SVB fall may just be the nudge regulators need to accelerate financial services in MENA

The Silicon Valley Bank Financial Group's collapse on March 10, one of the biggest bank meltdowns since the 2008 financial crisis, has shaken startups across the world.

While companies in the US, China, India, South Korea, Africa, the UK, MENA, and Southeast Asia spent sleepless nights in the aftermath of SVB’s collapse, MENA has particularly been hit hard as there is no bank that can support venture capital in the region.

According to a senior SVB executive who spoke on the condition of anonymity, local banks in the Middle East do not understand how venture capital funds are structured and how they are funding their companies. As a result, many MENA-based startups turned to SVB for their banking needs.

"Silicon Valley went through turmoil last weekend with the collapse of SVB, causing many startups, including several of Qashio's clients, to have funds locked up temporarily," says Jonathan Lau, Co-founder of expense management solutions provider Qashio.

"Fortunately, regulators and US government officials took swift action to ensure depositors were made whole and SVB is now fully operational. All our clients now have access to their SVB deposits today and are able to continue transactions and payments," Lau adds.

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Low confidence

The main impact, according to Lau, will be seen in tech investor sentiments, particularly when it comes to lending and venture debt. However, what will be the long-term effect of SVB’s collapse remains anyone’s guess.

For example, Kuwait Finance House has $1.2 million exposure to SVB, but it issued a statement to Arabian Gulf Business Insight saying there has been no material financial impact from the fallout.

The challenge of the collapse is the overall effect it has on the confidence in the sector. “This creates risk aversion and a lack of risk appetite,” says Philip Bahoshy, Founder of MagNitt.

"This is a push for regional banks and financial systems to become more empathetic towards startups," explains Prashant K Gulati (PK), Chairman Emeritus TiE Global and an early stage investor and mentor. "Considering how interesting the ecosystem in the MENA region has become, the amount of support was lacking,” explains Gulati.

Paperwork and the time required to open a bank account are one of many hurdles in MENA's banking ecosystem.

In search of solutions

An event like SVB opens eyes toward what can be solved within a region. As Jane Khedair, Executive director of the Institute of Entrepreneurship and Private Capital (‘IEPC’) at London Business School puts it, “The obvious and most readily digested lesson learned by companies is to open multiple bank accounts to avoid being overexposed to any.”

“Not ideal in the interest of an efficient operation but a measure that may well protect them going forward and facilitated by the Delaware incorporation of many of them to provide them with the freedom of choice,” adds Khedair.

According to Khedair, the abundance of family money in the MENA region has perhaps created a safety net for startups, especially for founders who are fortunate enough to leverage these connections.

“In the meantime, it will be interesting to see how these fledgling ventures, which rely on cash to accelerate their growth, may well be forced to exercise a more cautious approach,” says Khedair.

SHe explains many have started looking at the SVB collapse as an opportunity. Bahoshy, in his newsletter, explained that he has started to hear that banks such as HSBC, and JPMorgan, and other financial technology companies such as Mercury are building facilities to support banking in MENA. It is an opportunity for local banks as well to provide a more efficient startup and VC-friendly account opening process.

Opportunity

“One thing that SVB did quite effectively in the US was to provide loans and other alternate banking products that were beneficial for startups. In an ecosystem where venture capital funding is receding, alternative asset classes as opposed to venture capital are still a very nascent concept. Our Venture Debt report saw only about $260 million deployed across 18 deals. Recently, Goldman Sachs Group backed Kingdom of Saudi Arabia’s fintech company Tamara in a $150 million debt facility,” adds Bahoshy.

He explains a collaboration between the banking industry and the venture capital community is vital to provide facilities and support startups and consequently, minimise the reliance on having to use international banks.

“For the MENA region, we do not foresee any serious negative implications for the local tech startups here. Many local fintech companies, including ours, usually hold client deposits with the region's most secure and prominent banks and they have no reason to worry about counterparty risk,” adds Lau.

And, the financial crisis doesn’t stop at SVB. Troubled global bank Credit Suisse, which is being acquired by UBS, has also created a ripple in the region’s banking system. Saudi National Bank (SNB), the kingdom’s biggest lender, had taken a 10% stake in Credit Suisse last year when it raised $4.3 billion.

However, economists add that the SNB now has enough liquidity to withstand any losses that come in from Credit Suisse’s collapse.

“First SVB and now Credit Suisse–this has been a challenging week for governments, the investment community and for growing businesses. While the two incidents are symptomatic of what could be perceived as a banking crisis, their issues stem from very different circumstances and the response from regulators should steady nerves and build confidence in order to ensure that we don’t see a repeat of 2008 and the Global Financial Crisis,” Khedair says

That said, businesses globally–including those in MENA where so many of the region’s startups rely on SVB for their early-stage funding – have been shaken this week and continue to be on high alert,” adds Khedair.

According to Gulati, the world has adopted the Silicon Valley way of funding—where high-tech companies are built based on venture capital funding models.

“It is a central theme for what the younger generation is looking in terms of there future. And the Middle East is no different. The UAE and Saudi Arabia have made a significant push to work on the model. So what affects the Valley also affects the region. In fact, the SVB had a significant presence in the Middle East, and were in conferences in UAE and Riyadh.”

The SVB understood how startups and VCs work, and how the funding environment works. It, therefore, was able to work quickly and provide a level of service other banks weren’t able to do. In many ways, this also opened up holes in the system. There aren’t adequate laws, and regimes, that have forced founders to create companies with multiple or dual structures.

Citing an example Gulati explains startups will need stock options, but standard company laws do not provide for the granularity and class of shares that formal investors are used to. For example, even the common way for startups to raise money--the convertible note, or safe note are not favourable in the MENA region.

“Thus, they needed a bank in the offshore destination, and SVB understood this. It was one of the reasons where most money was raised in offshore structures. And this held true for the funds as well,” adds Gulati. And this holds true even for the venture debt structures. Now the startups need to find an alternative.

According to Gulati, there is a shift where startups are being asked to separate the treasury (the money they have), from the money they use. And the obvious solution of having more than one bank account. However, it is a long overdue solution for existing regulations to become more startup-friendly.

“We need to have institutions that understand the global nature of finance. People today are becoming more cross border. Even if startups are servicing UAE, they are global in terms of talent, services etc. Also the aspirations in this part of the world—UAE and Saudi especially, are becoming global centres of innovation, inviting global companies. We therefore cannot have a situation where financial institutions lag behind,” Gulati says.