Chalhoub Group, the leading partner for luxury across the Middle East, set up a centralised group treasury function back in 2014. Seven years later in 2021 in the next step on a treasury transformation overseen by Group Treasurer James Adams, the company established a separate entity for in-house banking, IHB. The process has standardised risk management policies and procedures with central oversight and control, and helped achieve significant savings from economies of scale and enhanced governance that come from reducing touch points with the market and rationalising the banking stack.
“Historically, the treasury activities were managed on a decentralised basis in the local operating entities. There were several problems with this, including cost effectiveness, limited visibility of global risks and lack of standardised policies with each operating entity taking a separate approach,” Adams tells Treasury Today in an interview from Dubai where he charts a treasury trajectory that has now become a bellwether for others.
Chalhoub Group was one of the first regional corporates to bring treasury under one umbrella and introduce an IHB to usher in benefits like fewer bank accounts and lower fees, increased liquidity and improved cash visibility and forecasting, positioning treasury at the forefront of a trend that is now increasingly visible amongst other fast-growing regional champions.
“Today we see more treasury functions embarking on this journey,” reflects Adams. “Going forward, we see more companies focusing on their treasury function to enhance governance and efficiency, with cash forecasting analytics, IHB and potential AI applications in treasury all playing key roles.”
A changing landscape
Demand for centralisation and separate IHB entities is coming from both large multinationals using Dubai and the UAE as a hub to manage their Africa and Middle East operations and the region’s largest home-grown corporates, typically oil and gas groups or FMCGs, reflects Viplav Rathore, Managing Director TTS and Head of LMS for Middle East & Africa Cluster at Citi.
The Middle East is one of several regional treasury centres for MNCs seeking to bring multiple functions under one treasury roof. These companies are rolling out cloud-based platforms in the region and have evolved IHB strategies and structures they have deployed in other treasury centres. They have also honed policy guardrails and are well-versed in empowering regional treasury centres to manage specific geographies.
MNCs are unlikely to use an IHB to borrow in local capital markets or tap bank revolving credit facilities, opting instead to draw on inter-company funding from their HQ to finance their operations, continues Rathore. Hedging also remains a centralised function, managed outside the Middle East. But MNCs are using an IHB to centralise bank account and relationship management and optimise cash and liquidity management. Some trade finance management is also being run by the regional entity, he notices.
In a parallel trend, local corporates are also getting in on the act albeit at a much earlier stage of their centralisation journey. For many, this has begun with developing a more sophisticated approach by hiring dedicated, professionally ACT-qualified treasurers to replace “double hatted” treasurers and finance officers for the first time.
Technology upgrades are also indicative of this growing sophistication, continues Rathore. TMS is now commonplace amongst regional corporates, and more treasurers are seeking to upgrade their ERP solutions in an evolution that indicates regional corporates can now justify investment in more sophisticated platforms as they expand the scope of the treasury function compared to five years ago.
Typically, cash pooling and liquidity optimisation are the first functions local corporates are centralising under an IHB strategy, followed closely by rationalising local and international bank relationships. Capital markets activity is beginning to step up too, visible in some corporates dipping a toe in the Sukuk market. Hedging, FX and interest rate risk management, and trade finance transactions, are also important but for regional champions, the level of globalisation is more limited.
How to get started
Regional corporates laying the first bricks of an IHB should begin by choosing a common entity that faces the Street (the financial community) and can provide arm’s length services to the various company affiliates. “Treasury teams begin by putting the paperwork, entitlements and scope of the entity in place to empower the IHB to operate on behalf of affiliates using the IHB,” explains Rathore. It requires focusing on local regulations and compliance requirements because different countries in the Middle East have different regulations, he continues. “Setting the scope of the entity and the currencies and entitlement around what the IHB can do is key,” he says. “It requires going through and seeing which entities can participate and what services can be offered without tripping withholding tax or local regulations.”
For example, some regional currency management may fall outside the scope. The Bahrani dinar, UAE diram, Quatari riyal, Kuwaiti dinar and Saudi riyal are all in scope, but managing currencies subject to strict controls will immediately fall outside the reach of an IHB. Moreover, functionality rarely includes trade finance at first either.
Setting the scope was central to the evolution of Chalhoub Group’s IHB. “The project required significant transformation and change management. We simplified the approach by starting with activities that could more easily be centralised into a Group Treasury function like FX, intercompany loans, funding and cash pooling,” recalls Adams. “We then gradually broadened the scope over time to include other areas. The most complex aspect that we have still not fully transitioned relates to the areas outside the direct scope of Treasury, particularly within accounting, for example, payables and receivables.”
The importance of buy-in from the different entities is important. For example, some corners of a business might be part of a joint venture, an acquisition or operating independently and won’t be included on the platform. “It involves drawing up a procedural framework whereby guiding policy documents adopted by the board shape the process and detail each country’s exposure,” explains Rathore. “Citi runs a green/amber/red process that will highlight different countries where buy-in is easy and the benefits will quickly appear: a red zone might include a JV partner or self-managed entities.” A similar classification can also be used for the ease of regulation and level of participation allowed for that country of operations.
Alongside the need for specialised skills and experience in change management and centralised treasury, building an IHB also requires a sophisticated ERP solution like SAP. Tracking, managing and settling inter-company positions and transactions depends on a system that can manage and warehouse transactions. The platform must also support tax, compliance, legal and operations teams. “It’s very important for companies operating in multiple jurisdictions to not trigger cross border obligations on the company. There is a big difference between a single entity offering services across the board to simply setting up in a particular market and selling in one place,” says Rathore.
Looking to the future the more sophisticated corporates in the region will evolve IHB by starting to offer payment hubs and more advanced processes like netting – FX and internal interest rate hedging – and payments and collections-on-behalf-of (POBO and COBO). This requires a strong platform to track, manage and generate payments and any roll out still comes against the backdrop of limited FX hedging co-entities. “Hedging activity is still small because all transactions are still back to the US dollar. We don’t see many euro or sterling-dominated transactions yet,” says Rathore.
“Our ultimate end goal will be to achieve a central POBO/ROBO structure with virtual accounts, allowing us to maximise the benefits from centralised cash management. However, there are several dependencies required to achieve this, including simplifying the group structure and rationalising the banking services,” says Adams.
The risks
Setting up an IHB comes with complex risks as well as compliance with local regulation to ensure the entity doesn’t inadvertently trigger tax obligations is perhaps the most important. Change management requires buy-in and sponsorship from the top; participation and a preparedness to delegate. It also demands a deeper skills set than simply pulling people from the entities. “It really does involve investing in technology and finding people who understand change management and understand how to construct something at arms-length, and how that should work,” reiterates Rathore who adds that the cost will also depend on the size, scale and the number of entities and markets.
Treasury teams in the Middle East should also prioritise the legal framework advises IHB specialist Bas Duynisveld, Head of Business Treasury at AkzoNobel, recalling his own experience at the company which set up an IHB from its Dutch headquarters in 2010. “One of the most important elements of an IHB is ensuring a solid legal framework. Legal issues define the agreements with our internal parties, and we have built a framework for transacting with our internal parties using service-level agreements that we review on a timely basis,” he says. Like Middle East corporates today, back then a primary motivation at AkzoNobel was to replace a fragmented landscape where different parts of the businesses had their own banking relationships with a centralised structure.
Positively, Middle East corporates will save from not touching the Street, avoiding contact with banks and providers. As companies reduce the number of touch points with the market they can tap more efficiency from spreads, self-fund and hedge through a netting entity. An IHB brings more control over costs and flows, enables treasury to reduce their banking footprint by rationalising the banking stack and RFPs. Experts say the process typically takes six to 18 months and savings can quickly appear.
Regional corporates should also bear in mind it’s an iterative, patient process. In another example from Europe, Solvay, the Belgian MNC chemical group, began setting up an IHB in 1984. It’s current set up is the result of several iterations over the past four decades which only now encompass a centralised and comprehensive system that covers cash pooling POBO/COBO intercompany funding, FX hedging and centralised treasury information and reporting.
“Be clear on the requirements from the outset,” concludes Adams. “Ensure there is full executive sponsorship and stakeholder buy in. As with any transformation project, do not underestimate the resources required, and recognise that change management will be key. Consider approaching the project in stages to make it more manageable. Future stages need to be incorporated into the treasury strategy and future proofed from a people, process and systems perspective.”
