As reported by Bloomberg, Credit Suisse “never really learned its lesson from the global financial crisis” of 2008. The effects of the crisis stirred by the missteps of this 166-year-old institution are still being calculated, but it is a fair bet that they will be felt around the world, including the Middle East and Africa (MEA) region.
For a frontline perspective on how this, plus the collapse of Silicon Valley Bank and Signature Bank, is affecting the region, we spoke with members of AFP’s MEA Treasury Advisory Council.
The shift toward local banks
Based on the discussion with Council members, they are witnessing a shift toward local banks, which Hisham Abouldahab, Group Corporate Treasurer for Al-Mansour Automotive, stated is a global trend. He also shared that the Gulf Cooperation Council (GCC) region is more stable than other regions of the MEA, but it could still be exposed to the domino effect due to the link between some financial institutions.
Ahmad Al Jukka, CTP, Treasury Manager for the Government of RAK, UAE, shared his experience as it relates to the government’s liquidity policy and its shift toward local banks. "We have to divide the investment between foreign banks and local banks, which suggests that local banks are always the priority,” he said. “Before the local banks proceed with any investment, they have to look at the asset’s allocation on the bank side, so we are grabbing the liability (i.e., USD deposits) and giving it back to local banks so we have a solid liability (i.e., deposit) base locally as a kind of protection against the domino effect and also to grant a better liquidity position for banks here."
From Qatar, Amir Khater, CTP, CFO and Corporate Treasurer of Tadmur Holding W.L.L., said local banks in Qatar offer whole recovery from any loss, while foreign banks do not. As a result, investors in the region prefer to deal with local banks, which can act as a haven.
While GCC banks are relatively stable, a lot of them are exposed by their ties to international institutions. Given that fact, are there proactive steps treasurers in the region should be taking? “Don’t put all your eggs in one basket,” said Khater. “Diversify your lenders and bank depositors. That is the most prudent approach, from a treasury perspective.”
Tom Hunt, CTP, Director of Treasury Services and Payments at AFP, agreed with the strategy of having more diversification in the banking structure. And as more people consider moving from a concentrated number of banks to more diversification, they’re seeking protection. “Banks must pay a premium to be part of the network to have deposit insurance, and that comes at a cost,” he said. “It's a risk profile for the bank. There's been a lot of discussion on the board about other structured money market deposit accounts. The question is, how do I rate my bank? Or how do I get valid information to know my bank before rating agencies know, before the FDIC reports come out? A lot of people are looking at the credit default swap spreads.”
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Materiality and exposure
MEA treasury professionals are also concerned with the difference between materiality and exposure. While they may not be feeling the effects of the multi-bank collapse yet, the materiality of it could be destroying whole banking systems. However, unlike the American banking system, the MEA region’s is large, protected and has several layers.
Hunt stated that credit default swaps are the best indication found so far from a leading indicator standpoint. Regarding sovereign risk, “If anyone wants to use their bank scorecard, they certainly can by using a link,” he said. “The bank scorecard gives a holistic assessment of what you have. It's meant to be a wide range of services, but where there are exposures, we can identify them and then use the scorecard approach.”
A closer look at diversification
There are many types of markets and economies in the MEA region, which Abouldahab stated, makes it challenging to limit the number of banking relationships you have. Your diversification may be substantial as each industry has its own mechanism and level of diversity.
Rania Afifi, CTP, Director of Treasury for Misr Italia Properties, agreed and added that diversification yields maximum benefits from each bank. “The diversification depends on what you want from each bank,” she said. “Some banks have better interest rates, so it’s better to assign your working capital and cash management to that bank. And some banks source the FX, so the allocation of trade finance documents should run to that bank.”
Afifi is dealing with at least 10 banks, a necessity in her industry. She works in the real estate and construction field, which uses direct finance techniques, requiring a significant level of diversification. “If the situation were stable, and the macroeconomic situation were better, I could rely on just 3-4 banks,” she said.
“The goal of diversification between banks does not rely only on the services the banks provide,” said Khater. “Because their ability to lend is limited, which also makes diversification important, especially in the construction and real estate sectors.”
“The banks are not willing to finance construction projects due to recent problems occurring in the U.S.,” said Nesrine Abdien, CTP, Finance Director, Africa Region of Hill International. “We are dealing with five banks to finance a project, which came at a higher cost, but by making this risk allocation between banks it will be much easier.”
Abouldahab is dealing with eight or nine banks, “Which is an excessive number, but each of them has a specific role in the business,” he said. His company is regional and operates in different countries, so it’s important to have banking relationships in the countries and areas in which it operates.
“The nature of the business has an impact on how many banks you must deal with,” said Naved Akhtar, CTP, Senior Treasury Manager for Deriv. “There are a lot of payments, payrolls, and tax payments to process. In countries such as China, dealing with a local banking partner is necessary to process these kinds of payments.”