Business in the United Arab Emirates (UAE) has evolved at a record pace. During the past decade, local companies have transformed into global heavyweights, prompting major overhauls in their cash management strategies.
Dubai, the flashy hub of the region, is ground zero for this cash revolution. This crossroads of the Middle East is known for splurging on the biggest and the best -- be it the world's longest automated driverless train for the new metro system, the tallest tower or a brand new free zone financial centre built from scratch in the heart of the city.
The UAE is also home to many of the new breed of global corporations. Emirati companies that have recently become known around the world include port developer and manager DP World, property developer Emaar and Emirates Airlines. The past decade's rapid growth coupled with the country's first sizeable economic correction since the collapse of its pearl industry in the 1930s is now opening local CEO's eyes to the need for advanced cash management techniques.
"One of the most successful products we've had is our smartBusiness solution," says Sanjay Uppal, group chief financial officer for Emirates NBD, a banking group created from the merger in late 2007 of Emirates Bank and National Bank of Dubai. "This cash solution has been extremely successful. In the last three years since we launched it, year-on-year growth has been in the very high double digits."
Emirates NBD's smartBusiness solution is a fully integrated, electronic, cash management product. While it's nothing ground breaking in the world of cash management -- features include fully automated payables and receivables management, electronic payment instructions, money transfers and remittances and salary direct debits -- it was one of the first such products to be made available domestically in the UAE when it was launched in 2006.
Domestic cash solutions are not the only growth business. Foreign banks that offer treasury services to UAE companies report increasing levels of interest in global cash products. One banker explains that domestic companies are looking for the same high levels of sophistication in their cash management strategies that are sold to US and European treasurers. This interest, accentuated by the economic crisis, has prompted strong growth in the need for local, regional and international cash solutions.
So while the UAE's 28 foreign banks clamour to offer international cash solutions, opportunities abound for simple cash management products within the UAE's domestic market.
Emirates NBD's size and scale gives it an advantage over domestic competitors when it comes to cash management. The banking group is the largest bank by assets in the UAE. As of the third quarter of 2008, Emirates NBD had $76.9 .billion in assets, well ahead of its closest competitor -- the National Bank of Abu Dhabi -- with assets of $44.8 billion.
With most local banks focused on the property sector over the past few years -- as much as 75% of lending went into property -- few banks made the investments needed to offer value-added cash management services. "smartBusiness was just a value add that was not [previously] made available by ourselves or the other [local] banks," says Uppal. "The advantage of the merger was we are now able to invest in infrastructure and technology at scales that perhaps very few other local banks can afford. This helps us maintain that edge."
He says that today, in the wholesale market, Emirates NBD has a market share of more than 20%.
One local corporate that has implemented smartBusiness is Liberty Investment Company. The group, a diversified holding company invested in the UAE's automotive, hospitality, real estate and travel sectors, implemented the solution across its businesses to integrate and simplify its group wide cash management strategies. "We decided to enhance efficiency and productivity by adopting an e-banking channel for safe and secure online payments to manage our large volumes of account payables," says Liberty's general manager of finance and corporate treasury, Amitava Majumdar.
That may sound like an obvious solution -- but the truth is many companies are still not handling their finances online.
"You will find that [in the UAE] there is a very wide array of small- and medium-size enterprises that still operate on cash in a manual basis," says Uppal. "But the upper end mid-size enterprises and the larger corporates are moving towards utilising electronic [cash management] channels."
According to the Dubai Chamber of Commerce and Industry, 90% of its more than 120,000 member companies can be categorised as small- and medium-size enterprises (SMEs).
The majority of these SMEs either do not have, or have only just begun the process of implementing, electronic cash management strategies. The UAE's domestic banks, with their local market understanding and physical presence, are well placed to take advantage of this transition to electronic cash solutions. Products that will be in demand include electronic account payables and receivables, automatic clearing house services, lockboxes and automatic money and salary transfers.
Hurdles
However, UAE banks' lack of scale and inability to invest in the electronic infrastructure necessary for successful electronic cash management solutions hinders their growth in the sector. Even if local banks turn to international firms for white-labelling services, the technological base still needs to be in place. The UAE currently has 24 local banks, of which only eight have assets greater than $10 billion. In addition, the average loan-to-deposit ratio among the Dubai-based banks is in excess of 100, which makes it difficult for local banks to find investment capital for new product offerings.
Consolidation of the UAE's local banking sector could give banks the capabilities to expand their cash management offerings. UAE Central Bank Governor Sultan bin Nassir Al Suwaidi has reportedly been pushing banking consolidation in the country, but only one merger between two successful banks has ever taken place in the country -- Emirates Bank International and National Bank of Dubai's combination to form Emirates NBD. Their success in a financial market segment that is growing during a global economic downturn should be evidence that consolidation is a good idea.
This story first appeared in the March 2009 issue of FinanceAsia magazine.
