The following is an edited transcript of the first part of a roundtable held in Dubai in April 2016, kindly hosted by D+H and chaired by Jags KothandaPani, Citi. In this first part, the panel focuses on the changing role, priorities and challenges of treasurers in the Middle East. The second part, to be published in the next edition of TMI (edition 245) explores the role of technology in facilitating treasury objectives in more detail. Edited by Helen Sanders.
Panel:
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Jags KothandaPani, Citi
Corporate treasury in the Middle East has never been more challenging and engaging, with real-time visibility of global cash balances, solutions around trapped cash in certain countries, the need to ‘do more with less’, and the pressures created by M&A amongst the most pressing topics. Treasurers are also expanding their role in many organisations, which is creating new challenges as well as opportunities. There are also broader themes that have an impact on treasury, such as the emergence of fintech and the changing regulatory environment.
Adam Boukadida, Etihad Airways
Our treasury function at Etihad incorporates the ‘typical’ responsibilities of group treasury, but also areas such as group insurance, which includes medical cover, aviation insurance cover for our fleet, and liability cover for passengers and staff. We manage corporate finance, including financing our fleet, and a payment solutions team that looks after all the incoming cash into the organisation globally as well as payment fraud. We have a team of around 50 people, which is fully centralised. One of our challenges is to manage the speed of growth, which is around 20% each year. Through both direct growth and our minority stake holdings in other airlines – eight currently – we have a hybrid growth strategy of which treasury is a key part.
James Adams, Chalhoub Group
Our treasury function at Chalhoub Group is very young: two years ago, we had no Group Treasury, although we have been established for over 60 years and have grown to become the leading partner for luxury across the Middle East, active in 14 markets. Before I joined the group, each company operated independently from a cash and treasury management perspective, but now we have a centralised treasury function with a team of seven which provides policy guidance and centralised FX hedging and risk management. We also have a group-wide view of cash management and a central treasury system, although local teams still manage their cash including local financing as required. Other activities that fall under our remit include managing the employee end of service indemnity investment fund and card acquiring for our retail point of sale. [[[PAGE]]]
Rahul Jayakar, Mashreq Bank
Established in 1967, Mashreq is one of the oldest banks in the UAE. It has established itself as one of the region’s leading commercial banks with a focus on cross-border trade finance and innovative working capital solutions to support clients’ day-to-day financial services needs. Our geographic footprint and focus is entirely consistent with the UAE’s role of being at the centre of Asian, Middle East and African trade. I joined Mashreq as Head of GTS for the International Banking Group in 2013 managing the business in 11 countries. In 2015, I moved to head the GTS business in UAE. GTS is a key growth business for Mashreq and we continue to see very strong demand for our transaction banking services in the region.
Sherie Morais, National Bank of Abu Dhabi
Like Haytham and Rahul, I’m also part of the transaction banking business for National Bank of Abu Dhabi, which has become an increasingly important area for the bank. One characteristic of operating in this region is differences in the degree of cash and treasury automation amongst our clients, from very manually intensive operations through to companies like Etihad that are highly automated. Many clients are moving towards a more centralised treasury model, but there are no rights or wrongs. What’s important is to understand the client’s roadmap and provide the solutions and tools to achieve it.
Jags KothandaPani
Based on your experiences, James and Adam, you mentioned growth and expansion in responsibilities: how do you feel the strategic role of treasury has evolved in recent years, and what new challenges and opportunities does this create?
Adam Boukadida
Most corporate treasuries have a similar scope of ‘core’ responsibilities, although the scale may be quite different. So cash and liquidity management is always a hot topic, particularly in the current climate, and in this part of the world, with the impact of fuel prices and liquidity volatility. International organisations also face the issues of trapped cash and delayed cash. In some of our markets, such as Sudan and Bangladesh, there are considerable regulatory challenges, which means that we need additional processes and local resources. Conversely, we also take opportunities to implement more creative liquidity structures to optimise in-country balances wherever possible.
Financial risk management is obviously a key point, both for cash and foreign exchange. Forty per cent of our cost base is fuel. In such a volatile environment, it is not sufficient simply to implement a hedging policy and do nothing beyond that. However, it’s important that our directors and shareholders are comfortable with any changes to the way that we hedge, which requires some education and influencing.
Another challenge is the shortage of treasury skills in this part of the world. A number of senior treasurers have come from the UK but it can be difficult to maintain top talent over the medium to longer term.
James Adams
We definitely see a skills gap in the region: while it’s relatively straightforward to find good finance managers and accountants, there are fewer treasury skills. The ACT Middle East (Association of Corporate Treasurers) has a key role to play in providing education, which is helping to encourage the development of skills and expertise, as is the increased awareness and profile of treasury.
Treasury priorities are driven by the company’s commercial strategy, and as the company grows, treasury needs to be equipped to support changing strategies, such as M&A. Managing cash and liquidity is essential as the company matures so educating business unit finance teams is a key part of the treasury role at Chalhoub.
In addition to managing cash and risk, we are also striving to find other ways to add value, and ‘do more with less’, so we’re putting systems in place to increase automation and enhance decision-making. So whether it’s buying foreign exchange at better prices, or using bank services more efficiently, we need to demonstrate treasury’s cost benefit as well as acting as a strategic function.
Jags KothandaPani
Having worked in treasury both in Europe and the Middle East, what differences would you identify?
James Adams
There are inevitably differences in regulation in the Middle East compared with Europe, but it is still possible to establish best practice treasury structures. Some things are more difficult, particularly where you have minority shareholders, and in some countries such as Saudi Arabia, cash pooling is less readily achievable.
In some cases, treasury practice is less mature than in Europe, but as many companies in the Middle East have grown rapidly, this is now becoming a higher priority.
Adam Boukadida
The use of technology is also less mature. The challenge now is for treasurers to justify the business case for sophisticated technology and demonstrate the long-term benefits in terms of visibility and control over cash and risk, and better use of resources. As our business has grown, we are now changing our technology for the third time in 12 years to reflect our changing demands.[[[PAGE]]]
Sherie Morais
As clients need to do ‘more with less’, banks have an important role to play in delivering the solutions they need to meet their strategic and operational objectives, both individually and collaboratively, such as on standardisation initiatives. We are seeing increasing demand in areas such as collections and reconciliation, so providing seamless integration and rich information is a major priority for the bank.
Rahul Jayakar
As bankers, it’s essential that we are aligned with our clients’ strategic goals, or our services become increasingly irrelevant. These goals evolve as the company grows and matures, from visibility over cash through to process efficiency and more sophisticated analytics and risk management. Furthermore, treasurers’ view of the supply chain is also expanding, so they are looking to the bank for solutions to support all the participants in the chain, to facilitate liquidity and reduce risk. This creates complexity and at the same time offers opportunity to the bank to offer structured trade finance solutions to multiple stakeholders in the value chain, as each entity seeks to optimise their balance sheet management. We are increasingly moving away from the era of plain vanilla solutions to a more sophisticated approach to structured working capital solutions as corporate customers continue to develop their treasury function.
Jags KothandaPani
What’s clear is that treasurers are becoming far more sophisticated from a technology standpoint, and often more so than banks and regulators. As treasurers focus on efficiency and high-quality decision-making, they are becoming more interested in benchmarking, with excellent diagnostic tools available to benchmark corporations against peers and the wider industry.
Given what we have discussed so far, how do you see the role of treasury changing over the next three years or so?
Adam Boukadida
I think the issues will be the same, but the priorities may differ. Banks and treasurers need to work together as trusted partners that understand each other’s strengths and challenges, particularly given the changing climate in emerging parts of the world. Banks are investing heavily in compliance, both internal governance as well as external regulations, and there is a knock-on effect from a customer’s perspective.
James Adams
This is definitely our experience. From our perspective, the problem is that each bank has developed slightly different requirements, so we’re duplicating a lot of our work to the point that we effectively have a dedicated resource now for legal and compliance.
We have started to do benchmarking, and we are looking for further efficiency savings through centralisation. We are also strengthening our bank relationships and using them more effectively by reducing some of the duplication that is inevitable in a partly decentralised treasury structure.
Adam Boukadida
Benchmarking is important to us too, not just formal benchmarking, but also keeping up to date with what other organisations are doing through publications such as TMI.
Similarly, I think many treasurers are now more focused on bank relationship management. Share of wallet may appear an outdated concept, but it remains important. Banks are experiencing greater challenges on how they share their balance sheets and on individual unit lending ratios. Corporate treasurers need to be aware of these requirements and where possible, look at ancillary business that can be offered to banking partners.
Rahul Jayakar
Absolutely, using the right tool in pre/post sale financing can help companies improve their days sales outstanding. In many cases, there is an immediate positive impact, improving profitability.
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Dubai International Financial Centre
As markets and economies expand, it becomes increasingly critical for global businesses to establish regional bases for their treasury operations. Managing global operations from its headquarters can expose any company to currency-related risks and disrupted cash flow across time zones.
As the emerging markets of Middle East, Africa and South East Asia (MEASA), with a combined GDP of US$7.8tr, continue to demonstrate strong potential for sustainable long-term growth, global firms can benefit from establishing full-fledged treasury units in the region to capitalise on the vast opportunities.
Dubai International Financial Centre (DIFC) is located in one of the world’s most accessible cities. Dubai’s connectivity to overseas markets and continued evolution as a preferred business destination provides a stable and secure regional base for firms seeking to diversify global business interests. With expanded logistical linkages, growing economic ties and existing social networks, Dubai enables firms to seamlessly access neighboring countries as well as the African and Asian markets.
Providing access and connectivity to the burgeoning markets of the MEASA region, DIFC stimulates trade and investment flows to the South-South economic corridor. Through the implementation of DIFC’s 2024 growth strategy, the Centre aims to serve as a key driver in enhancing the region’s financial landscape and generating lucrative opportunities for financial institutions seeking to diversify global business interests.
With an established financial services ecosystem and secure operating environment, DIFC provides an enabling world-class legal and regulatory framework, a global financial exchange, a strong ICT infrastructure and an expanding and diverse client cluster unmatched in the region.
DIFC’s infrastructure establishes a secure foundation for treasury operations in the region. The Centre offers access to a diverse range of financial institutions – including banks, international tax advisors, as well as corporate governance experts and financers, among other stakeholders – and evolves services to help treasury units grow operations and manage risks.
Today, DIFC is home to around 20,000 professionals and 1,445 active registered companies – including 17 of the world’s top 20 banks, 11 of the world’s top money managers, seven of the top 10 insurance firms, as well as seven of the top 10 law firms. The Centre has proved to be the ideal platform for corporate offices – including holding companies, proprietary investment firms, management offices and single family offices – and service providers in the fields of accounting and audit, corporate service providers, compliance, risk assessment, consulting, and recruitment.
DIFC’s independent regulator, Dubai Financial Services Authority (DFSA), plays a critical role in establishing a robust regulatory and comprehensive environment for businesses. Continuously upgrading and streamlining regulation policies and service offerings, DFSA offers flexibility and safeguards against legal risks and global economic fluctuations. Over the years, DFSA has introduced a broad range of new fund regimes and regulations and signed over 90 memorandums of understanding with key developed economies to facilitate ease of doing business in the region.
In 2014, DIFC enacted the Netting Law that provides legal certainty on the enforceability of close-out netting in case of insolvency in the payment and settlement system – thereby increasing transparency and stability and aligning the Centre’s system with international best practices.
Further to this, the Centre offers 100 per cent ownership, a zero per cent tax rate on income and profits (guaranteed for a period of 50 years) and free flow of capital and profit repatriation.
The Centre also provides access to a strong capital market – NASDAQ Dubai. With access to a deep pool of liquidity with the option of listing all types of securities including equities, REITS, ETFs and sukuk, NASDAQ enables corporate treasuries to raise funds or invest surplus cash.
With new trade opportunities arising in emerging economies in Africa, Asia and Latin America, many global firms are asking their treasurers to tackle risks encountered when navigating varied business protocols and customs. By setting up operations at DIFC, treasury units can access these regions from an integrated, secure and flexible platform with advanced support services.
