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Oct 18, 2012 12:16 PM IST | Source: ft.com

Commodity trade finance lures Arab banks

Liquidity-rich Arab banks have been quietly participating in commodity trade finance, which until recently, was dominated by a handful of French banks that provided credit lines to top trading houses such as Glencore, Vitol and Cargill.

Commodity trade finance lures Arab banks

Liquidity-rich Arab banks have been quietly participating in commodity trade finance, which until recently, was dominated by a handful of French banks that provided credit lines to top trading houses such as Glencore, Vitol and Cargill.


The increasing presence of banks from the United Arab Emirates, Qatar, Jordan, Bahrain and Saudi Arabia comes with the lower market share of eurozone banks in commodity trade finance, which dropped from 80 per cent two years ago to 50 per cent currently, according to recent published estimates by the central bank of Canada.


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Eurozone banks, the main financiers of trading houses, have reined in their lending due to constrained US dollar liquidity. BNP Paribas, Crédit Agricole, ING and Société Générale had provided most of the credit lines to the traders.


The amounts provided by Middle East-based banks are still relatively small, but anecdotal evidence suggest a growing interest in the region, bankers and executives say.


Trafigura, the world's third-largest oil and second largest metal trader, recently tapped a group of eleven Arab banks for a $400m loan facility. Bankers and executives said that Arab banks had also joined several global revolving credit facilities launched by Swiss-based trading houses this year.


Christopher Fix, chief executive of the Dubai Mercantile Exchange, said that there was "quite a bit of liquidity" in the Middle East region interested in commodity trade finance. He added that Arab banks could soon provide some of the loans that underpins the flow of crude oil out of the Gulf to global markets.


Industry executives said that some banks were exploring ways if they could structure commodity trade finance to make the loans compliant with sharia, or Islamic law, to increase the appeal of the product. Islamic finance is one of the fastest-growing sectors of the global financial system.


Commodity trade finance has a turnover of $1,500bn a year and is considered a low-risk, low-return business. In addition to the arrival of petrodollars to the sector, bankers and trading house executives said that financial institutions from China, the US and Singapore were also becoming more active in the sector.


The dollar funding scarcity has cut credit availability to commodities traders by 20-30 per cent, forcing trading houses to pay more for their loans, bankers say.


The move by the Middle East-based banks follows the involvement of the region's sovereign wealth funds in commodities trading houses. Qatar Holding is about to to become one of the largest shareholders in Glencore through the merger with Xstrata while Aabar of the UAE is already a top investor in Glencore.

The Commodities Note is a daily online commentary on the industry from the Financial Times

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