Over the last couple of years the MENA and GCC markets have started to push for more diversity in their financial activities. Securitisation has emerged as a catalyst and is experiencing notable growth that has already materialised in markets like Egypt, Lebanon, Saudi Arabia and the GCC countries. Some specificities related to these markets and major hurdles that have slowed progress, are examined thereafter.
Securitisation has already demonstrated its ability to structure transactions in markets where no specific regulations exist. Most of the countries in the MENA – GCC regions have yet to enact such regulations. Some countries have or are on the verge of enacting regulations. Others have yet to envisage such reforms and remain a challenge for securitisation transactions. Several countries have addressed the securitisation issue in a formal way, like Turkey, Tunisia and Lebanon for instance (which has recently enacted a new securitisation law). It is interesting to mention that the absence of such a precise and predetermined setting has not been a hurdle for securitisation transactions, a number of which has already close in some MENA – GCC countries.
In looking at Saudi Arabia and all other sharia based systems, it can be determined that there are stringent restrictions and uncertainties at many levels. Although transfer of assets or receivables is allowed, some restrictions apply as to the nature of the purchaser. Also, courts apply Shariah law in their decision-making process. Shariah is itself divided into different schools of thought. Although the Hanbali school is dominant in Saudi Arabia, a sitting judge can decide to choose another school of thought and focus exclusively on substance, ignoring what was created in form (a necessity in structured finance). This brings great uncertainty and instability to the cornerstone of a securitisation transaction: the concept of true sale. The possibility of re-qualifying a true sale and of piercing the legal and corporate veil makes any investor very weary of such a risk. Another problem faced in Saudi Arabia and in some other countries in the area are the very strict laws on foreign ownership. These hurdles imply that for transactions in such countries, the best ways to structure a securitisation transaction would be by using a two tier structure with both an SPV in the country of origination (the “Owner SPV”), and one in a foreign country, (“Issuer SPV”), with adaptable legislation (Jersey, Luxembourg…). It is necessary to mention that it is not an option to create an SPV as a subsidiary of the Originator, since it would expose the “Owner SPV” (the “local” one) to consolidation risk and would remain under the control of the originating entity.
In addition to the above mentioned factors there are a number of factors to be considered in any market for securitisation. In the MENA – GCC region these factors are also hurdles at this very early stage of the evolution of regional structured finance. The absence of fixed income capital markets which efficiency is measured by their ability to accurately and transparently reflect a true measurement of risk and return. Simply stated and in a market ignored by the Rating agencies, there is a real problem with information gathering, processing, disseminating and analysing.
In the rare cases where the mentioned handicaps can be overcome, some additional factors come into play. From the investors’ perspective, there is real hesitation to engage in what still seems to be an exotic financial instrument. This is a result of the lack of experience and exposure but also in case of banks, it is the result of fear of competition. Additionally, the stagnation of financial activities has affected the private sector. Companies that otherwise would be viewed as potential clients for a securitisation transaction, are so dependent on traditional banking and on their relation with those banks and would hesitate to jeopardize these relationships for a financing alternative. The choice of securitisation often comes at a moment where a company would have exhausted other alternatives. Beyond the absence of harmonisation of the standards used throughout the region which already makes the data eventually available hard to understand, the implementation of the International Accounting Standards (IAS) raises another problem. These standards (IAS or other) are the result of a lengthy nurture process stemming from back and forth “trial and error” actions on very sophisticated markets. Standards have been put to the test and improved on numerous occasions. They grew in sophistication along with the markets. This is a major difference with MENA – GCC where these standards have been imported in their most refined/sophisticated version. Thus, instead of starting to evolve in a rather flexible market, regional markets have to evolve with complicated accounting standards that developed markets did not experience while growing their business. This puts an additional hurdle for innovative financial instruments.