The UAE has been adversely impacted by the global crisis on two primary levels: one, related to a local real estate "bubble", which burst in the context of the crisis, and a second level related to ineffective communication and expectations-management relative to a large local financial obligation, which called the financial health of Dubai into question. Indeed, even as technology gains greater profile and credibility in the region, and technology driven financial sector delivery mechanisms attract interest among business executives, the Middle East continues to demonstrate an atypical affinity to traditional instruments and mechanisms, particularly in the financing of international trade, where documentary credits remain a well accepted instrument of commerce.
In parallel, the region is adapting to the realities of increasing global integration of financial services, gradually promoting notions of credible and verifiable financial reporting, financial transparency and, among other developments, shifting gradually, away from long-time practices around "name lending" (financing granted on the basis of networks and personal relationships – see quote below), in favour of more arm's-length and ostensibly more rigorous customer adjudication practices.
Credit Director, Petrochemicals, Middle East said 'I was trying to formalise a credit policy for suppliers in my company, and in doing so, would call on suppliers, asking to see financial statements and to better understand their business. In one case, I was offered three (very different) sets of financials, and invited to choose the one that best met my requirements. Such practices are less common now than once was the case'
Though the root causes of the global crisis were not a factor in the region, largely as a result of a staunch regional faith in the merits of traditional banking methods, requirements of Shari'a law and the tenets of Islamic finance, the regional exit of several international banks resulting from the crisis has contributed to an accelerated reshaping of the region's financial sector, partly reinforcing the preference of local businesses in dealing with local financial institutions.
Like other parts of the Middle East, the UAE has been working to respond to demands for increased financial and commercial transparency, and the application of credit and risk assessment disciplines. While the fundamentals of the region – largely supported by a still healthy petroleum sector – remain strong, local financial institutions are confronted with margin compression, cost pressures and imperatives to increase revenues while remaining aligned with the relatively conservative banking practices of the region.
Senior Banker, UAE commented "Local regulators are working to safeguard economic stability while also supporting the banks and financial institutions. At the customer level, we value proximity and knowledge of our client's business –as do the regulators and authorities – and we are open to business models which may assist us in enhancing operational capabilities and service delivery."
Trade will continue to be a core activity in the UAE – both in terms of the Emirates' own plans to continue to evolve as a regional trade and logistics hub, and in conjunction with expanding trade activity in the region, but also with rising economic powers such as India and China. Trade flows of this nature and scope will require robust capabilities in all aspects of trade finance and transaction banking, and well-timed alliances in the financial sector will assist in assuring those capabilities are available and well-deployed. Financial sector alliance models – even "old style" outsourcing activities – are relatively unknown in the UAE; the influence of foreign-based financial firms has been and remains disproportionately large, as does the local competitive threat from those institutions. Despite this, local banks and financial institutions are exhibiting a receptiveness to explore innovative alliance arrangements – but doing so with an eye to the creation of value for end-clients:
Senior Banker, UAE said "Local/regional banks are informed and intelligent, and will not blindly rush in without analysing the benefits. There has to be some contribution from the global bank and a matching contribution from the local bank – partnership on equal footing, together with a customer view, that will benefit all."
The United Arab Emirates are currently in the range between a market characterised primarily by Single Provider models and some degree of partial outsourcing. Outsourcing is relatively new to the UAE, and yet the short to medium term potential for movement along the collaboration barometer ranges beyond manufacturer-distributor, potentially reaching into some form of multilateral ecosystem. The UAE continues to make significant investment, and undertake significant effort, to diversify its commercial activities both sectorally, and geographically. This, coupled with ongoing investments in infrastructure and capital projects, requires the support of financial institutions, to a degree that cannot be provided by local institutions independently. In effect, end-client requirements, and the recognition of local institutions that they do not possess the capacity to respond fully to those requirements, will motivate a shift to financial sector collaboration.
