If you are considering extending credit to companies in the MENA (Middle East and North Africa) region – the Arabic speaking world, you may need to modify your credit policy to ensure that the unique risks of trading in this part of the globe is well managed and mitigated.
For a start, there are questions to be asked when on-boarding a new client to know who exactly you are dealing with, such as:
Does the company legally exist?
There are a lot of companies in the region that use trading names instead of their registered company name so it is important to establish that you are trading with a legal entity – otherwise any contracts signed may be null and void. Company Registration Reports from a reputable credit reference agency will usually provide the registered name, address and licence numbers, company activity and shareholders – taken from database information.
However, should you wish to have this information freshly investigated so that you can be sure of the current status, we would recommend a Corporate Records Report obtained from the local commercial authorities on the day. In some countries, it is possible to obtain Copies of Official Certificates but in others, this is not legal – so make sure that your business intelligence source, due diligence provider or credit reference agency is compliant themselves.
How much credit should I extend to them?
Company Credit Reports will usually include all that is in the Company Registration Reports, plus a lot more information about the size of the company, the management, their premises, which countries they trade with, what brands they sell, their payment history, some information about the country’s socio-economic and political landscape and a credit opinion.
Depending on the source of the credit report, financial statements may be included for all listed companies and in most cases for those countries where filing is mandatory. However, as filing of financial statements is not legally required in most MENA countries, these can be difficult to obtain and that is why it is important to have the opinion of a local expert as to how much credit you would be safe to extend.
Does the company physically exist?
A resourceful business intelligence agency can conduct discreet or pre-arranged site visits to establish the physical existence of a company and provide a report with digital photographs. It is surprising how often this task uncovers several companies trading from one mailbox and no actual physical evidence of a factory/shop/commercial or exclusive office premises.
Shell companies can be a menace to international trade when payments are not received – as the non-existence of any physical presence or notable assets is likely to make debt collection impossible.
What is their local reputation? Because we are local and we have been operating in this region for such a long time, Cedar Rose get asked this question often. Our Source Comments (Reputational Due Diligence) Reports involve us speaking to local people (covertly if required) in their language who may also know the company or its owners to see whether they are known to be involved with crime, corruption, terrorism, money laundering or any red flag issues that should raise alarm bells.
Further investigations can be conducted via Media Searches and Global Compliance Checks, PEP (Politically Exposed Persons) Screening and even Education and Employment Verification where there is any doubt over the integrity of the subject and/or its principals.
How can I be really sure this company/individual is not linked to unsavoury groups or corrupt practices that may bring my organisation into disrepute? The truth is, you can never be 100% certain without a crystal ball. But, when you need to be confident and able to prove that you have left no stone unturned, it is possible to identify and thoroughly investigate and screen a company’s shareholders and if those shareholders are also companies, to investigate their shareholders and so on.
This would entail requesting Enhanced or Comprehensive Due Diligence from a local and reputable business intelligence provider as it is a labour intensive and time-consuming task which requires extensive local knowledge and experience. From a compliance point of view, ensuring the companies you trade with, in MENA are not exposed to bad actors such as terrorist organisations or sanctioned entities is essential.
MENA Credit Reports
In order to provide accurate Business Credit Reports in the MENA region one of the main focuses is the source of the data therein; these sources include Local Commercial authorities like chambers and ministries in order to make sure that the company is legally registered. However, local commercial authorities usually provide the status of the company which does not necessarily reflect the operational status of the company.
When compiling a credit report for MENA countries some challenges occur and make the process much more difficult or challenging.
1. First of all, even in a single country, often not all the information is centralized in one place – it may be necessary to search several different jurisdictions to locate the necessary registration data.
2. Then, most of the time the registration data or any additional information can be found in non-familiar languages for example in Arabic or French – it is often not available at source in English.
3. As mentioned above, the status of the company at the register is not always reflecting its operational status, e.g. the registered status is mentioned as ACTIVE where the company could have already ceased or stopped operation and is actually dormant.
Records are often not updated in a timely manner. In addition, various words can be used or are found at the registers of companies or the commercial authorities unlike in other parts of the world where only two or three are used such as Active; Dissolved; Struck-off. This can lead to confusion as the data is not standardised.
4. Another challenge is when dealing with the MENA region some of the data available at official sources is not up to date.
5. There is also a common challenge which is when a company refuses to provide any information to credit reference agencies and this is a common situation because the Subject Company doesn’t have enough knowledge about the benefits to be obtained by providing correct information.
Language obstacles in MENA countries
One of the main challenges in the MENA region is understanding the language. The five most commonly spoken languages of the region are Arabic, the most widely spoken language in many of the MENA countries; Persian, Hebrew, and Turkish, in addition to French.
At Cedar Rose, we translate and transliterate business information to the English language, so that our clients and users can search and find the subject they are looking for using Romanised characters, and also to receive their credit and due diligence reports in the English language. We also allow them to search on our website in the local language using the local characters – because ultimately this will lead to greater accuracy.
Our translation process is done automatically using an in-house dictionary that has a specific and unified translation for each area and country, and then the translation will check quality checked by a team of professional translators.
Financial statements across borders
International Financial Reporting Standards (IRFS) is the international accounting framework within which financial information is properly organized and reported. It is derived from the pronouncements of the London-based International Accounting Standards Board (IASB). It is currently the required accounting framework in more than 120 countries.
IFRS is used primarily by businesses reporting their financial results anywhere in the world except the United States. Generally Accepted Accounting Principles, or GAAP, is the accounting framework used in the United States.
There are several working groups that are gradually reducing the differences between the GAAP and IFRS accounting frameworks and serious efforts are being made to eventually merge GAAP into IFRS, but this has not yet occurred.
At Cedar Rose we provide a standardized format for the financial statements of the companies we report on, which makes it easier to compare and contrast the financial results of companies and to find peers.
Companies in the MENA countries are not required to file financials. However, a reputable and knowledgeable local credit reference agency will provide an algorithmic assessment of risk for the company in question, which can even provide a detailed score if a company’s financials are unavailable.
At Cedar Rose, we provide this as well as detailed assessments of the scale of a company, history of late payments and even give trade suppliers the opportunity to rate a company’s payment - to let other suppliers know if they paid on time or if they paid late through the Trade Rate initiative on our website.
In the Middle East and North Africa, it is well known that there is a lack of available data with regards to actual payment history. In addition to this, companies in most MENA countries are not required to file financial statements which makes credit analysis more challenging.
At Cedar Rose, for years, while compiling a Company Credit Report, suppliers have been contacted and asked to complete a trade reference questionnaire providing an opinion based on their experience with the company being investigated. The information is inserted in our database, included in the subject’s credit report and constitutes a part of the payment history of the company.
The data is assigned a quantitative measure and is included in the CR score which is a credit risk scorecard and proprietary scoring model developed by Cedar Rose to evaluate a business risk level with a set of statistical indicators.
In late 2018, Cedar Rose has introduced the Trade Rate Scheme so business owners and credit managers can anonymously share their collective voice and have their say on late payments through a scoring system. Allowing companies to rate their customers’ payment performance online is both fundamental and lacking within the credit sector.
This initiative aims to provide a more efficient and robust credit reporting service. By joining forces, business people around the world can help each other to make better-informed choices about whether or not to extend credit and on which terms.
It’s very simple to participate in this initiative and there is no cost at all. Just search for the company on Cedar Rose website and click on “Trade Rate” to add your rating on the simple form – it takes less than two minutes of your time. Your rating will trigger us to freshly investigate your customer too, so after 15 days; an updated Company Credit Report will be available on our website at a discounted price of around 15 euros for you to download.
Automation and algorithms
In the era of technology and data being the oil in the market, artificial intelligence is the new tool to replace human intervention for time-consuming and repetitive tasks such as data entry, research, calculation, and analysis.
In the Credit Industry, Artificial Intelligence and Big Data uncover insights on behavioural predictions, and add intrinsic value to credit reporting. The value of creditworthiness is calculated in parallel with the likelihood that a business will or can pay back credit. However, the normative means of assessing this requires a multitude of factors, each with a different weight of effect on the final assessment.
Artificial Intelligence used to accomplish these assessments is cheaper, faster and more accurate than traditional methods, it requires an automation of calculus and being able to utilise the quantitative and qualitative factors, including specifically allocated weights and scores per assessment. It is automated, based on a larger pool of data and has rules that are more complex and sophisticated.
The automation of credit assessments has been widely adopted by companies, proving to increase efficiency, success and profitability. And by using AI the analysis and assessments are not subject to human bias as all analysis are carried out by a computer based on stored data. Thereby combining past experiences, statistics and analysis in order to generate an automated system, companies can formulate the necessary algorithms to perform automatically.
Automated algorithms are formulas that have been created, tested and applied by researchers, analysts and strategists in order to develop a functional process of calculation to form a specific score or value using the same data factors. Scorecards act as a template in which consistent and more reliable results can be generated, relieving any ‘guess-work’ that may have previously been involved within the process. With automated AI technology, results only differ depending on changes to input or value weight.
What are the factors behind this formula?
Any data is useful data, but what differs is the weight of its added value to the scoring module; data that is used in credit assessments include:
• Country of Incorporation
• History of the business
• Line of activity and industry in which the subject is engaged
• Shareholders and Ultimate Beneficiary Owners of the business
• Financial values and Ratio Analysis
• Suppliers’ feedback and trade references
• Legal type of the business and the liability behind its owners
Is it reliable to have human intervention in processes such as scoring?
Not really, as for example, humans tend to finalise on numbers that are rounded figures when producing a score or value after a study of a variety of elements. Alternatively and accurately, artificial intelligence through the use of formulas could derive a 3 digit decimal value after running the algorithms on the input data.
Therefore, AI also takes out any subconscious human intervention that may be inconsistent and lead to biased results. AI output is purely mathematical and reliant on data given and the weight each data carries. Conclusively, reliability is maintained by sourcing data from reliable sources and when algorithms are created on the basis of statistical modules from experienced analysts.
There are many advantages behind using the technology for credit analysis; one of the main benefits is the ability for AI to comprehensively provide automated scorecards for credit ratings. Using algorithmic methods via formulas applied on the data, the scoring system becomes instant, highlighting the efficiency of artificial intelligence.
Other benefits that we can highlight here:
1. Reliability: The process is designed to be objective, with no human standards that can create bias.
2. Simplicity: AI technology is relatively simple to follow and easily interpreted.
3. Time & Cost efficiency: AI eliminates the need for human invention which, in turn, reduces the operational costs of credit analysts and also saves time for the clients.
4. Improvements in operational efficiency: The process of evaluating credit risk when applying credit scoring is automated, thereby, eliminating human intervention for assessment that may lead to errors.
5. Accuracy: AI has a standard, accurate and consistent means of analysis using computed rules and calculations.
6. Flexibility: It provides a flexible algorithm that can be challenged and, therefore, constructively improved by Data Scientists.
7. Consistency: It provides broadly consistent results which represent a reliable and optimal estimation.
8. Directness: AI reduces guesswork that may be involved in the process of making everyday decisions.
9. Instant availability: It provides an automatic determination of the level of risk that a business has.
10. Intuitiveness: Artificial Intelligence can assist the client in what their next steps will be, within a process.
There are so many amazing ways artificial intelligence is used behind the scenes to impact our everyday lives, for example:
1. We assess our fitness by looking at fitness scores calculated based on AI and algorithms
2. Your Google searches are autocompleted based on your previous behavior on Google, and definitely this is done using AI and ML. When you begin typing a search term and Google makes recommendations for you to choose from, that’s AI in action.
3. Digital Assistants such as Apple’s Siri, Google Now, Amazon’s Alexa, and Microsoft’s Cortana are digital assistants that help us perform various tasks, from checking our schedules and searching for something on the web, to sending commands to another app.
4. Email communications such as Gmail, or messages on Linkedin, AI gives us Smart replies, which are simple phrases like “Yes, I’m working on it.”, and are tailored to the content of each email or message.
5. We watch movies on Netflix based on AI recommendation sometimes
6. AI is used for Products recommendation
7. AI is used for Music Recommendation
Artificial Intelligence makes our lives more efficient every day, it may be comforting to know that most of us have been using AI on a daily basis for many years.
AI transforms the process of analysing the value of creditworthiness, providing a more reliable and concrete assessment of weighted factors. The operational benefits that come with credit analysis have proven to be a success on a global scale. The pinpoint accuracy and objectivity of artificial intelligence will always prove to be more reliable than human intervention for credit analysis.
However, what is vital is that, where human intervention is necessary, collecting data from reliable and official sources has to be relevant. The data sources you use cannot be outdated or incoherent; otherwise, no matter the AI or human intervention, your credit analysis will be unreliable and inconsistent.
AI is most reliable when human intervention works alongside artificial intelligence, using the best features of both models will deliver the optimal outcome.
Why AI in credit reports?
A common misconception for data analysis when assessing creditworthiness is that financial data is the most important contributor and that the assessment cannot be reliably carried out without it. However, if you have experience within the Middle East or North Africa (MENA) region, you would know that successful AI assessments on creditworthiness can be performed without relying on financial data.
For example, some companies may have enough turnover and net profit to be considered large companies, but, carry a bad payment behaviour trend. This has been evident in several countries including some very high profile recent cases in the UK recently.
Collecting payment behaviour and reviews on businesses with their own suppliers can provide a robust and concrete basis on which to partially build your assessment but companies need to have a multitude of factors in place in order to be deemed creditworthy. AI is at its most useful when all of these risk factors are taken into account.
Application Programme Interface, or as most know it, API, has revolutionised the way the world operates and has provided efficiency beyond belief. The inherit design of this application software acts as the backbone of modern connectivity, providing and utilising efficiency, reliability and speed. API provides alternative means to achieve outcomes, meet demands and diversifies the way Business-to-Business (B2B) operations are carried out.
Cedar Rose has always taken pride in being one of the most innovative and up-to-date companies in its field. Thus, we heavily endorse the use of APIs to provide a bespoke service to our clients on a daily basis. As we offer data all around the world to a wide array of clients at all hours of the day, we need to make sure that we have accessible services for the greater benefit of everyone. Henceforward, we have enhanced our API capabilities to allow for instant services for credit reporting, risk assessments, due diligence and electronic identity verification.
We believe that our customers deserve the best, and when you need critical data for urgent decision-making, API can provide you with the relevant data-transfer in a fast, streamlined and secure approach.
Overcoming the challenges
By aiming to overcome the challenges faced by credit reference agencies and credit managers around the globe when trading with countries in the MENA region, Cedar Rose has brought together the official data from the entire region, translated it into the English language, cleaned, standardised and normalised the data so that it can be interpreted correctly in any country.
Using algorithms, Ai and machine learning, we have risk scored the data and made credit reports available instantly via our website at www.cedar-rose.com, via API directly into our clients’ database or via the Salesforce CRM as an optional free extra.
Uniquely, we have provided credit managers with the facility to provide instant payment feedback via our website, with controls in place to ensure that trade references are verified by our team of experienced analysts. Finally, countries in the MENA region is no longer lagging behind the rest of the world in terms of credit information – and in many countries in the region business is booming and opportunities for trade are in abundance.