As Dubai has grown, so has its role in the global transaction services industry, with the emirate now serving as the nerve centre of all trade taking place across the Middle East and north Africa. And as Dubai sets out its stall to become the next renminbi hub, this role only looks set to grow.

Dubai’s importance as a trading port stretches as far back as the early 20th century. Trade initially grew up around its pearling industry, but Dubai’s strategic geographical location quickly led to its emergence as a transshipment centre between East and West, helping to transform the emirate into one of the most important trading hubs on the global map. Today, the United Arab Emirates conducts international trade with more than 220 countries and Dubai alone is home to more than 20 free zones, including one of the world’s largest – the Jebel Ali Free Zone, which houses 7000 companies from 132 countries, including 120 Fortune 500-listed companies.

With world-class infrastructure, including the flagship port of Jebel Ali, which is the largest container terminal between Rotterdam and Singapore, Dubai offers virtually unrivalled global connectivity and now ranks as the world’s third largest re-export market, driven mainly by the emergence of Africa and Asia as regional powerhouses. Combined with its low taxes, free-trade agreements and clear-cut, business-friendly environment, Dubai has succeeded in attracting multinational companies and businesses from across the globe.

Nerve centre

As the nerve centre of all trade taking place across the entire Middle East and north Africa (Mena) region, trade finance and cross-border payments have become an essential part of Dubai’s banking industry, and it quickly claimed the crown as the regional global transaction services (GTS) banking hub.

“Dubai is a fulcrum for the whole region and serves as our regional hub from which we manage nine countries now,” says Natasha Patel, regional head of global payments and cash management for HSBC Middle East and north Africa. “Over the past three years, Dubai has come into sharp focus because of its status as a re-trading hub, especially linked to the rapid growth of China. With this, we’ve seen clients from a broader range of trade-linked sectors – retail, automotive, transportation, travel and tourism – as opposed to primarily just oil and gas, become more savvy with regards to cash management.” 

According to the Dubai Chamber of Commerce and Industry, about 60% of China’s total trade passes through the UAE, from where it is re-exported to Africa and Europe, making the UAE one of Asia’s most crucial trading partners and one of the greatest beneficiaries of China’s meteoric growth.

Africa conduit

Indeed, Dubai is fast emerging as a hub for investment into Africa, with trade between the emirate and African countries growing to Dh109bn ($30bn) in 2012 – an annual increase of 27%. Statistics from the Dubai Chamber of Commerce and Industry show that its African members have doubled to 6000 since 2008.

“There are a lot of Chinese and Indian companies who want to trade into Africa coming to set up shop in Dubai,” says Haytham El Maayergi, head of transaction banking for Standard Chartered UAE. “They use Dubai as a regional head office and as a procurement hub. It’s got a hugely well-connected airport, good taxation laws and works well with other time zones, so it makes a lot of sense to them.”

The UAE currently ranks as Standard Chartered’s fifth largest market, recording revenues of more than $1bn at the end of 2012 and coming behind only Hong Kong, China, Singapore and India. Standard Chartered’s GTS business accounted for about 35% to 40% of its wholesale banking revenues in 2012, generating $3.67bn in revenue – a 13% increase year on year.

The expansion of local corporates across the region has also helped spur demand for GTS banking solutions. “Many local companies have grown across the region over the past three years, which means that cash management has become a necessity for them,” says Ms Patel. “They want to ensure operational efficiency and ease of moving funds across the various markets in which they operate."

Indeed, as companies expand their regional footprint, they are developing more efficient ways to collect and manage payments, increasing the visibility of cash and smoothing trade finance processes. All these developments can significantly improve the performance of working capital, increase profitability and eliminate risk.

“Aside from the region’s global corporates, [Mena’s] small and medium-sized companies present an important and growing opportunity for the transaction business,” says Sido Bestani, head of the Mena region for messaging provider the Society for Worldwide Interbank Financial Telecommunication (Swift). “The Middle East has 9 million to 11 million micro, small and medium-sized enterprises, and these are growing rapidly. As they expand across borders, such companies increasingly look for more sophisticated banking services, including electronic banking and trade finance services, and this creates opportunities for banks and financial services providers such as Swift.”

In February 2013, Swift announced that its business in the Middle East had outperformed the total growth of the business globally by 45%, underpinning the growing importance of the region as a hub. The growth in Swift’s messaging businesses in the Middle East was led by the securities markets with growth of about 14% in 2012, followed by international payments traffic, which grew by more than 10%.

GTS bandwagon

GTS banking was traditionally the preserve of international banks, but burgeoning demand combined with its attractiveness as a lucrative but sustainable revenue stream has led many local players to follow suit. “The trend started six or seven years ago,” says Mr El Maayergi. “But it really started to pick up over the past 18 months as the local players realised that to develop the right kind of liquidity and to lend to the right type of assets, they need to go back to basics. They’re all now keen to grow transaction banking so they’re moving into countries such as Iraq and Egypt so they can build a network. Transaction banking is about building corridors, networks and solutions. It’s not just about having a piece of software that collects cheques or gives you online information.” 

Asif Raza, managing director, head of treasury services and investor services for the Mena region at JPMorgan, says: “Most international players based here have had very dedicated transaction banking divisions for some time and that trend has now shifted to local players, with a growing number setting up similar capabilities. 

“Their focus is to drive the fee-based business from the customer base by doing more cross-selling as this is a very profitable business for them. Transaction banking is important for business in any emerging market and is one of the key revenue generators. All UAE banks are offering the services that comprise transaction banking – whether trade finance, cash management, custody or foreign exchange – and they are looking to combine it all into one platform to sell to the customer.” 

Aside from the push from within banks, the local governments also deserve credit for providing local banks with the impetus to invest in cash management platforms. Ms Patel says: “If you look at the [Gulf Co-operation Council], pretty much every government is pro e-enablement and this push has encouraged the local banks to develop their cash management platforms. In fact, it has become mandatory in a lot of countries.”

Electronic impetus

In early 2011, the UAE's central bank issued a directive saying that all wage payments have to be made through a wage protection system in an effort to clamp down on the previous mismanagement of workers’ wages. Consequently, all banks now have to use an e-platform to pay workers.

“While some platforms are in their early stages of development, the important thing is that they’re growing in number and efficiency,” says Ms Patel. “I believe that in the next five years, we will see Mena becoming a region with extensive cash and liquidity management requirements."

Since HSBC enhanced its mobile banking service with the launch of HSBCnet Mobile in 2011, it has authorised about $10bn-worth of payments globally and the service was used to authorise more than $393m-worth of payments in 2012 across the Mena region.

In addition to the encouragement of the government, growing client sophistication is also helping to spur development and innovation in the GTS industry. “Local corporates have historically been comfortable with manual processes but we are seeing an increased drive towards payment automation and efficiency,” says Chris Jameson, head of sales for central and eastern Europe, Middle East and Africa (excluding Russia) for global transaction services at Bank of America-Merrill Lynch. “The practice of sending payment instructions manually with a wet signature is still a common practice in this part of the world. However, a number of the larger local corporates have been pushing the envelope on GTS solutions and have really transformed their operations into well-integrated, tech-savvy treasuries.” 

“Complex trade solutions using insurance have also started to be introduced into the marketplace,” says Mr El Maayergi. “Typically, we’d expect a lot of banks to focus on simple documentary trade for cash management but the market sophistication has increased over the past 18 months.”

Meanwhile, Deutsche Bank has invested heavily in its GTS platform in Asia and has been rolling this out across the Middle East. “We are on the ground with systems and people in Dubai and Abu Dhabi, Saudi Arabia and Qatar," says Harold Leenen, head of global transaction banking Middle East and Africa at Deutsche Bank. "By and large, we leverage our global platform, and if and when it is needed, we adapt it to local needs. Sophistication is driven by the clients. As the market becomes more advanced, we will evolve our products in response to their needs.” 

As with any industry, the development of UAE banks’ GTS operations follows a maturity curve and banks are at different stages of evolution. While some are now offering complex solutions and starting to anticipate customer needs, others are still in the early stages of building basic cash and trade systems.

Mobile roadmap

At the end of June 2012, the UAE central bank drew up a roadmap with local banks and telecommunications companies for improving mobile phone banking services in a bid to increase the value of mobile transactions in the country, especially for small-value payments. With nearly 14 million mobile phones currently in use – nearly two devices per individual – the country has one of the highest mobile penetration rates in the world, yet banks have been slow to allocate enough resources to this form of banking.

However, industry experts are bullish on its near-term growth. While the Middle East region currently accounts for just 1% of the global value of mobile transactions, its contribution is set to rise to be worth $27.6bn by 2017, accounting for roughly 4% of the global value, according to forecasts released by research firm Gartner in June.

While money transfers will be the main driver of this growth, payments from business to business and business to consumer will also play a key role, according to industry experts.

Another aspect that is expected to provide a significant boost to the GTS industry is an increased use of the renminbi as a currency to support the soaring trade between the UAE and China. Bilateral trade between the two countries has increased fivefold over the past 10 years to touch $15.6bn in 2012, according to figures from the UAE Ministry of Foreign Trade, and China will soon replace India as the UAE’s biggest trade partner. All of the leading UAE banks, such as HSBC, Standard Chartered and Emirates NBD, are now offering renminbi accounts, while a number of Chinese banks have opened branches, not least to serve the 3000 or so Chinese firms that operate in the UAE.

In January 2013, China's central bank and the UAE signed a currency swap deal worth Rmb35bn ($5.7bn), demonstrating the renminbi’s continued expansion and prominence in the Middle East. The deal, which expires in three years, marks the first currency swap between China and a Middle Eastern country.

Renminbi hub

Dubai is now vying with London and Singapore to become the world's next renminbi hub, with many industry commentators noting it has the key fundamentals to become a regional clearing centre for the currency. But, as things stand, the renminbi accounts for a low single-digit figure of total deposits in the UAE’s financial system.

“The flow of renminbi trade is currently relatively small but we expect it to grow exponentially,” says Ms Patel. “Twelve per cent of China’s trade with the Mena region is now settled in renminbi, up from 3% in 2010. The UAE central bank has shown a great interest in building a renminbi settlement bank in the foreseeable future.”

Mr El Maayergi also believes that the UAE has the potential to become an offshore renminbi hub. Standard Chartered has already signed several agreements with banks in the region that enable its financial institution clients to leverage its renminbi capabilities to service their clients’ needs in this currency.

Regardless of whether Dubai becomes a regional renminbi clearing centre, the sheer volumes of trade and banks' increased commitment towards the renminbi make it clear that China's currency will play an ever larger role in the UAE’s GTS banking industry.

Of course, while there are the inevitable comparisons between Dubai's and Asia’s GTS hubs, the needs of the Middle East region are very different given that the bulk of its business is re-trade. “Dubai doesn’t compare in size to Asia as a GTS centre,” says Ms Patel. “You must remember we’re starting fairly far behind Asia, as well as Europe for that matter. Cash and liquidity management is still a relatively new industry here and Dubai is on the first rung of the ladder, but the banks are climbing it very quickly.” 

And as they do, different models are emerging in the market with different price dynamics and different solutions – all helping to contribute to the vibrancy of Dubai’s GTS industry. For while it may be a young market, it is already a thriving one and will continue to grow in tandem with the exponential growth in regional trade flows, as well as the increasing sophistication of the market.

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