Q&A: Reducing risks and boosting growth in Saudi Arabia and the GCC
The global economy has always undergone changes. From the agrarian-based economy in the 18th century to the advent of the Industrial Revolution, from sailboats to steamships, there has always been a shift in economy, industry, and, ultimately the dynamics of a country.
Courtesy Trade Finance Global
The global economy has always undergone changes. From the agrarian-based economy in the 18th century to the advent of the Industrial Revolution, from sailboats to steamships, there has always been a shift in economy, industry, and, ultimately the dynamics of a country.
In 2024, we are in the midst of yet another transformative era as we transition the international trade industry to a more digital state.
To discuss some of the digital development occurring in Saudi Arabia, TFG’s Brian Canup (BC) spoke with Sean Bowey (SB), Head of Product, Global Trade and Receivables Finance, SAB, and Neil Shonhard (NS), Chief Executive Officer, MonetaGo.
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BC: To start, could you give us your broad perspective on the main areas to focus on to promote continued growth across the Middle East?
SB: Starting with the big picture, Saudi Arabia’s Vision 2030 is concentrated on the growth of the non-oil economy.
Coupled with that, there’s a significant push towards becoming a fully digital banking environment. This is crucial because a robust digital public infrastructure, paired with a young, technologically adept population, begins to remove much of the friction traditionally associated with trade.
There is also growing entrepreneurship, which is supported by enhancing SME growth through various government schemes and funds, such as guarantee schemes, but also by creating a digital public infrastructure that simplifies overcoming traditional challenges in this space.
The digital identity and the infrastructure to support it are very strong. We’re also seeing a strengthening infrastructure to support invoice validation, which isn’t just for its own sake.
This setup allows us, as banks, to inject more liquidity into the space because the traditional roadblocks are removed—KYC becomes a lot easier as we get feeds directly from the government’s digital infrastructure.
The fraud risk in terms of trade and invoice financing is also reduced because we can tap into third-party validation through trusted platforms, such as VAT tax platforms and invoice finance validation through platforms.
These, I think, are often overlooked factors in terms of economic growth, but you have to create that underlying infrastructure, those underlying conditions for that growth to happen.
BC: Moving to technology, how do tech providers like MonetaGo slot in and support removing risk?
NS: Focusing on Saudi Arabia here, we know that just 5% of lending in KSA is to the SME sector. That needs to be drastically improved. From a MonetaGo perspective, having tools like ours can help create safer, more trusted financing ecosystems, which is what Saudi Arabia is after.
With innovative solutions, banks can have increased confidence in extending their books of business, which is key to increasing trade growth. Cross-border interoperability within the GCC is also key, both for Saudi Arabia and the wider region.
We’re engaged in expanding our interoperable and scalable solution through the GCC. Many of the banks that we’ve spoken to in the region have remits to extend their supply chain finance books. Having the ability to validate transaction data in Saudi Arabia is obviously key, but having interoperability across countries or regionally is also key.
BC: Sean, could you expand on the market for supply chain finance and how it’s developing in the region?
SB: It’s still a relatively nascent market for this form of finance. It’s experienced growth starting in the US, with Asia and Europe following suit. However, this market is still relatively immature from a product perspective and from corporate acceptance of the product, although it is developing quickly and there’s interest in the product.
It is also an easier means for the banks to demonstrate that they’re supporting the SME sector. This, of course, is the easiest way to do it because you’re taking that corporate balance sheet and that corporate risk and using that to inject liquidity into the SME sector.
BC: What are the challenges with expanding further into the SME working capital cycle?
SB: The real trick for SAB is how do we get further into the working capital cycle of the SME? Obviously, traditional payables finance is only after the acceptance of the invoice.
We want to be able to find a way to support the pre-acceptance, the pre-shipment, and the build phase of the working capital cycle for those SMEs, which is where they really need that additional support.
Why don’t we typically do this? It comes back to Neil’s points. It’s the fraud risk and the credit risk in that space.
BC: So how does emerging technology play into this de-risking agenda?
NS: It’s crucial for banks like SAB, which operate regionally, to have an interconnected and interoperable technology infrastructure. This infrastructure not only validates transaction data for fraud prevention locally but also does so on a regional scale.
Connection to things like the Saudi tax registry ZATCA, or connection to data aggregators like Lloyds List Intelligence and S&P Global for price validation, both domestically and regionally, enhances the utility of this infrastructure. It not only fosters wider adoption but also simplifies the user experience for banks.
SB: That’s exactly it. For SAB, it’s a slightly different situation as a local, domestic bank in Saudi. Cross-border financing is limited by banking regulations. However, we leverage the HSBC network to achieve that global and regional bank effect.
The necessary technologies are in place to establish an infrastructure that provides third-party validation for the elements fundamental to financing. So as a bank, I’m looking for a digital trigger for financing, taking out as much of the fraud risk as possible from the equation.
In the region, practices like double financing of invoices and circular financing, where related parties circulate and finance the same invoices among themselves, are quite prevalent. However, current technologies are effectively reducing these issues, enabling banks to inject liquidity with greater confidence.
BC: What are the regulatory challenges in keeping up with digital evolution?
SB: Regulation usually lags a bit behind digital evolution; that’s the nature of it. Regulators in this region tend to be engaged and forward thinking and receptive to input in terms of regulation.
Broadly speaking, the legal regulatory framework for banking has kept pace and is moving in the right direction. I think the one where we would see the benefit, in terms of Saudi becoming a trade hub, is the adoption of MLETR-compliant legislation locally, especially after the UK has adopted ETDA, and France and the US are making strides.
So if Saudi wants to become a regional trade hub, I think it would do well to accelerate adoption and I know that work is underway considering that regulation.
There’s a digital platform, the Nafith Platform, for promissory notes, for example, which underpins a lot of the financing in Saudi Arabia.
There’s a digital platform as part of the digital public infrastructure run by the Ministry of Justice that creates promissory notes, which if they come through that platform, are guaranteed to be enforceable.
BC: Do you see Saudi acting as a catalyst for other countries in the region to enhance their trade and regulatory frameworks?
NS: Vision 2030 set a trend. Other countries followed with different vision statements. Saudi Arabia has a knack for setting fashion or the pace, and one would hope that other countries in the region are willing and able to adopt innovative technologies for the benefit of trade, risk prevention, risk mitigation, and digitalisation.
SB: And I think in terms of adoption of specific legislation, I know that the DIFC recently adopted what they deemed to be MLETR-compliant legislation. Bahrain and the Abu Dhabi Global Market have already adopted legislation. So some jurisdictions are a bit ahead, but it hasn’t really gained traction yet.
Whereas, I think if Saudi adopted legislation and started doing transactions, I think it would have a snowball effect within the region.
BC: Returning to the topic of fraud prevention, what type of economic changes could be expected if these programs and technologies are implemented more widely?
NS: Using MonetaGo’s experience in India as a case study, we’ve observed exponential growth from creating safer financing environments. The focus on previously neglected sectors like the SME and MSME sectors has multiple benefits.
More financing translates into more economic growth; more goods produced, and more taxes generated. Additionally, increasing confidence in credit insurance, which might have been reluctant to underwrite in certain markets previously, catalyses even more lending.
This results in a domino effect—governments collect more revenue, businesses thrive, and banks profit. Ultimately, leading to widespread socio-economic benefits both nationally and regionally.
BC: Could you outline key next steps to advance the technology and fraud prevention industries?
NS: From the fintech perspective, agility is key. Governments can sometimes be slower to act, which is where partnerships between public and private sectors become essential to accelerate the time to market and subsequent benefits of these solutions.
An example is Swift; realising they weren’t agile enough to deploy necessary value-added services, they initiated a partner program, which led to our partnership with them creating a global standard for fraud prevention.
This standard has expedited our collaborations with central banks and other public entities, enhancing our impact across the GCC and globally. Such partnerships are crucial for thriving business and financing ecosystems.
SB: Absolutely, Neil’s point about the synergy between agile fintechs and the more methodical governmental approach is crucial. Saudi Arabia and other governments in the region are quite forward-thinking and plan strategically to incorporate these advancements.
The drive often stems from practical use cases provided by corporates and fintechs. As a bank, we may not always be as nimble, but we are committed to supporting any development that facilitates our operations—more digital trigger points and controls mean a smoother process in trade finance.
We’re very keen on anything that bolsters this environment, as it ultimately simplifies our work and enhances the services we can provide.
