Dubai will remain leading hub for trade finance

DUBAI — Despite recent turmoil in the financial markets and the resulting global credit crunch, Dubai's position as a facilitator of international trade will remain strong. Although money supply will be a little tighter over the next two or three years, "continuing trade flows across Asia will offer Dubai fantastic opportunities", says Robert Parson, an international lawyer specialising in trade finance at Clyde & Co.

By Assistant Editor, Business (By Lucia Dore)

Published: Mon 24 Mar 2008, 8:52 AM

Last updated: Sun 5 Apr 2015, 1:22 PM

Dubai will feel some impact from a tightening in money supply but, as yet, this "has not really hit home," he says, speaking to Khaleej Times. "Money will be more expensive. Banks will have to look at financing in a much more structured way and at how "clean" (ie money with no strings attached) is lent. But that shouldn't blunt the growth of trade generally in the region," he continues.

Principally, this is because banks "that engage in this business have been stepping up to the mark in terms of their financial discipline", Parson says. Specifically, he refers to the way banks profile customers in terms of credit and the way technology has been applied to improve the delivery of trade services. "All these have made banks more efficient and much more able to cope with the types of difficulty that the markets are in now," he explains.

In the past trade flows have been very much South-North but now that South-South trade flows are prevailing, Dubai is well positioned to be a financial services hub and the main hub for the movement of goods in the region, says Parson. The abundance of liquidity and the ease at which it is available also helps.

"One of the reasons for success in the region is the huge demand for liquidity. It requires approximately four times as much money to finance the same volumes of crude oil today that took place in 2001. This is just a factor of the rise in price," he explains. The prices of metal as well as agricultural products have also remained high.

To meet the demand for liquidity, there has been "a huge expansion in the commodity trade finance department of banks," he says. The fact that many banks are moving back into trade finance after an absence of about 10 years, and "many local banks are gearing up" to do business in the sector is testimony to that, he adds.

Parson also says that traditional trade finance products, such as the letter of credit and bill of exchange, are making a comeback. "There is a trend back towards more tightly structured trade finance products and the letter of credit that was looking for a boost after many years of pulling up," he says. The introduction of the Uniform Customs and Practice for Documentary Credits (UCP 600) in July 2007 has "ironed out a number of inefficiencies in the operations of the letter of credit and the time taken," he adds.

Another area of potential growth is the insurance sector and the support it can give to the trade finance industry. Parson says there "is a healthy private (insurance) market," particularly of political risk and private insurers. "I see this area offering huge growth. Partly as a result of tighter rules on credit and as a result of recent financial turmoil, the availability of the insurance sector as a potential bolster for liquidity and for covering credit risk could provide some very interesting opportunities," he says.

He also expects the hedge fund business in commodity trade finance to remain "very popular" mainly because he thinks these funds are better managed than property hedge funds. "Property hedge funds were effectively given the green light as a safe investment for people to put their money into and people weren't looking very closely at the detail. The commodity hedge funds, which do free up a lot of money in the market for banks to invest in other projects, are carefully managed and hedged."

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