Role of alternative finance in changing global economy
, May 8, 2014
The global economy is continuing to strengthen and geographically diversify. The value of alternative finance and the vital role it can play in the evolving landscape was the focus of expert speakers and panelists at Falcon Group’s fifth annual trade and corporate finance forum, held recently at Dubai’s Madinat Jumeirah.
Global trade is undergoing a dramatic transformation. Driven by two key trends – technological innovation and demographic shifts in emerging markets – international trade flows are becoming easier, cheaper and more accessible.
Enhanced technological capabilities close the physical and cultural gaps between countries, facilitating trade and significantly reducing costs. Yet it is the unprecedented economic growth in the emerging markets that is really fuelling demand for trade, said experts.
“2012 was the first year since the 17th century where the ‘developing’ countries started producing more than the ‘developed’ countries,” revealed Pascal Lamy, former director general of the World Trade Organization, and the forum’s keynote speaker.
“And the middle class worldwide, that is roughly two billion people today, will rise to five billion people by 2030 – with the extra three billion all coming from the emerging markets.”
Clearly, with more trade, greater economic strength and an established middle class – and therefore a larger consumer base – the emerging markets are ripe with opportunities.
This shifting trade focus towards the emerging markets – and towards Asia in particular – is a trend evident in the Middle East.
“The Middle East’s trade with Asia now accounts for almost 55 percent of its total trade,” explained Dr Nasser Saidi, former chief economist of the DIFC. “And China has become the Middle East’s number one importer of oil – replacing the US and Europe.”
Yet the growth in the emerging markets brings up the issue of funding – and particularly funding constraints. That said, while in the emerging markets such constraints restrict new opportunities, in the developed world it’s more about what Saidi calls “the four Rs” of regulation, recapitalisation, restructuring and retrenchment.
Lamy agreed. “Retrenchment is down to three factors: regulation; increasing banking operating costs; and the likelihood that traditional European and US banks will need higher recapitalisation,” he explained. “All of these factors combined mean that traditional operators will remain constrained.”
In short: the companies – both in developed and emerging markets – wishing to take advantage of the opportunities available in order to trade, grow and contribute to the global economy are being deprived of traditional lending and access to liquidity. And it is an issue that can be particularly challenging in the Middle East.
“Despite the fact that we are a region with enormous liquidity that exports to the rest of the world, this liquidity is not being used to finance our companies; it is being used abroad or given to state companies,” said Saidi, explaining one factor behind the shortage of liquidity in the region. “In fact, only 20 percent of SMEs in the Middle East have a bank loan from a financial institution.”
The restraints on global banks, combined with the rapid growth of “south-south” trade, are creating an imbalance between demand and supply. And it is here that non-bank operators and alternative lenders can come to the fore.
Alternative finance: funding the future
Certainly, the benefits of alternative finance are being recognised by an increasing number of corporates.
“Non-bank investment is now substantially higher than bank investment in the emerging markets,” stated Saidi. “And that trend is likely to continue as a result of regulatory changes – in particular Basel III.”
Indeed, alternative financiers are funding both corporates in the emerging markets, and trade – thus significantly contributing to economic growth.
And as non-bank finance becomes more mainstream, companies are discovering a multitude of advantages to diversifying their funding sources – with alternative financiers, such as Falcon, able to create innovative solutions structured to their precise needs.
“Global banks – and often regional banks – aren’t geared to fully understand how to work with you, or lend to you,” explained Mustafa Abdel Wadood, CEO of Abraaj Capital. “It takes specialists – hence the emergence of alternative lending and the increasing role of private equity as partners in growth – to understand specific requirements, and to be able to respond to client needs accordingly.”
Dell’s Martin Uchytil, finance director in the Middle East, agreed with this sentiment.
“From a corporate perspective, multinationals look for expertise, capacity, flexibility and credibility in financing partners,” he said. “Additionally, the ideal finance partner should have local presence, as well as local market knowledge. It also needs global reach, a portfolio approach, a compliant partner and someone that’s easy to work with and can create innovative solutions to help whatever local needs a multinational has.”
“Falcon, as an alternative finance provider,” continued Uchytil “has brought Dell a different approach and a new flexible financing solution to complement existing banks’ offerings – allowing Dell the opportunity to address its own needs, and the needs of its partners, in a more complete manner.”
Alternative financiers are able to complement global banking, and are a valuable source of funding, regardless of the strength of the economy. Also, they face fewer regulatory restrictions than global banks.
Of course, given the impact regulation has already had on global bank lending, delegates at the forum were keen to understand how future regulatory proposals could also restrict alternative financiers.
“The regulation of alternative financiers is a positive step,” explained Kamel Alzarka, chairman of Falcon Group, during the panel debate. “Falcon is already regulated by the DFSA, and far from restricting business, it encourages it – separating credible alternative financiers from newcomers and less credible financiers.”
The rising role of alternative financiers is becoming evident; providing an avenue through which corporates can grasp the trading opportunities presented in this unfolding, developing landscape and helping emerging markets to fulfil their potential. - TradeArabia News Service