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Retreat of traditional commodities trade financiers set the stage for global activist funds

By Naim Azad Din, Vice President, Sidra Capital 22 May 2012

In recent months, we have seen major global banks exiting or sharply deleveraging their exposure to certain segments of the commodities' trade finance sector and have tended to refocus exclusively on the largest international trading houses. Three of the major global banks had announced, either publicly or privately, of their reduction and/or exit plans since November 2011 to cope with the latest capital adequacy framework requirements which are likely to have significant impacts on the banks' capital ratios. According to some estimates, they collectively account for roughly half of the lending to the world's commodities trading houses.

Other major European banks have also announced or put in place similar plans. The move has signaled potential liquidity constraints for the majority of the small and medium size (SME) commodity players within the sector. Knowing the importance of SME growth in maintaining the global economic recovery, this inevitably requires imminent albeit sustainable solutions.

The crisis is not only European but seems to be global given that these banks did not just lend to European trade finance players but were also among the largest trade finance and commodities finance banks in Asia. Though it is believed that the larger Asian banks and American banks are stepping in or will step in to fill in the vacuum, the question is whether it would be enough and how sustainable it would be in view of a more stringent capital charge requirement under the updated framework.

As the effects of credit contraction trickle down the business value-chain, the SME commodity players will be forced to either look for alternative sources of trade financing or run their businesses on cash from equity. Again, the issue of sustainability lingers on for these players.

This has presented an opportunity for Global Activist Funds to profit in terms of growing importance and relevance as well as size. In a nutshell, activist funding could be viewed as a substitute to trade finance at least from an operational perspective because they both target similar market participants - i.e. real commodity players - but they significantly differ in their operations because activist funding does not target speculators.

Activist funding is also not governed by BASEL III and hence capital charge would not be part of the consideration and this would have significant bearing on how transactions are priced. They support real trade finance activities and therefore the real economy by emphasizing on the quality of the prospective transactions rather than beneficiaries' balance sheets, like most financial institutions primarily do.

From an asset class perspective, activist funding could be carved out as a class of its own whilst capable of being the optimizer for any investment portfolio. Its return is commensurate to the risk assumed, which will be assessed, priced and where possible assigned to third parties, including insurance companies. Further, it offers low correlation to other asset classes; no price directional risk as qualified transactions have to be self-liquidating; and a high volatility absorption capacity.

One of these activist funders is INOKS Capital based in Geneva. It currently advises and manages two funds named Ancile Fund and Ancile Fund SICAV-FIS with assets under management of USD 85 million. It entered into a partnership with a Saudi Islamic investment bank, Sidra Capital, to develop a Shariah-compliant collective investment scheme to undertake various investments within the commodities trade sector based on a similar strategy as activist funding.

Sidra Capital focuses on developing and offering alternative investment products only ranging from real-estate, structured trade investments and leasing.

The sponsors believe the time is right for the roll-out of such products to partially assume the traditional roles now left unattended by the banks. Not only will it ensure continuity for the trade financing transactions but it will also uphold the spirit of Islamic economics in general by ensuring strict compliance with simple Islamic financing structures' values and criteria.

Naim, VP Asset Management of Sidra Capital.

Joined the firm in Jan09 following a stint with HSBC, Malaysia where he was the Global Relationship Manager with its Global Banking & Markets team. He was primarily responsible in managing the entire spectrum of banking relationships with key Multi National Companies and most importantly, Government-Linked Companies (GLC). His experience gained during his stint at Public Investment Bank, the 2nd largest banking group in Malaysia, had provided him with the relevant skill set in managing major corporate exercises as he was responsible in managing numerous transactions following the 1997/1998 Asian Financial Crisis.

© Zawya 2012

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