Historically, companies have expanded across the Middle East and Africa, a region that spans countries as diverse as Dubai and Nigeria, by setting up small treasuries on a country- by-country basis, establishing single country operations.
Today there is an increasing initiative amongst MNCs in the region and fast-growing regional champions to introduce a more centralised view of treasury that brings standardisation, policy frameworks and new procedures to bear.
“Developed market MNCs and large Middle Eastern companies, especially in commodities, hydrocarbons and the FMCG sectors, are now established in Africa and the Middle East. We are seeing these groups starting to establish a group treasury structure, often accompanied by an underlying in-house bank (IHB) aspiration,” explains Viplav Rathore, Managing Director, Liquidity Management Services, based in Citi’s Dubai office where he supports clients across 20 regional markets from Nigeria to Turkey and Pakistan.
Establishing a group treasury involves introducing a new tone from the top, he explains. In a gradual process, HQ will step up the advisory support it offers its single country treasury, often run by just one person taking care of all the treasury needs from hedging to liquidity. In a next step, a large part of the execution and control function shifts to HQ, providing policy frameworks to cloud based platforms.
The final step on this journey involves establishing an in-house bank. But Rathore flags IHB entities have yet to land in the region. “The regulation is still complex,” he explains.
The gradual trend in regional treasury centralisation is supported by other key themes emerging in the region like demand for working capital optimisation, automation and ESG integration.
The challenge of multiple banks
One of the biggest challenges corporates in the region face is navigating multiple pockets of cash across different countries and legal entities, which sits with multiple banks. Rathore explains that this leads to dispersed cash and presents key funding challenges given the difficulties of moving money out of different markets. He adds that many corporates are still wary and cautious of using multi-bank Swift solutions.
Multiple bank relationships have led to poor cash visibility that also makes forecasting difficult. Moreover, as the region’s companies flex internationally, having the right currency in the right place in real time is an essential pillar to growth. “Real-time treasury has become an aspiration,” he says.
Corporates could introduce at TMS and ERP, but Rathore reflects that companies’ appetite for “systems spend” is often limited. Many TMS solutions are expensive, and it is difficult to pick and choose the most useful applications. “They have to buy the full package,” he explains.
“Clients want to select a solution, but cost is an issue.” He says sophisticated corporates that issue debt require counterparty risk systems, a credit system and processes that track bank lines. But not all corporates in the region need this Rolls Royce support – they just need a cash pooling model and to establish self-funding models.
Corporates in the region also face another challenge: they lack credible counterparties that can overwrite high levels of country risk. “Corporates in the region always struggle to find credible counterparties from a credit risk perspective,” he says.
Citi advises clients to focus on addressing the problem they are trying to solve. For example, if they want more visibility, they should look for a balance [sheet] and visibility aggregate solution. If they want to originate transactions with multiple banks, Citi Direct offers the ability to relay Swift messages to other banks. “With Citi Direct, they don’t’ have to log in to multiple banks and can originate transactions from a single platform,” he says.
Other centralisation strategies could include introducing savings by reducing the number of bank accounts and costly KYC and maintenance. He reflects that only rarely are these bank relationships linked to credit lines or credible counterparties, and treasury could put the savings into a TMS solution. “A standalone TMS won’t sail, but it could dovetail with other transformation benefits that offset the cost of a TMS solution.”
He concludes that corporates are also latching on to virtual account solutions.
“We have found that clients are able to rationalise the number of bank accounts by setting up virtual account solutions which can then be linked to an ERP. Because they are self-managed the reconciliation happens quickly.”
