How Trade Finance Drives UAE’s Export & Growth

How Trade Finance Fuels The UAE’s Export-Import Industries

The UAE has become an excellent trade hub due to its strategic location, business-friendly policies, and robust financial sectors. The UAE is among the ​world's top 20 exporters: UAE is globally 21st largest exporters. Moreover, the  UAE plays a vital role in international trade and finance. However, businesses engaged in exports and imports embraced themselves in trade finance to get many financial solutions. Trade finance is meant to diminish the gap between when products are purchased and when the importer distributes them. In UAE, trade finance is done with local and international banks, and it offers services to businesses and other programs. Also, trade finance gives businesses financial mechanisms so they can do local and international trade without much maturity. The UAE is an excellent global trade player. They hold a liberal trade regime. This regime includes low tariffs and few non-tariff barriers, which promote trade and market access for products. Trade finance includes- Banks, Trade finance companies, Importers and Exporters, Insurers, Export credit agencies, and service providers.

We will be discussing the role of Trade Finance and the lackings and prospects in this article.

Trade Finance as a Driving Force in Import and Export:

In the UAE, trade financing, letters of credit (LCs), and export financing are essential for enhancing international trade, mitigating risks, and making timely payments for exporters and importers. Trade finance improves cash flow during international trade transactions and various financial instruments to smooth export operations. The components provided by trade finance for exporters are:

• A letter of credit (LC) is such an instrument by which an importer bank ensures making payment to exporters if the terms and conditions are fulfilled. 

• Export Credit Agencies (ECAs)

• International Trade Facilitation: Trade finance provides essential tools and procedures to involve international and local trade 

• Financial Access: Trade finance helps access financing and reduce risk to expand businesses and enhance growth. 

• Risk Reduction: Trade finance instruments, bank guarantees, and letters of credit reduce risk for foreign trade.

• Economic Diversification: By enabling growth in non-oil sectors, enhancing export competitiveness, attracting foreign investment, supporting digital trade and fintech growth trade finance is facilitating Economic Diversification in UAE. 

• Transactional Streamlining: trade finance plays a critical role in transactional streamlining by optimizing cash flows, timely payments, and reducing risks.

• Enhancing the Trade Hub Role: Trade finance creates opportunities and enhances the position of the UAE's trade hub. 

• Trade Relation Growth: Trade Finance enhances the relations between buyers and sellers ensuring proper and timely payments. 

• Invoice discounting: trade finance immediately converts the invoice discounting into cash flows.

• Export-import credit facilities: trade finance facilities providing credits for traders.

Other Importance of Trade Finance: 

• Trade finance gives short to medium-term working capital using exported and imported products and services as security and collateral. Consequently, companies increase revenue potential and improve profit margins.

• Trade Finance gives companies opportunities to stock large amounts of products and benefit from the economic scale.

Trade finances Importance to liquidity Businesses:

• Trade finance mitigates the gap in cash flows for companies and provides credit time to customers facing delayed payments. 

• Trade finance supports SMEs to compete with larger businesses. 

• Trade finance facilitates diversification in dealing with varieties of suppliers. 

Export-Import of UAE: 

The UAE exported $99B in crude petroleum in 2023. Which makes it 5th largest exporter of crude oil. This is the main export product of the UAE. The major destinations of crude oil are Japan, Thailand, India, and Singapore. The United Arab Emirates was the world's second-largest gold exporter, which was $46.8B. The destinations are Hong Kong, Switzerland, Turkey, India, and Saudi Arabia. UAE’s trade finance plays a vital role in contributing to the country’s position as a gold trade hub. The liquidity and management tools provided by trade finance help risk management in gold transactions, catching miners, refiners, traders, and end users. Moreover, gold trade increased 36% in 2023. This fact requires a corresponding increase in trade finance liquidity. 

Recent Export-Import Data of UAE: 

Exports: The top export materials of UAE are Crude Petroleum ($99B), refined petroleum ($51.8B), gold (46.8B), broadcasting equipment ($13.6B), and petroleum gas ($13.2B). The main destination countries are China ($40.2B), India ($38.2B), Japan ($37.4B), Iraq ($22.6B), and Thailand ($15.8B)

UAE was the World's biggest sculpture and limestone exporter, the amount was $852M and $695M respectively in 2023.

Imports: The top import products of UAE are Gold ($75.2B), Cars ($22.5B), refined petroleum ($17.3B), and diamonds ($16.7B). The destination countries are China ($74B), India ($28.8B), USA ($24.6B), Turkey ($14.7B) and Japan ($13.8B). However, UAE was the world's biggest importer of Tug boats ($1.05B), Other Sea Vessels ($774M), Pitch Coke ($219M), Bitimin and asphalt ($140M,) and Large Aluminium Containers ($27.4M)

UAE’s Trade Finance Current Condition:

UAE's dynamic trade finance sector has become a key factor for global business expansion. This enables BNG to optimize capital and achieve sustained growth. The country's trade levels reached  $ 800 billion in 2024, which was a record growth. The major reason for this is the oil-producing sectors contribute 30% of the GDP. Also, oil and gas exports make up nearly  13% of their total export value. 

The UAE has a liberal trade regime with low tariffs and few non-tariff barriers. They are pursuing improved market access through multilateral trade liberalization and bilateral agreements. Moreover, their objective is to reach 50% from non-oil foreign trade. Digitalization is introduced to improve customer experience and the UAE Trade Connect system aims to combat fraud and invoice duplication. The government, banks, and technology firms prepared the UTC system to face the paper-based systems.

USE's enterprises are citing 51% currency volatility as a top supply chain worry. Companies are utilizing traditional trade finance, inventory finance, and working capital to the funders to smooth out trade risks. 

Leveraging Trade Finance Effectively: 

Enterprises should understand their needs of whether they need short-term liquidity, long-term financing, or risk management. They must do a detailed analysis of their requirement. Also, they should choose the letter of credit or trade credit insurance that aligns with their business, mission, and vision. However, they must also discuss with lenders about fees, payment periods, interest rates, and business needs. 

The gap in Trade Finance: 

UAE's trade finance has huge potential, though there exists a gap due to the rejection of SME applications from banks. These occurred due to some regulatory operational challenges. SMEs (Small and medium Enterprises) struggle to meet many requirements like credit history, extensive documentation, and collateral. Furthermore, banks are also facing challenges to provide SMEs including lack of collateral and security.  XYZ Trading LLC is an SME in Dubai that struggled to secure trade finance despite having great demand for its products. 

The trade finance gap was $3.3 billion in 2020. These are due to weak regulations, lack of proper compliance, sanctions, and export controls. 

Future of UAE’s Trade and Export-Import: 

UAE is involving digital technologies in financial solutions and trade finance. Moreover, to facilitate cross-sectional data sharing and transaction initiation Central Bank of UAE is introducing and Open finance platform. The field of trade finance and other financial Institutions are using machine learning in credit risk management and other activities. So these would streamline the process and help to achieve growth. So, digitalization, blockchain, and technological innovations are pushing the UAEs businesses to a faster-growing rate. 

Conclusion: 

Good administration, political forstraight, and ideal location make UAE the Global Trade Hub. 

Trade finance can be considered the backbone of the export-import sector of the UAE. That's why, companies streamline their processes and get timely payments. If UAE continues to develop its position as a trade hub, trade finance will be essential in deriving opportunities, growth, and sustained international trade and commerce.

This is for all business owners, financial consultants, brokers, entrepreneurs, legal consultants, or individuals seeking to finance their business or start a new company. Seek professional help, by reaching out to the contact below, you can get in touch with the author of this blog: WASIQ SUHAIL.

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