Katherine Evans participates in the IR Global Guide – The Middle East & North Africa: A dynamic region for inward & outward investment

Foreword by Andrew Chilvers

The Middle East and North Africa (MENA) region is a hugely diverse cultural and geographical mix that stretches from Morocco in northwest Africa to Iran in Southwest Asia.

The region is home to a range of economies with vastly different levels of openness to international trade and investment. But with the help of international organisations such as the OECD and IMF, along with local and foreign investment, much of the region has started to make giant strides in economic development in recent years.

Despite the Covid-19 pandemic that resulted in negative growth of 3.8% for 2020, most analysts agree the region continues to offer ideal opportunities for businesses and investors going forward. Indeed, with the pandemic starting to ease, an estimated $4.1 trillion of projects are planned or underway in many countries across the region as they continue to diversify and expand their economies.

Moreover, to ease the stress on local companies while offering incentives to foreign investors, most MENA countries recently announced a series of fiscal stimulus packages including tax payment reductions and loan guarantees for businesses. These moves have been popular inside and outside the region for encouraging investment and many analysts predict growth increasing to as much as 3.1% for the region in 2021.

Nevertheless, this uptick in economic growth depends on several factors including the ongoing success of the Covid-19 vaccine rollout across the region and the stabilising of oil and gas prices. Furthermore, if geopolitical tensions continue to stabilise, many believe oil exports will recover to 1.8% for 2021 and this will be supported by the resumption of large-scale capital investment projects that were largely put on hold during 2020.

The MENA region: bursting with opportunities for businesses that want to enter global markets

The MENA region has huge commercial opportunities for businesses wanting to bring their products and services to new markets, as well as for businesses from within the region looking outwards for investment opportunities and international markets for their own products and services. This activity is only going to increase with the opening up of trade between UAE and Israel. Israel is currently the MENA hub for the hightech sector, and UAE (particularly Dubai) is currently functioning as the leading entrepreneurial hub of the MENA region, attracting investors from Asia and Europe to supplement their home-grown regional expertise.

One of the biggest drivers for Mirkwood Evans Vincent’s corporate legal team in recent years, has been the need to find alternative sources of investment for our clients, which bypasses traditional banking institutions, partly due to the difficulty of securing sensible offers for young businesses operating in the technology sector, and partly due to what we have increasingly seen as the over-eagerness of traditional banks to foreclose on basically sound businesses because it appeared more profitable to cash in loans than to support businesses in difficult times.

Whilst replacing traditional banking products with Islamic finance products is far from a panacea for the ills of the world economy and whilst there are still angel investors out there who are interested in sharing risk with the businesses they invest in, there are some serious issues with the standard capitalist financing model, which have caused financial crashes of serious proportions in recent years and are likely to continue to do so. We have a global economy based on debt and a reliance on annual growth in GDP on a per country basis, which is environmentally unsustainable, together with the creation of an artificial money supply not backed by real assets. Islamic banking products such as Mudharabah, Musharakah and Ijarah at least come from a different place in terms of the requirement to apply risk and profit sharing across all contracts.

Let’s look at the example of compound interest, a key ingredient of the traditional banking system. Compound interest sounds like a fabulous concept if you are an individual putting money into a pension scheme in your twenties and watching that money grow through the decades based on the performance of investments made by the pension company. It takes a more sinister turn though if you are faced with the real situation of countries which borrowed US$5 billion in 1985 for an infrastructure project but would have seen that debt grow to US$44 billion by 2000. Islamic banks would not have been able to charge more than the initial premium for the cost of the infrastructure project, which would have meant that US$5 billion could only have increased based on increased value for both parties. The debt itself would have to have been fixed.

The importance of a shared risk and reward model is important for businesses wanting to use money to buy assets. Using an Islamic finance product such as Ijarah, the bank might buy the asset for the business and agree a fixed annual “rental” for the asset based on its total asset value at the point of purchase. If the business paid back 10% of the original purchase price in the first year after the Ijarah was entered into, the business would now own 10% of the asset with the bank owning the remaining 90%. On that basis, the rental payable by the business to the bank for the subsequent year would reduce to 90% of the original annual rental figure because now rental would only be due on that part of the asset which the business did not yet own. This process of transferring ownership of the asset over time would continue until the business owned 100% of the value of the asset. This is a model that a number of my non-Islamic clients have found most attractive and innovative vs the more traditional bank finance options.

My firm is very fortunate to have excellent contacts within the region through the IR Global MENA group. In the last six months alone, two of my clients have successfully found interested investors to help their businesses grow, using businesses based in the MENA region looking to expand their business portfolio. I have also been able to assist other firms to assess the legal implications of opportunities with tech clients to ensure that the best possible solution can be delivered to those clients. Whether you are a UK business looking for investment or interested in selling your goods and services into the MENA region in a post Brexit world, or whether you are a MENA business looking to do business in the UK or find investors from the UK, I look forward to discussing your business’ plans for growth with you, using the wealth of expertise available through Mirkwood Evans Vincent and the IR Global MENA group.