEF) to arrange and administer loans under its £3 billion (€4.14 billion) Direct Lending Facility. This enables Crown Agents Bank to work directly with UK companies and to arrange finance to support their exports. Projects with a contract value of between £5 million (€6.9 million) and £50 million (€69 million) can be considered where the UK content represents at least 20% of the total contract value. Finance can be arranged on fixed rates of interest, which is a very attractive feature in the current low-interest rate environment. As a bank with one of the lowest minimum loan values on the UKEF panel it allows us access to a broad customer base in underserved markets. Adding value to the supply chain and maximising revenue streams from all complementary business units is fundamentally important, and through Crown Agents’ proprietary logistics entity, Greenshields Cowie, we are able to provide incremental services such as the provision of transit insurance cover and freight- forwarding services; added enhancements to our service delivery which bring repeat transactional business. Innovation and the ability to adapt to a dynamic environment remain central and provide vital differentiating factors to our success. With our sister company Crown Agents Investment Management Ltd (CAIM) we share a common base of central bank clients, which allows us to exploit synergies between the two companies. For example, we have recently perfected an arrangement whereby security instruments and funds held under management by CAIM on behalf of a Sub-Saharan central bank have been committed as collateral to support our LC confirmations of the central bank’s LCs to cover import of strategic commodities. With a formal legal opinion over our right of set-off in place, we are now able to accommodate higher value transactions for the client which our balance sheet might otherwise not have been able to accommodate. What challenges, if any, do you face in growing your trade finance business and what infrastructure is in place to allow for expansion? Trade in Africa presents unique challenges in terms of financial infrastructure and regulatory compliance but also significant opportunities in fee income, under South-South trade and also intercontinental trade transactions. Significantly, trade flows within this corridor is increasing at a faster rate than trade flows in the developed-to -developed and developed- to-emerging marketing corridors and by 2030, is expected to represent 40% of global trade. The need to optimise efficiency within cost and balance sheet constraints are major challenges for any bank. To support our core product offerings, we are establishing risk-distribution platforms by partnering with The finance of international trade is a specialised field. How does Crown Agents Bank assist in this area? And what is the scope of your service and offerings? Though our provision of services to our parent, Crown Agents Limited (Crown Agents), over many years, supporting its procurement and tendering activities, we have gained an intimate knowledge of developing markets and expertise in providing structured trade finance solutions appropriate to such markets. It is becoming increasingly clear that although the size of lines is important to the commercial banks, this is often secondary to considerations of efficiency in service delivery and speed of turnaround. The efficiency of our cross-border trade solutions continues to be key to our development in providing confidence to our importing clients and in engendering credibility with overseas exporters. It is vital to ensure that the supply-chain is not frustrated and we work behind the scenes with our clients by holistically reviewing underlying contracts, proforma-invoices, purchase orders, etc. so as to ensure that the instrument meets the needs of the exporters the first time around. Examples of product offerings include LC confirmation, LC issuance, issuance of demand trade finance liabilities through requiring the provision of cash collateral or other collateralised assets, but with substantial growth in GDP throughoutAfricaandanincreaseinforeigndirect investment, commercial banks in this region are now in a position to grow their balance sheet and attract high net worth clients. With this comes an increase in demand to remain competitive and secure unfunded trade lines with overseas correspondent banks. We therefore adapted our strategy and we now offer unfunded trade lines to carefully selected target clients. Underpinning this strategy are our regular country visits to meet our clients face-to-face. This enables us to obtain a clear understanding of the clients’ requirements, changes in their business strategy and to inform our risk assessments. Our holistic due diligence approach to trade finance transactions focuses on understanding the supply contract and the stakeholder clients for each transaction that we are involved in. As a niche bank, with a niche client base, many of the trade transactions that pass through our books are repeat contracts with the same importer/exporter clients. This enables us to develop a strong connection and familiarity with the clients’ businesses and trading patterns. You work with emerging and fragile markets, what risk mitigation strategies do you employ with regards to trade finance? We have recently conducted an overhaul of our risk management strategy and established a strong risk infrastructure to support controlled growth.Overthelastfewmonths,wehaveinvested heavily in resources, not only to strengthen our risk, compliance and credit departments, but we have also invested in risk/screening software solutions. This has allowed us to accommodate an increase in client on-boarding, and for risk assessments and transactions to be conducted speedily and effectively. Fraud, money-laundering, dual-use goods and sanction breaches are inherent risks faced by trade finance banks and although we take com- fort from our robust on-boarding process and our selective clients and markets, we additionally subject transactions to referrals to the Interna- tional Maritime Bureau and to Worldcheck. Our relationships with central banks in the developing countries are key factors in informing our risk appetite in terms of assessment of sovereign, political and credit risks in challenging markets. Our policy has, until recently, followed a process of securitising the major part of our Tel: +44 (0) 208 710 6614 | Email: abrar.ahmed@crownagents.co.uk Trade in Africa presents unique challenges in terms of financial infrastructure and regulatory compliance but also significant opportunities in fee income, under South-South trade and also intercontinental trade transactions ““ Spotlight On...Spotlight On... FINANCEMONTHLY 9190 www.finance-monthly.com
  2. 2. key FIs, for the sale and purchase of trade risk and to provide tools for effective risk diversification. A key feature of maximising utilisation of lines will be the ability to establish partnerships with FIs in the primary market and purchase trade receivables in the secondary market booked against spare capacity under our correspondent banking lines. Conversely, a downstream distribution channel will allow us to diversify our risk base and allow us to make the best use of contingent lines and allow us to handle the incremental trade of our client banks. While mindful of the retention of our existing clients we have embarked on an ambitious exercise to identify and broaden out our client base, and we have identified potential appetite from new and exciting prospects, for whom we have an ambitious client on-boarding exercise completing due diligence on around 60% of all opportunities. Turnover of around £600 million (€825 million) is targeted by FY19. We are an approved confirming bank under the respective Global Trade Facilitation Programmes of the ADB and the IFC, and this also allows a degree of flexibility in being able to confidently undertake significant high value transactions. Currently, we are progressing similar potential relationships with the AfDB and the EBRD. The latter will provide a strong platform for our future aspirations of forming correspondent relationship outside Africa and Asia. Similar partnerships with ECAs such as UKEF in providing guarantees under short-term finance are also in progress and once complete, this will allow us to actively target UK exporters transacting into the developing sectors more effectively. Capital adequacy considerations under Basel III are also driving banking innovation. An interesting development in the trade finance sphere has been the recent rise of private equity investment to support banks’ trade finance activities. Such investors understand the inherently low risk, nature of ‘vanilla’ trade transactions and allow enhanced returns on the investment over the interest margins in the form of fees. With the global interest platform at a low level, investors are increasingly keen to capitalise on alternative deployment of assets, generating higher returns in the form of fees under the related trade transaction. Standardisation of underlying documentation such as the BAFT MRPA is also harmonising the processes and providing confidence to banks and investors. We are presently in discussion with fund management companies whose clients are targeting returns from the stability of trade assets directed to markets such as Sub-Saharan Africa where (with the entrenchment of prime banks due to reasons of risk and operational efficiency) there are greater opportunities to grow our business and achieve higher fee returns. To add further value to the supply chain, in addition to core product offerings, our future offerings may also include facilities under back- to-back LC confirmations, and pre and post shipment finance to carefully selected corporates. The global trade finance market has experienced periods of stress, most notably right after the Lehman bankruptcy in 2008. What has changed since then and how have you adapted to these changes and client demands? One of the fall-outs from the 2008 Lehman and other contemporary crises has been the global regulatory reaction deeming trade finance activities as being somehow ‘risky’ and a perception that banks were disproportionately leveraging their balance sheets to generate higher returns. The scrutiny focused on whether the traditional view of trade and export finance as a low-risk asset class was still valid and the ICC coordinated a gathering of empirical data of loss defaults from its members by commissioning a report which evidenced that over a pool of 4.5 million transactions covering $2.4 trillion (€2.25 trillion) worth of trade the default rates ranged from a low of 0.0033% to 0.24%, significantly well below the 1.38% average default rate reported by Moody’s across all corporate products. The argument with the Basel Committee for a fairer treatment of trade finance activities so that the activities can be accommodated mostly off- balance sheet with lower product risk weighting is gaining ground and we have seen some accommodations and relaxations such as the waiver of the one-year maturity floor and lower credit conversion factors for certain products. There was also recognition that for countries coming out of recession, the re-establishment of trade lines and engagement with trading partners was key to increasing GDP. By following a fairly conservative business platform, maintaining high levels of liquidity, substantial risk diversification, a relatively low exposure under our unfunded lines offered to clients, and a focus on the developing markets, (where the impacts cascade down much later) we have been fortunate to have been able to ride out the storm relatively unscathed. Client demands for unfunded lines in the devel- oping markets remain high and, although our risk-appetite is tempered by a risk-averse policy, with a proportionately high level of liquidity at our disposal we are looking to offer larger un- funded lines to eligible clients to compete with their existing correspondents and to become the bank of choice for our correspondent banks. In fact, throughout 2014, we doubled our corre- spondent banking network and are looking to double up again by the end of 2016. Delivering and meeting the demands of customer expectations while keeping costs down is a question frequently asked by global trade executives. How does Crown Agents Bank approach this? We seek to ensure a profitable return through optimisingthatreturnwithinourriskparameters, risk diversification, the expansion of our client base, and through an alert management of cost/ income ratios. The challenge is to understand the service and product gaps in the market and focus on delivering these at a competitive price. A regular turnover of lines is key to ensuring that our income base is optimised and that our balance sheet is utilised more efficiently. How does structuring clients’ supply chain finance ensure that they are able to operate at optimum levels? The key to client retention and to ensure that their growth pattern aligns with that of our bank is to understand the supply chain and provide efficiencies where it might benefit to be injected. For example, cash flow is an important element where an exporter is often required to purchase raw materials or components for assembly prior to shipping and we are looking at ways to support exporter clients through pre-export finance, secured against future sales, discounting deferred payment undertakings, while on the other side of the supply chain we are looking at offering refinance facilities to importers. Over the last five years we have been heavily involved in supporting imports of strategic commodities such as fuel and fertiliser into East Africa. This has seen us financing the export supply chain in the amount of around $150 million (€140 million) through our discount of deferred payment obligations to major commodity traders. The facilitation has allowed the traders to offer credit terms to buyers under our tacit agreement to discount the proceeds and thereby ease cash flow. How have technological advancements benefited your clients’ requirements? We have recently undergone a transformation to our core banking system and have implemented a new trade finance system to capture all key static and transactional data. Such information will assist us to analyse trading patterns of our client base; to target new correspondent banking relationships and also to cross-introduce clients where there are commonalities in trade. As we scale up, we shall also be looking to offer clients the facility to input applications through a portal which would interface with our in-house trade finance processing system. This will achieve efficiencies by speeding up the application process, create uniformity and ensure that a single data capture point translates into the final STP throughput with minimal manual intervention. What would you say is your approach when analysing client requirements and drafting a plan? Our business development team draws on a depth of banking industry experience from not only trade finance but also cash management and treasury related activities. While trade finance business remains a key component of our projected business growth, our strategy is to consider and target clients’ requirements from a holistic perspective. Often, trade finance related activities will follow after a period of treasury related or payment services activity. This approach not only allows us to provide products and service appropriate to our clients’ needs but informs our business strategy and enables us to target clients and products that are likely to maximise income with an optimum use of our balance sheet. Business rationale is formed from a SWOT perspective and relationship accountabilities are distributed across relationship managers who have the closest connection with counterparts in a given region . Our clients’ requirements, whether we are dealing with a correspondent bank or dealing with an exporter, revolve around trying to balance the competing interests, such as in terms of pricing expectations and the conditions placed into the underlying trade instrument. For example, of primary concern to an importing client in the developing world might be the issue of overseas bank charges, which is often borne by the importer, or it might be the need to ensure that contractual conditions are captured in the LC. On the other hand, a dialogue with an exporter is likely to reveal its concern over onerous conditions and perhaps unrealistic expectations under an LC. Regardless, the key to a successful outcome is to be given the opportunity to review the contract holistically and focus on optimising each stage of the supply chain by providing appropriate risk-mitigation measures and cash flow solutions. Our aim is to build long-standing relationships with importers, correspondent banks and exporters,andtherebyensurerepeattransactions through gaining familiarity with the clients’ operational processes, engendering confidence in our technical expertise and being recognised as trusted partners. About Abrar Ahmed Abrar Ahmed is Head of Crown Agents Bank’s Trade Finance department and is responsible for business generation, relationship management and managing the Bank’s trade finance portfolio of correspondent banks and corporate clients, as well as providing consultancy services to the Crown Agents Group under various international procurement contracts. With over 20 years’ experience, he has previously been involved in management roles of trade finance departments at various international banks in the U.K. He is also an active member of the International Chamber of Commerce (ICC) U.K, participating in regular meetings of the Banking Technique and Practice sub-committee and contributes widely to on-line trade finance publications and global forums. About Crown Agents Bank Crown Agents Bank is a specialist provider of payment, cash management, trade and treasury services, focused on the needs of governments, development organisations, financial institutions and corporates. The Bank’s geographical coverage centres on emerging and fragile markets and offers tailored, practical and effective solutions built on deep local knowledge and experience of complex environments. With the global interest platform at a low level, investors are increasingly keen to capitalise on alternative deployment of assets, generating higher returns in the form of fees under the related trade transaction “ “ Spotlight On...Spotlight On... FINANCEMONTHLY 9392 www.finance-monthly.com

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