Vol. VII. No. 53 June 2011
Editor’s note
Publisher & Managing Director Sankaranarayanan
sankar@sterlingp.ae
MANAGING Editor K Raveendran
ravi@sterlingp.ae
Editor C L Jose
cljose@sterlingp.ae
consulting Editor Matein Khalid
matein@sterlingp.ae
Director Finance Anandi Ramachandran
anandi@sterlingp.ae
Editorial Contributing Editors Anand Vardhan MARKETING Account Group Manager Rizvin Ali
rizvin@sterlingp.ae
DESIGN DIRECTOR Ujwala Ranade
ujwala.art@gmail.com
ACCOUNTS Sujay Raj Circulation Supervisor Printing
sujay@sterlingp.ae Ibrahim A. Hameed
Asiatic Printing Press L.L.C., PB 3522, Ajman, UAE. Tel. 06 743 4221, Fax: 06 743 4223www.asiaticpress.com, email: asiatic@eim.ae Distribution UAE: Tawseel PB No 500666 Dubai, UAE. Tel: (+971 4) 342 1512 Sultanate of Oman: Al-Atta’a Distribution Est., Kuwait: The Kuwaiti Group for Publishing & Distribution Co.Bahrain: Al Hilal Corporation, Qatar: Dar Al-Thaqafah, Saudi Arabia: Saudi Distribution Company
Consumers welcome Central Bank move The consumer society has welcomed the Central Bank moves that reduced fees and commission the banks used to charge on the unsuspecting customers and the new restrictions imposed on retail credit. Though this could have a negative impact on the profitability as well as the credit growth of the banking industry, which is passing through one of its worst patches, it will help the society, and even the banks, in long run. There could be arguments raised against the Central Bank for unilaterally deciding on fee structure, which ideally is a prerogative of the banks in a free economy. Banking & Business Review (BBR) genuinely believes that Central Bank should pay attention to a few other areas where innocent customers are being taken for a ride. One is the Credit Shield used by the card issuers to charge an insurance premium that comes through a negative option, which means that until the cardholder calls the issuer bank and cancels it, the credit shield keeps getting charged to the statement. Despite the promises that the credit shield offers protection to the cardholder in the event of a job loss, practically this doesn’t work out. Mortgage loan is another area. There are banks or at least one bank that has changed the terms of mortgage loan by replacing Eibor with their own prime-lending rate (PLR) as benchmark. How can the bank(s) change the terms of a loan during the tenure of a loan, without the borrower’s consent? The banks’ argument that no bank will set a higher PLR in a competitive environment is ridiculous.
CL Jose
SterlingPublications FZ LLC Loft Office 2, G 01, Dubai Media City
P.O. Box 500595, Dubai, UAE. Tel. + 971 4 367 2245, Fax +971 4 367 8613 Website: www.sterlingp.ae Email: info@sterlingp.ae Overseas offices: India: Anand Vardhan, DII/89, Pandara Road, New Delhi, 110003. Tel: 0091 1 26517981 BANKING & BUSINESS REVIEW Bahrain: Sunliz Publications W.L.L, PO BOX 2114, Manama, Kingdom of Bahrain. Tel: 00973 17276682 June
2011 1
CONTENTS
11 COVER STORY
Central Bank puts its foot down 2 BANKING & BUSINESS REVIEW
June 2011
BANKING 14 Lending takes a backseat
CORPORATE GOVERNANCE 16 Wide gap between theory and practice
TAKAFUL 18 Higher retention in takaful 22 There’s enough re-takaful capacity
INTERVIEW 24 Anan Fakhreddin, CEO, DAMAS
FINANCIAL FRAUDS 30 Fraud, a real threat 34
Loan Syndications
36
Outsourcing
38
Islamic Finance
42
Capital Markets
44
Analytics
BANKING & BUSINESS REVIEW
June 2011 3
ROUND-UP
Accenture joins hands with Saudi’s Al Faisaliah A
ccenture is enhancing its capabilities in the Middle East through an agreement to form a joint venture with Saudi Arabia-based Al Faisaliah Group (Al Faisaliah) through the acquisition of a majority stake in Al Faisaliah Business & Technology Company (FBTC), an Al Faisaliah subsidiary. FBTC is a leading information technology services business in Saudi Arabia. A statement from the company said the transaction is subject to customary closing requirements and is expected to close within 90 days. FBTC is already one of the leading Enterprise Resource Planning solution providers in Saudi Arabia and provides integrated business and technology services to a wide range of clients. “Once the transaction is completed, Accenture’s position in the Middle East market will be strengthened by the combination of FBTC’s enterprise architecture, systems implementation and technology consulting skills, with Accenture’s broad management consulting, technology and outsourcing experience, industry depth, focus on innovation and global delivery capabilities,” the statement added.
ENBD asset division best in region E mirates NBD Asset Management Ltd, a wholly owned subsidiary and the asset management arm of Emirates NBD, had been named the region’s “Best Fund Management Company,” at the annual Arab Achievement Awards 2011. In just over four years, Emirates NBD Asset Management has grown exponentially and is considered among the largest asset managers in the UAE today, managing one of the largest ranges of public mutual funds. With over Dh4.5 billion ($1.2 billion) of assets under management, the company currently manages 13 different funds across a range of asset classes. These include its MENA equity and fixed income funds, global risk profiled funds and a complete suite of Shari’a compliant vehicles.
4 BANKING & BUSINESS REVIEW
June 2011
NBAD launches unique account
Suvo Sarkar
T
he National Bank of Abu Dhabi (NBAD), one of the top player in the UAE’s banking industry, has launched NBAD One, a premier current account that offers customers a unique blend of financial and non-financial benefits and privileges. A statement from the bank said, the NBAD One account, which comes with no monthly charge, is specifically tailored to reflect NBAD’s dedication to fulfil the evolving needs of today’s savvy customers. “It is a special account loaded with a host of free privileges in addition to the usual functionalities of a checking account,” it added. NBAD One offers account-holders the benefits of a free MasterCard Platinum Debit Card, which comes with higher purchasing and cash withdrawal limits; and a free-for-life credit card. Cash withdrawals are free at all NBAD and nonNBAD ATMs across the UAE. Bundled with the account is free life insurance coverage of up to Dh500,000, a lifetime overdraft facility of up to AED 100,000 as well as discounts on processing fees of loan products to ensure that customers benefit from significant financial savings while enjoying the security and confidence of banking with the safest bank in the country. “The NBAD One Account is tailored to meet the everyday needs of value-conscious UAE consumers who seek easy access to their funds as well as a host of financial and nonfinancial benefits,” said Suvo Sarkar, the General Manager of Consumer and Elite Banking at NBAD.
Dubai SME partners with ADIB signs MoU with Red Crescent Emirates NBD A D ubai SME, the agency of the Department of Economic Development (DED), Government of Dubai, entrusted with the development of the small and medium enterprise (SME) sector, has signed a partnership agreement with Emirates NBD to offer benefits to the top 100 SMEs. Emirates NBD is the first bank to have signed with Dubai SME, to support the SME100 initiative. Under the Partnership Agreement, some of the benefits and privileges SME100 companies will enjoy include complimentary upgrade to Business Banking Select Package, Dedicated relationship manager as the key contact, most competitive foreign exchange and telegraphic transfer (TT) rates, most preferential rates on trade services, special rates on deposits and investments, highest number of free or discounted charges on day to day transactions, preferential rates for online transactions through smart business, access to exclusive business banking centres and priority Queue cards for fast teller transactions.
Jafza saves Dh3.8m on power bill J
afza, the flagship entity of Economic Zones World (EZW), said it has been steadily energising its green efforts and actively managing utility usage to ensure minimal impact on the environment. The Free Zone has managed to save 4700KWH of electricity and Dh3.8 million in one year by curbing electricity consumption in buildings 14, 15, and 16. As part of World Environment Day celebrations and its overall strategy to contribute to long-term business and community sustainability, EZW extended its support for the third consecutive year, to an event organised by the Ministry of Environment and Water at Dubai Mall on the June 4 and 5, 2011. Jafza promoted environmental awareness by distributing information encouraging people to take daily measures to conserve energy and reduce their carbon footprint at the event.
bu Dhabi Islamic Bank (ADIB has signed a memorandum of understanding (MoU) with UAE Red Crescent Authority to support the Red Crescent scholarship program. This program aims to support students with their tuition fees. Under the terms of the agreement, ADIB will provide financial donations to Red Crescent worth Dh100 for each active ‘ADIB Banoon Account. “Through this initiative, ADIB confirms its commitment to establish a strong partnership with the Red Crescent Authority, and play a prominent role in promoting values and goals with a humanitarian dimension to meet the needs of the community,” a statement said.
Innovative offer from Al Futtaim A
l Futtaim Motors, the exclusive distributor of Toyota in the UAE has introduced a unique ownership package named ‘Fuel & Go’. “The package, based on the Toyota Choices auto finance scheme launched in April 2011, makes owning a new Toyota even easier than ever before,” a statement from Al Futtaim said. The benefit-loaded ‘Fuel & Go’ incorporates all the costs associated with owning a car in just one low monthly payment. These include 2 years motor insurance, 2 years servicing, 3 years roadside assistance, 5 years warranty, vehicle registration, as well as the added benefit of the down payment and a guaranteed future trade in value. “This is a great way to buy a new car for a low fixed monthly payment without all the bills that come later,” said Simon Monahan, General Manager Toyota Retail, Al Futtaim Motors. “
ENBD arm is official partner of Russian body T
he Private Banking Division of Emirates NBD, a leading bank in the region, is now official banking partner of the Russian Business Council, an organisation representing the interests of the Russian business community in the UAE. “The UAE has been attracting significant interest from Russian investors in recent months, and the establishment of the Russian Business Council will further drive this bilateral relationship,” said Gary Dugan, Chief Investment Officer, Private Banking, Emirates NBD. He said Emirates NBD Private Banking is pleased to be named the official banking partner of the council and it looks forward to providing the members with regional expertise and bespoke advisory services. Established in late 2010, the Russian Business Council, which is registered with the Dubai Chamber of Commerce and Industry (DCCI), comprises representatives from 22 companies of Russian origin with operations in the UAE. The 39th business council to be registered with Dubai Chamber, it has been set up with the objective to help business communities of the UAE and Russia to establish stronger trade ties and contribute to the economic development of both countries.
BANKING & BUSINESS REVIEW
June 2011
5
ROUND-UP
ICA signs MoU with Amad I
nternational Copper Association (ICA), the apex body promoting the use and application of copper across various sectors, and AMAD, Saudi Arabia-based specialists in engineering, industry and IT, have signed a Memorandum of Understanding (MoU) to serve as local partners to implement the initiatives of ICA in the Kingdom. The partnership was formalised on the sidelines of the Electricity Efficiency Forum that was held recently at Riyadh International Convention & Exhibition Centre. Ravinder Bhan, the regional representative of ICA said the partnership with AMAD will strengthen ICA’s presence in Kingdom of Saudi Arabia, one of the key markets in the Middle East region with a strong focus on infrastructure development. The Kingdom faces the challenge of meeting the growing requirement of power, projected to increase at an annual 8 per cent over the next five years. “Through our partnership with AMAD, ICA will highlight the practical efficiencies that can be achieved through the use of copper in the energy and power sector of the Kingdom,” Bhan added.
Masdar’s role in promoting clean energy highlighted M
asdar Institute of Science and Technology delegates and experts from Masdar shared views on concrete cooperation activities on clean energy with the Gulf Cooperation Council (GCC) during a meeting in Abu Dhabi as well as at the EU-GCC Clean Energy Network second discussions group meeting at Brussels. The discussions indicated promise for the creation of stronger ties between EU organisations and researchers and their GCC counterparts. The Brussels meeting highlighted the results and outcomes achieved by the network so far. Members discussed solid steps to achieve results in the fields of renewable energy sources, energy demand side management and energy efficiency, clean natural gas and related technologies, electricity interconnections and market integration. The EU-GCC Clean Energy Network was set up to advance the common interest between the EU and the GCC for strategic energy cooperation. As the lead research representative for the Network, Masdar Institute works together with the EU consortium to create, operate, promote and disseminate information and proposals and sustainable strategies of the Clean Energy Network.
SMEs should learn to think big Citi offers custody services for S Nakheel Sukuks mall or medium doesn’t matter; one should be able to think big. The Small and Medium Enterprises (SMEs) should learn to think big in order to achieve higher targets in their business journey. “SMEs need to think big and plan early to be in the premier league by following the proven methodology of implementing a successful Intellectual Asset Management system to identify, protect and realise intellectual assets in their organisations,” said Stephen Jiew, Senior Associate, Al Tamimi & Company. Jiew was speaking at the TECOM SME Builder that provides an opportunity for owners of small and medium enterprises to upgrade their business management skills. TECOM SME Builder is an initiative of TECOM’s Partner Development Management (PDM) department. Stephen Jiew said stressed the fact that intellectual assets form the most valuable component of successful companies in the world today. “Think Coca Cola, BMW, Rolex or Virgin, their intellectual assets are the reasons why the market is willing to pay a vast premium over the book value of these companies. Never has it been more critical than now in this prolonged economic recovery period to harness one’s intellectual assets to differentiate the business in this ruthlessly competitive business landscape,” he added.
6 BANKING & BUSINESS REVIEW
June 2011
Islamic bonds are part of credit settlement programme
C
iti has started offering special Custody Services to clients who are scheduled to receive Sukuks as part of Nakheel’s Creditor Settlement Programme. “We are keen to hear from all Nakheel creditors who require custody services for the Sukuks and we currently offer special assistance with custody account opening, documentation as well as competitive pricing,” said Richard Street, Head of Securities and Fund Services, Middle East. A statement from Citi said investors would benefit from the local expertise and the globally consistent services of Citi’s dedicated Direct Custody and Clearing (DCC) experts; a dedicated team of specialists has been allocated to guide customers through the entire process. Citi UAE has been offering DCC services in all three UAE exchanges, Abu Dhabi Securities Exchange (ADX), Dubai Financial Market (DFM) and NASDAQ Dubai, where the Nakheel Sukuk will be listed.
London Business Forum office in Dubai T
he London Business Forum is relocating its newly set up Cairo regional headquarters into Dubai as the first main hub outside London. The company revealed plans to organise more than 25 world-class forums in Dubai targeted at business professionals across large enterprises and SMEs from May to December 2011. The Cairo office, which was set up in October 2010, will continue its operations, but Dubai will serve as the regional headquarters for the MENA region, announced the leading UK-based company that organises business events tailored to help business people gain insights into emerging topics in the corporate arena. Hany Mwafy, CEO, London Business Forum, MENA region, said,” “We are putting investments in markets across the MENA region via Dubai because we believe that the region will see a higher demand for our bouquet of services.”
Online spend trends revealed F
our months after its launch in the UAE, the “Just For You” Visa Card is highlighting a number of trends in pre-paid card usage across the emirates. Analysis of customer contact between Majid Al Futtaim Finance (MAF), issuers of the card, and customers who have purchased and used “Just For You” Visa cards has revealed that almost 70 per cent of pre-paid card users are GCC nationals, with the remaining 30 per cent split evenly among Asian and Western expatriate. “Majid Al Futtaim Finance has seen a significant uptake in card purchasing around major giftgiving periods since its launch, most notably with Valentine’s & Mother’s Days,” an MAF statement said. Other card usage indicators point to birthdays and other special occasions such as graduations and anniversaries. “Before launching the ‘Just for You’ pre-paid card, we understood that a cash culture is prevalent in this region, and we saw our Visa Just For You Card offering from Majid Al Futtaim as a compelling new cashless option,” said MAF CEO Rasool Hujair.
Mongolia, a country to watch out ‘We expect Mongolia to maintain its position as one of the strongest growing economies in the world for some time to come’
A
midst the regular news of the debt-stricken European economies such as Greece, Spain, Italy, etc, there is still discernible news in the market that is capable of exciting a true optimist. According to Gary Dugan, Chief Investment Officer, Private Banking, Emirates NBD, Mongolia is not only a star of the past, but also a potential mega star of the future. He says, for Mongolia, the star performer of a stock market in 2010, the future still looks exciting. The basic story of Mongolia is of a former Soviet satellite that is slowing gaining its confidence and exploiting its undeniable strength of a massive under developed mining industry. Just one example will explain the potential perspective of the economy and its market. Dugan cites the largest copper mine called Oyu Tolgoi, world’s largest copper mine, that is due to go into production on 2012. He says the output of the mine alone will add a forecast 30 per cent to the GDP of Mongolia. The country that once was the centre of the Mongol empire under Genghis Khan that stretched from Europe to Asia has a population of two million of which the majority live in the capital of Ulanbaatar. The development of the country continues unabated. The Louis Vuitton store has already opened as a sign of the increasing wealth of at least part of the population. Basic infrastructure is still poor, requiring massive investment. “However the potential from the development of the natural resources of base and precious metals, and coal should provide the government with increasing income allowing them to invest in the future,” he noted. But again, there are a few who keep their fingers crossed on the prospects of Mongolia. “It is however chicken and egg. Without the investment in infrastructure the mines can’t easily get their product to market. Without the mines selling product, taxes can’t be raised to fund the investment in infrastructure. Irrespective we expect Mongolia to maintain its position as one of the strongest growing economies in the world for some time to come,” notes Gary Dugan.
BANKING & BUSINESS REVIEW
June 2011
7
FUTURES TRADING
Indian rupee continues to be star Exchange witnesses 70 pc year-on-year volume growth in May
D
GCX volumes in May registered a 70 per cent yearon-year increase to reach 237,920 contracts valued at $11.76 billion, the highest monthly value ever recorded on the exchange. Precious metals and Indian rupee futures were the standout performers of the month with the Indian currency trade growing by 1,413 per cent during this period. Year-to-date volumes on the exchange climbed 55 per cent to total 1,148,833 contracts while year-todate average daily volumes also rose 53 per cent to touch 10,941 contracts. Gold futures sustained their solid growth in 2011 to rise 39 per cent year-on-year, reaching 60,638 con-
8 BANKING & BUSINESS REVIEW
tracts. Silver futures grew 46 per cent to touch 7,937 contracts. Currency futures accounted for almost 70 per cent of the month’s volumes. Year-to-date currency volumes increased 72 per cent to reach 874,609 contracts. Indian rupee futures sustained its high-growth trend expanding by 1,413 per cent over the same period last year. Volumes for DGCX euro/dollar and yen/dollar futures increased 3 per cent and 56 per cent on last
month to reach 14,508 and 1,947 contracts respectively, while sterling/ dollar declined 44 per cent monthon-month to reach 6,006 contracts. Australian dollar, Canadian dollar and Swiss franc grew 35 per cent, 277 per cent and 131 per cent from April to aggregate volumes of 4,951, 1,223 and 5,525 contracts respectively. Meanwhile, WTI crude futures grew 36 per cent from last month to reach 4,190 contracts.
Currency futures accounted for almost 70 per cent of May volume on DGCX
June 2011
BANKS
All-purpose terminals from DIB D
ubai Islamic Bank (DIB) has established Express Banking Terminals at key locations across the UAE in order to give customers 24 hour access to a wide range of banking services usually only available in branch, online, or through phone banking. DIB customers can use Express Banking Terminals to access a number of account and card services, such as to print statements, request cheque books, apply for Al Islami Salary-in-Advance, open investment deposits, apply for supplementary cards, or transfer funds. Customers can also pay a range of bills through the terminals, including phone and TV (Etisalat and du), utilities (DEWA, SEWA,FEWA), airlines (flydubai and Air Arabia), and Salik fees. Additionally, the terminals allow customers to register for Al Islami Online Banking, Al Islami Mobile and Al Islami SMS Banking.
Islamic CDs face viability challenge
T
he Islamic certificates of deposits (CDs) though has proved to be successful with the net value of certificates issued is currently at Dh12 billion, there are issues with respect to the viability of executing the short-term papers, according to Islamic banking sources. In fact, overnight CDs are not available in Islamic space though conventional certificates are available in that tenure. One-week is the shortest tenure available in Islamic, but the execution of this is cumbersome, according to Islamic banking sources. “Islamic CD is structured around commodity contracts and the CDs are issued against underlying contracts. Cost of getting in and getting out of this short-term contract involves cost and hence I think the viability of these papers is in question,” said treasury head of an Islamic bank. Short-term liquidity has always been a challenge for Islamic banks and other Islamic institutions. “This is not a straight forward issue and has been under discussion between Islamic banks and Central Bank of the UAE for several years before we were able to produce any instrument for this,” said Sultan Nasser Al Suwaidi, the Governor of the Central Bank of UAE while addressing an Islamic seminar recently. He said that during the fourth quarter of 2010, Central Bank of the UAE was able to create an Islamic CD, which has been very successful since inception in November 2010. According to sources, Central Bank is creating separate treasury to keep the Islamic pool of funds flowing in through the issue of Shariah-compliant CDs. In his address, Al Suwaidi has also mentioned about a larger initiative, which is the establishment of the International Islamic Liquidity Management Corporation in Kuala Lumpur, Malaysia.
BANKING & BUSINESS REVIEW
June 2011
9
COVERSTORY
Sultan Nasser Al Suwaidi
10 BANKING & BUSINESS REVIEW
June 2011
Central Bank puts its foot down T he past few months have marked the role of the Central Bank of UAE in rationalising the bank-customer relations with a focus on protecting customers. The regulator of the 50odd banks - foreign, local, Islamic and conventional- has put its foot down by directing the banks to bring down and harmonise the fees across the board. Not before long, the Central Bank once again addressed the banks and asked them to streamline the retail loans by capping the amount of loan one can avail and by rationalising the tenure of the loans. A few days ago, the Central Bank Governor has gone a step further to express his displeasure about the way the Islamic banks share their profits with depositors. Addressing an Islamic conference in Abu Dhabi a few days ago, Sultan Nasser Al Suwaidi, the Central Bank Governor said the distribution of profit to shareholders and investors/depositors, is not a clear-cut issue at the moment. “We need a standard formula to calculate profit in an equitable and fair way at all Islamic banks,” he said. Islamic banks share their profit with the depositors/investors as against the conventional banks, which pay a pre-fixed interest to their depositors. Though the profit rate offered to the depositors in Islamic banks are more often said to be higher than the interest received by the depositors from conventional banks, there have
been complaints that the depositors with Islamic banks are not rewarded adequately when compared with the shareholders of Islamic banks. Though there are three types of deposits, Wakala and Mudarabah are the two types that have takers as the third one, Musharakah is considered to be risky, and hence its existence in this market is almost nought For most banks, Wakala deposits and Mudarabah are just comparable to savings deposits with conventional banks, and on this front, Islamic banks can compete with any conventional banks in the market. Islamic banks are putting money in the market and generating profit and this profit in turn is shared with depositors also. In the case of Wakala, the depositors are parking their funds with Wakil or the bank. The Wakil invests the funds in appropriate assets and at the same time, commits an indicative rate to the depositors. “This type of deposit (Wakala)
has good demand, especially from corporates as the returns can be predetermined and budgeted by the corporates. The agreement between the Wakil and depositors also have clauses that state what happens if the Wakil makes better profits than estimated or if the profit falls below certain level,” chief executive of an Islamic bank said during an interview with Banking & Business Review (BBR). There has been debate within the Islamic banking circles about the way the profit is distributed between the shareholders and depositors when the deposits are in the form of Mudarabah. Mudarib, the manager of Mudarabah or the bank [here], invests the funds in different assets and undertake to share a particular percentage of the profit with the depositors. This is part of the contract and every bank can have different ratios, but they need to maintain the same ratio with all its depositors and cannot differentiate among the depositors.
The shareholders of Islamic banks quite often get dividend, which is inevitably much larger than the profit share the depositors receive from the bank BANKING & BUSINESS REVIEW
June 2011 11
Issue with Mudarabah The calculation of Mudarabah profit is complicated and the pool of funds will include the shareholders funds also. Some banks build a margin called reserve funds, which is built over the years in order to act as a cushion in case the bank incurs loss in a particular investment. The issue here, according to experts, is that the depositors generally stand to get a relatively small portion of the profit as share. On the other hand, the shareholders quite often get dividend, which is inevitably much larger than the profit share depositors receive from the bank. There have been complaints that the distribution of profit is more skewed towards the shareholders than to the depositors. A banker told BBR that the Central Bank might be addressing this issue on a broader sense. There are a couple of other issues in the Islamic finance space that need to be addressed and they include the structuring of sukuks, the issue of short-term liquidity, etc.
Tightening of regulations The measures Central Bank took in 2009 and 2010 were primarily to tighten the regulations and strength-
12 BANKING & BUSINESS REVIEW
en the liquidity positions of banks. On one hand the Central Bank opened new liquidity windows for banks and on the other, tightened the capital requirements by directing the banks to increase their capital adequacy ratio to 11 per cent by June 2009 and 12 per cent by June 2010. During the fourth quarter of the current year, the Central Bank came out with the new provisioning norms that rendered provisioning tougher than many other markets. While the Central Bank’s new provisioning norms required banks to start provisioning once the arrears on principal or interest crosses 90 days, and that even at the rate of 25 per cent, the apex bank also insisted the banks build up a 1.5 per cent general provisioning of the risk-weighted assets, over and above the specific provi-
sioning stipulated by the new provisioning norms. But the year 2011 saw the Central Bank throwing its weight around the banks in a move to protect the customers from high fees and commissions. The Central Bank sent the strong message out to the banks asking to reduce most of the fees and commissions the banks were charging to the customers under the garb of liability certificate, bounced cheques, failure to maintain minimum balance, etc. “Many of these fees have been halved with many others coming further down, through the Central Bank action,” a banker told Banking & Business Review (BBR). The latest in the series of directives from the Central Bank was on the retail loans. According to banking sources, the new move that is envisaged to overhaul the retail loan regime, will dent a deep impact on the bottom line of the banks. There are estimates given by financial experts that the credit restrictions imposed by the UAE Central Bank have led to a drop of between 20 and 30 per cent in the retail trade, according to Dubai’s retailing and banking circles. The new Central Bank guidelines on personal loans and other forms of credit, which came into force last month, put a number of new restrictions on the credit that banks can offer to their retail banking customers. Under the new regulations, personal loans have been capped at 20 times
The measures Central Bank took in 2009 and 2010 were primarily to tighten the regulations and strengthen the liquidity positions of the banks
June 2011
a borrower’s monthly salary. Similarly, the repayment period for personal loan cannot exceed 48 months instead of a maximum of 240 months existed until the new directive. While the debt service burden ratio - the aggregate payout of instalments against loans, including personal, car, housing loans and credit card payments, against the monthly income, must not exceed 50 per cent. Another major squeeze on retail credit has come in the form of new restrictions on the issue of credit cards to customers. The new guidelines restrict the issue of credit cards to only those who draw a monthly salary of not less than Dh5,000.
The automobile sector has already reported a similar drop in the total sales of vehicles following the restrictions enforced by Central Bank for auto finance. According to the new rules, the bank finance provided to automobile buyers cannot exceed 80 percent of the value of the vehicle and the loan tenure cannot be longer than five years for new vehicles. According to banking circles, the overall credit tightening in the country has impacted the banks’ retail credit business to the extent of 40 per cent, which is forcing the banks to explore other ways for making up the huge gap.
Dealers arrange finance While Al-Futtaim has come out with new schemes to finance the vehicles bought from them, other auto dealers are also said to be working on similar schemes to finance vehicles. Most auto dealers have taken a blow in 2009 with the sales in some cases falling by about 40 to 50 per cent. “Though there has been a pick-up in sales since the mid-2010, the new financing restrictions could slow this down again. I think the auto dealers themselves will have to resort to innovative schemes to boost their sales,” a dealer said.
BANKING & BUSINESS REVIEW
June 2011 13
BANKING
Lending takes a backseat By CL Jose
L
ending has taken a backseat for UAE banks. Loans and advances as a past percentage of assets has been steadily falling for the few years, especially since 2008, when the UAE economy started feeling the taste of recession. The trend is more pronounced in the larger banks, which seem to be shying away from lending and preferring to park their surplus funds with Central Bank and other banking institutions at abysmally low returns. While the total assets of the UAE banking system as of 2008 end was at Dh1.456 trillion, loans and advances accounted for 68.24 per cent of the total assets, at Dh994 billion. But the year 2009 witnessed a marginal drop in loans and advances as a percentage of total assets, to 66.99 per cent when the total assets improved to Dh1.519 trillion and the loans inched up to Dh1.018 trillion. The year 2010, when the recession was well at play, the percentage of loans to assets fell further to 64.23 per cent when the total assets were at Dh1.605 trillion with the loans at Dh1.031 trillion. Though the first quarter of the current year saw the assets grow substantially by Dh90.3 billion, from Dh1.605 trillion to Dh1.696 trillion, the growth in lending was to the tune of only Dh16.8 billion. The quarter saw lending making up only 61.8 per cent of the total assets of the banking system as of March 31, 2011. Let us take the four leading banks in the UAE, two each from Abu Dhabi and Dubai. For Nation-
14 BANKING & BUSINESS REVIEW
al Bank of Abu Dhabi (NBAD), the loans and advances constituted close to 68 per cent of the total assets of the bank in 2008, but the share of loans fell steadily through the years as it dropped to 67.189 per cent in 2009, to 64.71 per cent in 2010, and towards the end of the first quarter of 2011, the lending accounted for only 61.346 per cent of the total assets of NBAD. In the case of Emirates NBD, the largest bank in the country in terms of assets, the share of lending fell from 73.97 per cent
in 2008 to 58.87 per cent as of the end of first quarter in 2011. Interestingly, the year 2009 saw the share of lending for Emirates NBD growing marginally to 76.218 per cent and subsequently falling to 62.53 per cent in 2010. ADCB and Mashreqbank also witnessed similar drop in the share of lending as a part of their assets through these years. While the loans and advances accounted for 58.86 per cent of the assets in 2008 for Mashreqbank, it dropped by more than 11 percentage points to 46.928 per cent as of the first quarter end, 2011. ADCB also witnessed a sharp drop in the share of lending since 2008. While the lending made up 73.48 per cent of the total assets of the bank in 2008, the scenario changed totally and towards March end, 2011, loans and advances accounted for only 66.99 per cent of the total assets of ADCB which used to be one of the top three banks until a few years ago.
Safety first, returns next
The recession seems to have prompted banks to leave the objective of making big profit and instead think ways to protect their
In the case of Emirates NBD, the share of lending as part of total assets fell from 73.97 per cent in 2008 to 58.87 per cent as of March end, 2011
June 2011
capital by parking their surplus funds with safe hands even foregoing lucrative returns that could be otherwise earned through lending. According to bankers, the profitability will suffer further with the Central Bank recently bringing about curbs on charging fees and commission, and more recently, tightening the terms for retail credit. Let us have a look at what Emirates NBD have done with their funds. While 40.438 billion has been parked with Central Bank (it includes the mandatory deposits also), Dh25.778 billion worth funds are with other banks as ‘due from banks’ and about Dh14 billion are investment securities basically in highly rated bonds.
For NBAD, while Dh24.184 billion is parked with Central Bank, a little over Dh19 billion is with other banks under ‘due from banks’ For NBAD, while Dh24.184 billion is parked with Central Bank, a little over Dh19 billion is with other banks under ‘due from banks’. The asset book shows that Dh15.490 billion has been allocated against reverse repurchase agreements and Dh24.627 billion has gone to non-trading investments. While a big chunk of ADCB funds, to the tune of Dh20 billion, is due from other banks, the bank has been aggressive on lending
with only Dh5.532 billion being parked with Central Bank. Mashreqbank has been conservative on lending, of late. On the one hand, the bank has been downsizing its book, and on the other, large funds, comparable to loans and advances in size, have been parked with Central Bank, and as deposits with other banks, at Dh12.012 billion and Dh15.076 billion respectively.
BANKING & BUSINESS REVIEW
June 2011 15
CORPORATE GOVERNANCE
Wide gap between theory and practice UAE corporates ignore governance code set more than a year ago
I
t is well over a year now since the UAE Corporate Governance code was enacted – on April 30, 2010. Now the obvious question would be how far our corporates have been able to fulfil the requirements of this code, which is believed to help strengthen the overall performance of corporates and more importantly, instil greater credibility and faith into the corporate regime of the country.
Governance code, enacted on 30 April 2010, listed companies on local securities markets must have a minimum of 30 per cent independent director representation and separate the role of Chairman and CEO. However, research from Hawkamah shows a wide gap between legislation and reality with an estimated 56 per cent of listed companies in the MENA region having no more than
fast-track the financial transformation of the country and improve conditions for foreign investment, was the broad consensus among corporate governance opinion leaders who convened in Dubai recently to discuss the gap between regulation and compliance in the boardrooms of UAE companies. The panel discussion was hosted by NxD-global, and represented by
Nick Nadal
Dr Roger Barker
Yasser Akkaoui
But the ‘stock taking’ in the UAE proves that the accomplishment on this front leaves much to be desired. To the surprise of all well-wishers, research from Hawkamah shows there is significant gap between the current regulation and the reality in terms of the corporate board makeup in the UAE. “There is a stark lack of ‘independence’ on the board,” the findings conclude. According to the UAE Corporate
one independent director and 42.3 per cent of companies still combining the function of Chairman and CEO. It has been proved beyond anyone’s guess that absence of sound corporate governance practices is a barrier to success for companies looking to attract investment. Regulatory enforcement of the number of independent directors on the boards of UAE-based public joint stock companies has the potential to
Nick Nadal, Director, Hawkamah Institute for Corporate Governance and Mudara Institute of Directors; Dr Roger Barker, Head of Corporate Governance, Institute of Directors UK; Yasser Akkaoui, Vice Chairman, Institute of Directors Lebanon; and John Martin St Valery, Partner, NxD-global. Panellists expressed concern that in the 12 months since the enactment of the code, a lack of compliance with independent board representation re-
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June 2011
mains. They highlighted the need for greater enforcement of the provision to encourage a mindset shift among UAE’s listed companies and to improve corporate disclosure practices. “The Emirates Securities & Commodities Authority (Esca) has made great progress in collecting the corporate governance disclosures from 70 per cent of listed companies in the UAE, but we must see this increased to 100 per cent,” said Nick Nadal, Director, Hawkamah Institute for Corporate Governance and Mudara Institute of Directors. Nadal said Hawkamah’s CEO research indicates that compliance enforcement is the number one reason why business leaders would effect change in their companies. “This suggests the need to police full transparency and accountability in order to build an adequate foundation for the deepening and growth of UAE capital markets,” he added. Loose interpretations of independent directorships were identified as potential barriers to optimum board effectiveness and highlight the need to improve corporate understanding of the business value of independent non-executives, rather than viewing them as a ‘tick the box exercise.’ One of the important education elements, according to John Martin St. Valery, Partner at NxD-global, is to understand the meaning of the word ‘independence’ as it is set out in Article 1 of the UAE Corporate Governance Code. The code clearly articulates the criteria for an independent director as someone who is wholly unrelated to the management of the company, the board, associated parent companies and stakeholders. “This independence is what gives the non-executive director the ability to really challenge and scrutinise the board,” he added. The introduction of a professional director qualification for UAE nonexecutives and mandatory self assessments or audits of board performance were two recommendations proposed by the panel that would
John Martin St Valery
Martin Bond
help improve the level of boardroom oversight in UAE companies. Dr Roger Barker, Head of Corporate Governance at the Institute of Directors in the UK, pointed out that such sound governance frameworks were essential in attracting foreign direct investments. “There is a wide body of research that shows the strong positive relationship between corporate governance or the transparency level of hosting countries and FDI inward performance within those hosting countries. In fact, disclosure has been shown to have a more significant positive impact on FDI inflows than the adoption of international ac-
counting standards and legal frameworks. The presence of independent non-executive directors on corporate boards is positively associated with the comprehensiveness of financial disclosures,” said Dr Barker. “We are now at a stage where businesses need tools to help them enact good corporate governance practices and this will only increase as regulations continue to be enforced and companies realise the benefits that increased independence can bring to their boards,” said Yasser Akkaoui, Vice Chairman, Institute of Directors Lebanon and a reference name in corporate governance activism across the Middle East.
Research from Hawkamah shows a wide gap between legislation and reality with an estimated 56 per cent of listed companies in the MENA region having no more than one independent director and 42.3 per cent still combining the function of chairman and CEO BANKING & BUSINESS REVIEW
June 2011 17
TAKAFUL
Takaful acheives higher retention Expense ratios in the GCC takaful remain higher than Malaysia 18 BANKING & BUSINESS REVIEW
June 2011
T
he takaful operators retain more business than conventional insurers due to the focus on less complex business classes takaful players enter into, and the potentially excess capacity, according to a report. The World Takaful Report released at the World Takaful Conference recently, said, on a whole, the GCC industry cedes more to reinsurers than Malaysian players. This broking approach causes excessive reliance on investment returns to generate profitability.
Underwriting Results Average combined ratios of takaful have continued to improve over 2010 to reach 80 per cent, coming closer to the operating performance of conventional players. Interestingly, younger takaful players with predominantly general takaful-based business are found to have higher claims ratios than the Malaysian market. Expense ratios have risen for both takaful and conventional players in 2010. Takaful companies saw their return on equity (ROE) recover in 2010 but they remain below their conventional counterparts. Expense ratios in
On average, takaful operators in the GCC and other emerging takaful markets write less business than their counterparts in the more mature market of Malaysia the GCC remain higher than Malaysia, while within these regions there is little difference between takaful and insurance [conventional]. Takaful operators in the GCC appear to be paying more in commissions for their business, and receiving less in reinsurance commission and insurance. Investment returns for GCC takaful companies were positive for the first time since 2007.
Average Expenses Ratio Expense ratios in the GCC remain higher than Malaysia, while within these regions there is little difference between takaful and insurance. It has been found that takaful operators generally retain more business, which reflects a focus on less complex lines and extra capacity.
The report has highlighted the fact that takaful operators have higher underwriting leverage (U/W leverage), a result of less equity when compared with established insurers and limited solvency requirements. Investment strategies have remained largely unchanged in 2010, while GCC operators continue to adopt a more relatively aggressive strategy on investments. Takaful operators in the GCC have witnessed high volatility, which reflects their aggressive investment strategies. The takaful operators in the GCC have returned better results than their
BANKING & BUSINESS REVIEW
June 2011 19
Malaysian counterparts. However, they have suffered through the crisis from having aggressive investment strategies. Returns have again picked up in 2010 after a significant fall during 2008 and 2009.
Risk Retention
Takaful business volume on the rise The report said that the global takaful contributions grew by 31 per cent in 2009 to $7billion and the opportunities in the core markets suggest that the industry will reach the size of $12 billion (Dh44 billion) by the end of the current year [2011]. The report prepared by Ernst & Young with a focus on ‘Transforming Operating Performance’, has analysed the key trends shaping the industry, mapped out the strategic direction of the market leaders and probed the emerging landscape of opportunities available in the industry. It has found that most GCC markets have witnessed a slowdown in takaful growth, with only Saudi’s cooperative insurance market remaining strong on the back of compulsory medical. Unlike the GCC, the South East Asian markets have continued their strong takaful growth. Indonesia is rapidly emerging as an important takaful market. Sudan is the most significant market outside of the GCC and South East Asia, while Egypt, Bangladesh and Pakistan are experiencing rapid growth. Continued strong growth in the takaful industry suggests that global contributions could grow substantially by the end of 2011. Though the World Takaful Report 2010 forecasted total contributions to reach $6.8b in 2009, the results have been slightly better despite the economic slowdown in key markets. Compulsory medical insurance requirements in Saudi Arabia have contributed to growth in Family & Medical takaful. Family takaful remains under-pen-
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Takaful operators in the GCC appear to be paying more in commissions for their business, and receiving less in reinsurance commission and insurance etrated and is estimated to contribute only 5 per cent of gross contributions in the MENA region whereas conventional Life accounts for approximately 15 per cent market share. On the contrary, family takaful in Malaysia is highly penetrated and is estimated to contribute 77 per cent of net takaful contributions in 2010. By comparison, in 2009, life insurance contributed 58 per cent of gross global insurance premiums, the report has learnt. Despite having a large number of operators, Malaysia has a relatively high ratio of gross written contributions per operator. On average, takaful operators in the GCC and other emerging takaful markets write less business than their counterparts in the more mature market of Malaysia. This volume of contribution reflects the relative stages of development across global takaful markets and supports the argument that takaful needs to build scale if it is to successfully compete in many emerging markets. The relatively high levels of premium per operator in Malaysia would seem to support the need for further competition.
ful remains higher than conventional peers, although improvements have been made on those front. Unfortunately, service quality remains suboptimal for many operators in the takaful industry. Most takaful operators are startups or small players, limiting their access to quality customers, which negatively impacts their loss ratios. Moreover, access to potentially lucrative commercial lines is limited due to underdeveloped broker relationships. Due to the fact that complex risks are not well understood and potentially mispriced, business mix is sub-optimal for many operators in the industry. Importantly, dearth of Shari’a compliant capital market instruments is exerting pressure on returns for takaful. And this has landed many takaful companies at high direct exposure to equity markets in the hope that they can maximize returns. There are four takaful models currently in use and the revenue drivers for each differ significantly. Moreover, Shari’a and regulatory requirements are still evolving and vary across the geographies.
Investment results
• Mudarabah: A principal-manager agreement is used between the policyholders (Rab al Mal - capital providers) and the takaful operator (Mudarib - entrepreneur) for both underwriting and investment activities. • Wakala: A principal-agent arrangement (wakala) is used between the policyholders and the takaful operator for both underwriting and
There was a small recovery in takaful investment income in 2010, following two years of losses. Conventional players continued to post healthy returns all these years. Most takaful operators are yet to achieve critical business volume, despite incurring substantial establishment costs over the years. Expense ratio for taka-
June 2011
investment activities. • Wakala-Mudarabah combination: A combination of the principalagent (wakala) and principal-manager (mudaraba) arrangement is used with wakala is used for underwriting activities and mudarabah is used for investment activities. • Waqf: A Waqf fund is established via a donation by shareholders whereas this Waqf cannot be used to settle claims. The combined model is used to manage participant contributions with a Qard facility provided by shareholders. In the UAE Wakala or the combined model is followed by most takaful operators. The insurance will require all composite operators (and insurers) to separate family and general business operations. The regulation in the UAE also requires the operators to be supervised by a central Shari’a board established by the regulator.
Competition, the biggest risk Competition has been ranked the highest risk by senior executives as downward price pressures continue in the industry. It is also believed that the evolving regulations likely to result in larger capital requirements for the players. The current socio-political uncertainty in MENA, the largest market for takaful poses considerable growth risks. “Achieving technical profits remains a challenge but more engagement with actuaries being seen as a positive step in the context. Shortage of qualified talent pool and rising competition have consistently been identified as key risks in both the GCC and South East Asia (SEA).
Takaful operators have higher underwriting leverage, a result of less equity when compared with established insurers and limited solvency requirements It has been noticed that the newly established operators continue to capture market share through aggressive pricing strategies that were described by a number of interviewees as “unsustainable”. Interviewees, particularly in the GCC, argued that this trend was especially evident in pricing for group and commercial risks. “However, there are some signs that the situation in the GCC is improving. Interviewees also argued that pricing pressures are not attributable only to takaful operators,” the report stated.
Argument for consolidation Regulatory authorities across the GCC have indicated that there would be no further licenses issued until market conditions stabilise. There were also suggestions that consolidation was needed in the insurance and takaful industries to help build scale. However, this stance appears flexible given that a small number of new operators have been announced and rights issues have been approved for companies which could have become targets for M&A. Consolidation that has taken place in the GCC has been driven by international insurers and has not impacted takaful.
Rising Competition
Regulations
A further increase in the number of operators in the GCC and additional licences in Malaysia have pushed competition to the top of the risks agenda of late.
Regulations vary significantly and continue to evolve in the takaful space. Further regulatory changes are viewed as impacting key takaful markets.
Noticeable examples include stricter solvency requirements taking effect in Saudi Arabia after an initial grace period. The UAE has issued regulations specific to the takaful industry, including the appointment of a central Shari’a committee similar to that seen in Malaysia. This is in addition to the 2007 insurance law and recently issued insurance regulations covering solvency, investment and technical reserves. Bahrain meanwhile has issued bancassurance regulations restricting the number of banks that insurance and takaful operators can distribute through. Interviewees agreed that new regulations were a positive development. However, there were some reservations, particularly over product approvals and the restrictions this placed on innovation. Meanwhile in Malaysia, Bank Negara is in the process of implementing risk-based capital (RBC) requirements for takaful operators and has issued new guidelines covering the valuation of liabilities, financial reporting and operational framework.
Consolidation in the GCC Regulatory authorities across the GCC have advocated consolidation in the insurance industry, although this stance is yet to result in significant M&A activity beyond that seen with international insurance companies. A number of interviewees also pointed out that many operators were not attractive targets for M&A.
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June 2011 21
TAKAFUL
‘There’s enough re-takaful capacity’ Ashar Nazim - Executive Director and MENA Head of Islamic Financial Service Ernst & Young has answered a few queries from Banking & Business Review (BBR) on certain issues in takaful industry By CL Jose Takaful companies sell basically conventional products to their clients - barring the Life takaful. The only difference between the conventional insurer and takaful is that the latter makes investments only in Sharia-compliant areas of investments. What is your view on this observation? We disagree with that statement. The concept of takaful is quite different from conventional insurance. For instance, the takaful policy is different from conventional insurance, as it is not based on a sale contract but on the principles of risk sharing or mutuality. Participants contribute towards a common pool and this pool is used to support the participants in their hardships. There also other key differences like: • A) Interest (riba): Difference between premiums paid and claims received by customer is termed as interest by religious scholars. Also, interest is earned on investments made by conventional insurers. • B) Excessive uncertainty (gharar): Any valid sale contract in Islam must be very clear in its terms. In conventional insurance, the insurer does not know how much he will eventually owe; the insured does not know how much he will ultimately pay and the time of this payment is not specified either. • C) Gambling and speculation (qimar and maysir): One party’s benefit is dependent upon the loss of another. There is speculation, where the insurer pays a small sum of premium hoping to gain a big sum in claims.
Ashar Nazim
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• D) Risk Transfer: There is total loss for the insured if the claim does not occur. If it does occur, the insurer loses out. The insurer is incentivised to price for exploitation. There is no sufficient re-takaful capacity available and hence the reinsurance is mostly being done with conventional insurance companies. When do you think the region will have re-takaful capacity to serve all takaful companies? The retakaful industry has grown considerably over the past few years and has substantially bridged the capacity gap that existed some time back. In fact, with the entry of global players such as Munich Re and Hannover Re, the retakaful industry has been injected with sufficient capacity to meet most re-takaful requirements. As a direct consequence of this growth in capacity, Shariah scholar’s are now insisting operators use retakaful and not re-insurance. However, there are certain lines of businesses, which still face capacity issues. This is generally because there are not enough takaful contributions to form a sufficient risk sharing pool of funds. Eg. There is very little capacity in aviation business lines or other small frequency large exposure business lines. Most takaful companies do not have sufficient capital. There are companies whose shareholders’ equity has fallen below their paid-up share capital. Do you believe that they should/can raise fresh capital and re-capitalise the company once again? Between 2005-2008, a large number of takaful companies were formed and in some jurisdictions, shareholder capital required by the regulator was a relatively small amount of money. Many of these companies were formed on the basis of the healthy returns being seen by conventional insurance companies coupled with the opportunity to grow the takaful industry. For many of the new start-
Takaful policy is different from conventional insurance, as it is not based on a sale contract but on the principles of risk sharing or mutuality ups, their business plans did not take into account the severity in business conditions that the current financial crisis brought about. Most projections were based on pre-crisis growth patterns, which were in hindsight, unrealistic. This has placed considerable pressure on companies with shareholder capital being eroded to allow companies to continue trading. With so much competition now in the market coupled with a more savvy and demanding consumer, some takaful operators will need to invest money into changing their operating model and this then becomes a decision for shareholders to make. Those who are in it for the long term will make the investment to allow for the changes for the growth. For other shareholders, they may choose to find an exit strategy, which could result in the company being acquired. Many markets present a strong case for consolidation. However, we are yet to see strong growth in mergers and acquisitions. Takaful companies are required to distribute their surplus to the policyholders. But we have learnt
that in the UAE [at least] hardly any companies distribute their surplus to their policyholders even during a year when the company has booked a net profit. Do you think the regulators are going easy on this aspect? Or can the takaful companies use these surpluses to set off losses made in any of the past? In certain jurisdictions where the wakala waqf model is in place, the operator is not permitted to distribute surplus. Even in jurisdictions where surplus distribution is permitted by Shari’a, the regulators allow for the shareholders to first reclaim any loan (qard al hassan) that they have made to the operator to bridge the gap between claims and premiums. For many young takaful operators that have not yet reached critical mass, the underwriting results are often negative and require for the shareholders to provide a loan to meet operational needs. If there is a good year of performance, this loan is first returned. As a benchmark, the takaful market in Malaysia is more mature than that of the GCC and here we see surplus distribution more frequently than in other markets.
With the entry of global players such as Munich Re and Hannover Re, the retakaful industry has been injected with sufficient capacity to meet most re-takaful requirements BANKING & BUSINESS REVIEW
June 2011 23
INTERVIEW
Eyeing a golden future T he Damas crisis has been resolved with the Cascade agreement involving the company, the banks and Abdullah Brothers, the largest stakeholders, being in place. Though the conclusion of the agreement took a bit longer than it should, the solution, according to the chief executive of the company, gives now enough room for the company to focus on its core business. “Damas needs to re-engineer its network,
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especially in India, Turkey, Lebanon and Egypt and we are working on that,” said Anan Fakhreddin, chief executive officer and member of the board, Damas during an interview with Banking & Business Review (BBR). He said the company has enough credit lines to take the business forward. “We are not thinking of any aggressive expansions or fresh fund raising for the time being. We will just focus on our business and within three years, we are
Anan Fakhreddin
confident that all our pending issues will be sorted out,” he said. These are excerpts from the interview BBR had with Damas CEO recently.
The last two years saw the size of the industry drop, but the contraction for Damas business during this period was much less than the industry average
Damas business has diamond, 22 carat gold, 24 carat gold and other branded jewelleries range. Between diamond and gold how is the ratio of sales divided? Leave diamond; I would put it in this way – between 22 carat and 24 carat, the former accounts for about 60 per cent of our business. Within the 22-carat jewellery, we have diamonds as well. How many outlets does Damas have now? It is about 320 outlets and out of this UAE has around 120 shops Didn’t you close down a few shops in between? In the last 14 months, we closed down a little over 30 shops. Mind you, this is part of a standard practice whereby we keep assessing the viability of shops and locations and carry out necessary changes in the shop locations by closing an existing shop or opening a new one.
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June 2011 25
‘It may be surprisingg that we have increased our market share in the last two years’ ditional 49 per cent of the ownerhsip and the second market obviously is India. We have decided to focus more on India. We are still evaluating our possible options there, but until now we have not taken a final stand on what we need to do about Indian operations. There will be some action there, maybe, within two to three months.
Which are the other countries you have presence? Other than UAE and GCC, we have branches in Turkey, Jordan, Egypt and Lebanon. What about India? We have a joint venture operation in India with the reputed jewellery house Gitanjali where we have a significant stake. D’damas India Jewellery, is a joint venture between Gitanjali Group and Dubai-based Damas. It has a presence in about 150 towns and cities across India. Its main area of business is manufacturing and marketing of gold, diamond, silver, platinum branded jewellery’s in India. It has six sub brands – Lamhe, Glitterati, Vivaaha, DER, Solitaire and Saumya. D’Damas India is also used as manufacturing base and will export jewellerys to markets like Saudi Arabia, Japan, US and Europe markets. There are rumours that Damas is having a rethinking on this joint venture. How far is this true? The mandate given to us from the day one onwards is to assess all the markets we are present in. As a strategy, we may pull out from some smaller markets where we do not have a significant presence. We have clearly identified two markets where we are really keen to grow. One is Saudi Arabia where we bought out an ad-
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Any proposal to pull out from India? Our objective is to make sure we have got the right set-up on the ground, exploit the business opportunities in the Indian market. But how we will do this is the question in hand; we are evaluating our options. Any statement on this now will be premature. One thing is almost sure- there could be a change in the present arrangement. Which are the markets you are thinking to pull out from? I will put it this way. The countries that are under evaluation include, Lebanon, Egypt and Turkey. This doesn’t mean that we are going to pull out from there. We know that we need to re-engineer our presence there. Damas’ presence in these markets are through joint ventures with varying levels of ownership. We have several options before us for these markets. How big is your manufacturing facility in Dubai? We have a manufacturing facility very near to the head office in Jumeirah Lake Towers (JLT) area, but this facility does not provide all the jewellery we need. We do not view manufacturing as our core operation and hence we cannot rely on our manufacturing facility for all our needs. We are a retail jewellery operator and hence we depend on our manufacturing
June 2011
facility to the extent of the value addition it offers to the company. We are not supplying jewellery outside; the manufacturing is only driven by our requirement in retail. No doubt, you are still the leader in this market. Until two years back you have been gaining market share. How much share you lost in the last two years? It may be surprisingg to you that we have increased our market share in the last two years. You know that the last two years saw the size of the industry dropping, but the contraction our business witnessed during this period was much less than the industry average. In the UAE, we currently control about 23 per cent of the retail jewellery market. How do you see the gold jewellery business going forward, given the volatility in price and also the current record high prices? The demand for gold will not drop however high the prices go. Do you think there will be a shift from 22 carat to 24 carat (pure gold) in terms of investment prospects? Though 24 carat always had a niche, which is bound to continue, the bread and butter for gold business is 22 carat. How do you foresee the price movement [gold] in the coming one or two years? Usually we stay away from speculating on the price as price hardly plays any role in our business. We do not bank on gold price flucutations and I believe, that is the ideal stand a jeweller should take. There are different schools of thought when it comes to direction of gold price in the future. One thought is that the price will go
In the UAE, Damas currently controls about 23 per cent of the retail jewellery market up to $2000 or $4000 within five years. Price does affect the business as there is a segment of people which is elastic to price movement, especially in 22 carat. Do you have any plans to go to the West (Europe and America) market like some other jewellers [in the UAE] have done? We tried some Western markets which was a not a success. Middle East is our core market and this is the market we can understand better than any other markets. There are many similarities among the Middl East markets when it comes to consumer segment and product segment and this makes it more viable for us to expand within this region than moving out. In the Mena region? We have presence in some markets in the Mena region (outside GCC) directly or indirectly. But as I said, currently we are evaluating these markets. You said you are not keenly following the gold rates. What is your hedging strategy? It is a fact that price fluctuation is a key risk in our business. We use different methods to hedge the price risk. Having said that, for a jeweller, the best hedging strategy, is to buy gold unfixed; sell the gold and fix the price and pay it. This is the natural hedge that is ideally suited for a jeweller.
interest rate we and the banks have agreed upon.
How do you overcome this? For us, credit is not an issue now. Our credit lines are now secured with our banks. After the restructuring, the agreement clearly says how much money we have and how much can be used as working capital. We have an allocation of Dh1.9 billion, whereas Dh1.1 billion is the payment due from us to the banks. Out of this, Dh200 million has already been paid. So the amount of Dh1.9 billion can be viewed as the credit lines we enjoy with our banks. How many banks are involved? About 25 banks. What are the terms of the restructuring [cascade agreement]? We have been given sufficient time to pay up the dues, and the interest rate is very favourable under the current circumstances. We may be able to renegotiate on the terms including interest rate in the future. As of now, we are pleased with the terms of restructuring. Will the banks need to take a ‘haircut’ like in the case of Dubai World where the terms highlight very low interest rate? I cannot comment on that or on the
It is true, there is an allocation to the tune of Dh1.9 billion, mainly in the form of gold. Don’t you think you need more funds for the future expansion? We have a very conservative approach on expansion. Our future journey will be in such a way that will not impact the cash position of Damas. Will you be going for a rights issue? We have just concluded the cascade agreement that involves Abdullah Brothers and banks. What we need to do now is to focus on the business with the funds at our disposal and the operational revenues. How much do Abdullah Brothers owe now? (as on the interview date) They owe Dh614 million to Damas. What is the highlight of Cascade agreement in relation with the recovery from Abdullah Brothers? What we agreed in the agreement is that we will try to make recoveries from Abdullah Brothers and if anything falls short of the Dh614 million after three years, we will go to Abdullah brothers for fresh discussion and explore all options we have, including the share pledge and settlement agreements. The whole idea of the cascade agreement is to avoid a firesale that will be of no one’s interest. Everone is keen to recover the maximum and in this context, three years’
We hear that the banks are not supportive to the jewellery business as before, and are very reluctant to extend loan? Credit has become difficult the world over. Obviously, banks are doing their risk analysis before lending, and lending market, as anywhere else, is tight here too.
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period is ideal, I guess. So at the end of the three years, will Abdullah Brothers have ownership in Damas? It all depends on how things will turn out in these three years. There is a share pledge now and whether these shares will land up with the company or Abduallh Brothers can retain them depend on several things that take place in the coming three years, including the direction of property market. A simple query on the operational part. How much is the making charges in gold? Dh 4 to 8 per gram How strong is Damas on real estate holdings? Damas doesn’t have much real estate assets except some here and there. The main asset on the books of Damas is the gold inventory. Do you have any diversification plans within the core area of operations? One of the real advantage we have over other jewellers is that we are already well diversified – in terms of range of jewellery, geographical presence, segments of business, etc. What are your plans for Saudi? We used to focus more on the lower segement in Saudi until recently. We are changing the focus and will now focus more on middle class and above. We have reduced the number of shops to 32 from 40odd there in Saudi.
jjewellers in Dubai offer hefty discounts in the range of 50 to 80 per cent. What is the secret behind this? Unfortunately some jewellers follow this as a pricing strategy or promotional strategy. Diamond is also a well-known commodity whose price is known in the market. Some jewellers may be pricing it such a way as to give hefty discounts on the list price. But this is not possible in gold and no one is known to be offering any sort of discounts on gold. Does this mean that the real price of diamond is something that is not accessible to the common public or there is no uniform international pricing mechanism as in the case of gold? I will not agree with that. First of all, there is ‘carat’ for diamond and this is a factor that determines price of diamond. Moreover, there is certificating system that endorses the origin and quality of diamond one buys from any shops in the UAE. Also, the customers have the option to send the diamond they buy, to the Dubai Municipality laboratory to check the quality of diamond he/she bought from the jeweller. Is the range of diamond very vast
How big is your wholesale operations? We are very active in wholesale. A good size of our revenue comes from wholsale division. Have you done any tightening within the organisation? We have now closed the chapter of all legal issues. We have in place, strict corporate governance and strict systems. There has been a reduction in the workforce in the last two years. Coming to diamond, we hear that
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compared with gold? Yes, it is too large. No two diamonds are alike. So how will the customer assess the correctness of the price? First of all, the customer can ask for either a certificate or statement for the diamond he bought from the jeweller. The UAE has several certified labs where the customers can check the four Cs that determine the quality of diamond, namely, Cut, Clarity, Colour and Carat weight. But I would add one more C to this: Confidence, which can be assured if you buy diamond from a reputed jeweller. The fifth C will take care of all aspects of quality. I can tell you, our diamond acquisition team follows the best practices in the industry. We only deal with best of suppliers and most of them are DTC sight holders. Moreover, we go through a detailed system that makes sure we are paying the right price for the diamonds we buy. So you mean to say that Damas is not into the hefty discount business? No we are not into that. Our buying has set certain standards and we never go below that and here is where the fifth C – confidence plays a significant role.
Damas buys 100 pc in Kuwait operations
Damas International Ltd (Damas) said its subsidiary, Damas Jewellery LLC, has signed a Memorandum of Understanding (MoU) to acquire the remaining 10 per cent share capital of its existing joint venture operation in Damas Kuwait. The move increases Damas’ stake in Damas Kuwait to 100 per cent, bringing the Kuwait operation, which includes 23 stores across the country, within the full control of Damas. “This acquisition is part of our ongoing strategy to strengthen our control in key markets,” said Anan Fakhreddin. He said the Kuwaiti market is a core market for Damas as it offers a lot of potential for Damas’ business, and the full ownership is the best retail formula to maximize results. “This acquisition will enable Damas to offer a broader range of products in the Kuwait market, which in turn will strengthen our brand. This reflects our ongoing commitment to focus fully on our core operations after the close of our financial restructuring and it becoming effective,” Fakhreddin added.
FINANCIAL FRAUDS
Fraud, a real threat F
raud is the biggest threat to technology today. UAE is more concerned about this fast-growing threat as this is a country that relies heavily on technology and has more than a hundred financial institutions. What makes combating fraud more complex is the fact that the fraudsters are more often a step ahead of the institutions and their fraud detection systems. However, things are changing and there are now highly sophisticated companies that have developed systems and people who can help institutions keep frauds at bay. Banking & Business Review (BBR) recently got an opportunity to talk to Chris McAuley, Director, SAS Fraud & Financial Crimes Global Practice, EMEA, on the new trends in fraud and ways to combat them. SAS is the leader in business intelligence and analytical software and services, and has delivered proven solutions that have helped drive innovation and improve performance to customers located at over 50,000 sites around the world. Excerpts from the interview BBR had with McAuley.
Chris McAuley
The best precaution that institutions like banks to insurers to government agencies can take is the deployment of an enterprise fraud detection platform, which can cover all products and channels on a single platform
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Why does fraud seem to be on the rise across our institutions, especially banks? In addition to the economic hardships the people are going through, penalties attracted by perpetrators of fraud are not prohibitive enough. They are much less than for other “hard� crimes (e.g., drugs, weapons, etc). Unfortunately, it remains a fact that the scale (in dollar terms) of the fraud needs to be large enough for the law enforcement to prioritise an investigation. The information age has also played a role by lowering the barriers to entry for criminals. Information on how to commit fraud successfully is available in many different forums. For example, fraud scheme blueprints and devices, like card skimmers, can be purchased on the darkest corners of the Internet. In addition, with the establishment and ready adoption of Internet based transactions across industries, the growing levels of anonymity have provided a shield for committing fraud. Fraudsters can now hide behind this anonymity and can commit fraud via the computer network, no matter where they are in the world.
With the rise in fraud, what trends are you seeing in the fraud space? Our valuable institutions are the hardest hit by the ‘organised’ criminal who operates with a level of sophistication that far exceeds an institution’s current ability to detect fraud. This has resulted in a ‘perfect storm’ with fraud accompanied by all-time highs across industries. Fraudsters are now making use of technology to continuously evolve their fraud strategies and are spreading activity across products, channels, programs, and industries. On the other hand, fraud detection is typically managed within siloed business units, product lines, programs, or agencies resulting in many undetected risks. Perpetrators take advantage of these silos and are able to hide within these systems and organisational limitations to avoid detection. If that is the case, what can organizations do to combat the rising fraud issues? Sophisticated criminals also leave traces and clues within an organizations data. The best precaution that institutions like banks to insurers to government agencies, can take is the deployment of an enterprise fraud detection platform, which can cover all products and channels on a single platform. An enterprise approach will break down silos to leverage all data assets and will allow an institution to better understand the full profile and behaviours of legitimate vs. fraudulent individuals. Furthermore, to combat the high levels of fraud sophistication, equally sophisticated analytic techniques must be used for detection. A hybrid analytic approach to mining data, including anomaly detection, predictive modelling, and link analytics, is the only way to successfully profile fraud behaviour and for institutions to become proactive in preventing fraud before the event occurs. Fraud prevention is sometimes difficult to measure. What is the ‘business aspect’ for an organiza-
tion to take action? The implementation of an advanced fraud detection platform is a distinct competitive advantage for an organisation. Fraudsters will move to the path of least resistance and attack the weakest link to avoid detection. This results in a major first mover advantage. Organisations that are taking action are finding upwards of 10 times return on their investment within the first year of implementation. Fraud prevention directly benefits the bottom line. Despite the competitive advantages mentioned, I also urge organisations to combat fraud at an industry level. Through sharing of fraud information, schemes, and known perpetrators within the industry, a greater achievement can be made
when organizations combat fraud issues together.
the
In the UAE and worldwide, what is the dimension of fraud in credit cards and mobile channels and what precautions can be taken? I have personally not seen published credit card figures for the UAE market. In such a rapidly growing banking market that is expanding to support the robust economy, the risks are clearly very high with measurement being difficult due to legacy technology and disparate data. However, on a global scale, credit card fraud for developed economies averages in the 6-8 basis point range, and for emerging economies this could be as much as 15 -25 basis points of card transaction value. Using these
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baseline numbers, this would add up to significant dollars across the card transaction base. Lost & stolen, counterfeit, and ‘card not present fraud’ are the most repeated in the global marketplace and the local market is also seeing similar fraud types. Mobile payments are the largest growing payment type and will continue to grow exponentially in the near future. In the US, mobile transactions are now growing 14 times faster than online transactions and 1600 times faster than branch transactions (source: George Tubin, TowerGroup). I would expect similar statistics in Europe. Along with the boom in mobile payments will come a boom in fraud within the mobile channel. This is a major gap in both banks and Telcos that are supporting mobile payments, as the mobile service offering has greatly outpaced efforts and technology on the fraud detection side. The best precaution that institutions can take is to deploy an enterprise fraud detection platform that can cover all products and channels offered on a single platform. This will support the removal of the artificial organizational and data silos and will also allow an institution to better understand the full profile and behaviours of their customers. The platform should include an advanced analytic capability that can leverage these client profiles across all products and channels to identify anomalous activity and flag fraud based upon predictive techniques. By implementing a platform that can provide milli-second response times, and blocking transactions before they occur will maximise the fraud prevention and this will greatly impact the bottom line. Online transactions have become very popular now. How can we prevent online fraud? Online fraud is an extreme and ever-growing concern in all regions around the world. With the es-
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On a global scale, credit card fraud for developed economies averages in the 6-8 basis point range and for emerging economies can be as much as 15 -25 basis points of card transaction value tablishment and ready adoption of online banking, growing levels of anonymity in banking transactions has provided a shield for committing fraud. Fraudsters can now hide behind this anonymity and can commit fraud via the computer network no matter where they are in the world. This means that organised criminals in Eastern Europe and Asia - two areas of rapidly increasing fraud risk - can access information and funds across the world without ever crossing their own borders. As the levels of sophistication of the fraudsters increase, equal levels of sophistication in fraud prevention must be deployed within our institutions. As it specifically relates to online fraud, a three-layered security approach is required; network and online session security, customer authentication, and transactional fraud detection. *Network and session security will prevent known viruses and malware (malicious software) from accessing computer networks and thus the secure online sessions. Antivirus software and network security infrastructure are necessary to protect mass compromise of personal information. Intrusion detection analytics can also be leveraged to determine weaknesses in this security and identify access attempts so the security gaps can be filled. *Customer authentication should be dual layered, both at the time of login and at the time of transaction. It is especially important for those users who can perform administrative functions (e.g., adding a payee
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to a payroll account). In addition to the standard user login and password, the dual layered authentication can include challenge questions or secure tokens that provide a PIN that changes every 60 seconds. In addition, device identification software can ensure that the device being used to access an account belongs to the registered account holder prior to approving transactions. * Though network security and customer authentication are mandatory, it is not near enough. The recent Zeus Virus attacks that allow a fraudster to access a user’s browser sessions despite multi-layer authentication have proven that fraudsters have the capability to circumvent these protection techniques. As such, it is extremely important to implement a transaction detection solution that will leverage analytic techniques to determine the validity of a transaction and block suspicious transactions before they are executed. These techniques should also be deployed on non-monetary transactions such as logins and changes to customer details. Algorithms that detect anomalous activity in comparison to a user’s profile as well as predictive modelling techniques that leverage past fraud cases to forecast fraudulent activity on future transactions are available in the market. These capabilities have proven extremely successful at preventing online fraud. Can you please share with is fraud examples from UAE and worldwide markets?
The fraud within the UAE market typically follows the fraud cases that are seen in other markets across the globe. As a whole, fraud has now shifted from opportunistic to a more organised activity. The organised attacks extend across an institution’s products and channels, across multiple institutions, and across industries. Information on committing fraud and the tools to commit it can be found on the Internet – making fraud a viral problem. In addition to the recent fraud concerns around online and mobile payments fraud, additional trends are: *Credit and debit card fraud continue to be major issues globally, with major concern around mass compromise of card data that can lead to distribution of “white plastic” (counterfeit cards). *Phishing and other customer victimisation scams continue to rank high on the list as they lead to account takeover and identity theft. *As mentioned, organised criminal organisations are in the game, and it has now extended beyond 3rd party fraud where they victimise a customer to first party fraud. The first party fraud occurs when fraudsters open credit facilities to gain access to funds they never plan on repaying. This is also referred to as bust-out fraud or sleeper fraud. Organised rings will use real and fictitious identities to amass credit, often appearing as legitimate paying customers. As their credit facilities are increased across their network, often to millions of dollars, they will max out the credit facilities at a defined time and bust-out with the money. *Internal fraud continues to be a major issue. As economic times have worsened globally, insiders who have access to funds and information often leverage their positions to take funds or obtain and sell personal information to the outside. Organised fraud rings also place and groom insiders in order to better understand how to avoid an institutions fraud technologies and procedures.
As the levels of sophistication of the fraudsters increase, equal levels of sophistication in fraud prevention must be deployed within the institutions Like fraud, money laundering also poses big challenge in this market. What kind of technologies you suggest to combat this? How can technology help in this matter? What is the expected growth, what is SAS’ market share? Money laundering technologies have been in the market for quite some time. They typically leverage a batch process to run rules and scenarios to flag transactions that are suspicious for money laundering. This typical process is becoming antiquated, as the rules based approach is resulting in a high number of false positives alerts that require investigation. This high number of false positives results in wasted investigator time and in additional risk that the true money laundering activity is actually missed due to high workloads. SAS expects to see a wave of upcoming investment in the banking industry to implement new state of the art AML capabilities that will leverage robust analytic approaches to address the false positive issues (called “compliance analytics”). This will also ensure that investigators are spending their time addressing true suspicious behaviour and filing better reports to the regulators. SAS does not share its specific market share or revenues, as we are a private company. However, SAS’ AML solution has been implemented for clients on six continents, covering mostly banking institutions, but extending to retail and insurance organisations as well. Can you tell us how is it possible
to detect and prevent financial movements supporting terrorism with software solutions? Terrorist financing is always the greatest concern within the compliance space. Terrorist organisations tend to be sophisticated and have a deep understanding of the banking environment that allows them to conduct their activity without being detected. As such, it is extremely important that the banking institutions break down the organisational and data silos and better share information across their footprint and within the industry. Through improved sharing of information across a bank’s products and channels, a bank can get a holistic view of the activity and better flag suspicious individuals that are spreading their activity to remain hidden. In addition, banks must begin to apply advanced techniques to detect this behaviour through extending their compliance programs to include predictive analytics and social network analysis. Predictive analytics will allow institutions to enhance their profiling efforts for terrorist financing behaviours, while social network analysis will provide the automated capability to link account holders together and look for suspicious activity at a network level across customer relationships. As we are well aware, terrorist organisations are inherently networked; so one way to truly detect them effectively is through viewing them as a network of individuals versus just as individuals.
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LOAN SYNDICATIONS
Syndicated deals market sees signs of recovery Qatar’s Gulf Drilling closes $430m facility
T The new deal will help GDI pursue its strategic plans, to increase its share of Qatar’s drilling market
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he syndicated loan market, which has been lying inactive for some time now has started seeing signs of its resurrection. There are reports that leading banks, especially foreign banks, are in talks with several large corporate groups on their funding needs. A top official of Standard Chartered Bank told Banking & Business Review (BBR) that his bank was working on a strong pipeline of syndicated deals that may start rolling out within a few months from now. In Qatar, Gulf Drilling International Ltd (GDI) has closed a new $430 million (QR1.57 billion) credit facility with a syndicate of three banks. The Mandated Lead Arrangers of the credit facility are Qatar National Bank (QNB), Samba Financial Group (Samba), and International Bank of Qatar (IBQ) while QNB is also the Facility Agent and Security Agent. The new credit facility, which has a term of ten years and four months, will be used to finance a projected $538 million (QR1.96 billion) business expansion plan that includes the construction of two new hi-spec premium jack-up rigs, two new land rigs and the acquisition of a jack-up accommodation barge. “In combination with its existing fleet, which includes five jack-up rigs
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and four land rigs all operating in the State of Qatar, GDI is set to become the dominant drilling contractor in Qatar. The jack-up accommodation barge will also mark GDI’s first entry into the accommodation barge market,” a statement from the company said. Saad Sherida Al-Kaabi, Chairman of GDI said, “These new investments will nearly double the value of GDI’s existing assets. This will help GDI pursue its strategic plans, to increase its share of Qatar’s drilling market and to diversify into complimentary lines of business. It is encouraging to see such strong participation coming from Qatari and GCC banks, as supporting our local banks is a priority. I would like to take this opportunity to especially thank QNB for their continued support and cooperation in this and previous deals.” Ibrahim J. Al-Othman, Chief Executive Officer of GDI said the company is pleased to have assembled such a strong group of bankers, which underscores the strength of GDI’s financial backing. “GDI is grateful to have QNB serves as the Facility Agent and Security Agent as they are most familiar with our operations, having served in similar capacities for two other syndicated loans and are the sole provider of two additional loans to GDI,” he added.
GFT establishes presence in region Launches office in Dubai; innovative products on offer GFT, a global leader in online currency trading and derivatives, has increased its commitment to the Middle East region’s trading and derivatives market with a broad set of initiatives. With offices in London, New York, Singapore, Sydney, and Tokyo, GFT claims that it now extends wide array of financial products, award-winning trading software, and excellent ability to maintain competitive spreads even during the markets’ most volatile times to investors in the Gulf region as well. “Our goal has always been to give our account holders around the world the tools that they need to trade quickly, efficiently and securely,” said Gary Tilkin, president and CEO of the company. GFT is now offering customers in the Middle East opportunities to trade forex and contract for difference (CFDs) either online through GFT’s award-winning DealBook software or in-person at its trading office in Dubai. GFT has recently released its completely new, multilanguage website, www.gftarabic.com which allows consumers across the Middle East to open trading accounts (interest-free accounts to those who qualify), free practice accounts, learn more about trading in the FX and CFD markets, and select from a variety of trading tools, all backed with world-class service, twenty-four hours a day. “Our Middle East account holders can trade CFDs in oil, gold, silver, stocks, and indices from around the world, all in one convenient, secure GFT account. We recently announced the integration of MetaTrader 4, an automated trading solution. GFT traders can now leverage MT4 tools and strategies in their trading while still enjoying the GFT benefits of great execution, service, security, and competitive spreads,” a statement issued by GFT noted.
One-week Eibor more than halves during year Benchmark eases across the tenure
T
he one-week Eibor, the benchmark set by the Central Bank by computing rates offered by 12 banks, has more than halved since the start of the year (year-to-date), from 0.537 per cent to 0.262 per cent (as of June 10, 2011). Most of the drop in the benchmark has taken place in the last two months. The easing was noticed across all maturities though lesser as the maturity increases. The one-month Eibor dropped by 27 per cent during the period, from 1.64 per cent as of the year start to 1.20 per cent towards June 10. While the two-month benchmark dropped by 25 per cent to 1.37 per cent, the three-month and 6-month Eibor dropped by 23 per cent and 20 per cent, to 1.65 per cent and 1.91 per cent respectively during the just over 150 days since the start of the year. However, as the trend shows, the drop in the one-year benchmark was the lowest as it fell by only 16 per cent during the period – from the beginning of the year to June 10. However, the easing of the benchmark doesn’t seem to have any tangible bearing on the lending activity as is evident from the UAE banking indicators released by the Central Bank of UAE for the month of April. Though there has been a steady growth in the total assets of the banks since the start of the year until April, the assets remained flat during the month at Dh1.695 trillion. But the total deposits and loans witnessed growth in the month with the former growing by 23 billion in the month of April alone and the loans posting a marginal growth of 0.57 per cent – from Dh1.048 trillion to Dh1.054 trillion. “Though loans and advances market remain relatively dry still, the easing of liquidity, which is manifested by the big drop in Eibor rates across the tenors, will certainly lead to a pick-up in the lending soon,” bankers queried by Banking & Business Review (BBR) said.
The easing of the benchmark doesn’t seem to have any tangible bearing on the lending activity BANKING & BUSINESS REVIEW
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OUTSOURCING
Outsourcing has come of age
Malek Al Malek
T
he outsourcing industry has been able to revolutionise the employment landscape of the emerging markets, and UAE is one of the biggest beneficiaries of this new-wave industry. Today the outsourcing industry is embarking on a growth path with global revenues projected to touch $479.3 billion by 2016 from $370 billion at present, according to a report issued by Dubai Outsource Zone
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The UAE outsourcing market will record a CAGR of 10 per cent up to 2016
(DOZ) in collaboration with global business research and consulting firm Frost & Sullivan. The report has further revealed that the global outsourcing markets will register a compound annual growth rate (CAGR) of 8.35 per cent, while MENA region is expected to witness a CAGR of eight per cent during the forecast period (2009-2016). The UAE outsourcing market will record a CAGR of 10 per cent during the same period, it points out. Titled ‘Outsourcing Opportunities in the MENA Region’, the release of the report marks the fourth anniversary for Dubai Outsource Zone. Focusing on the current status and future prospects of the industry at a global, regional and local level, the report points out that the international outsourcing industry has witnessed a major shift in the past five years. Malek Al Malek, Managing Director of Dubai Internet City (DIC) and Dubai Outsource Zone, said: “As DOZ celebrates its fourth anniversary, the growth witnessed by the cluster in such a short time signifies the role it has played in developing the emirate’s outsource industry. “DOZ offers a blend of benefits including state-of-the-art infrastructure, hi-tech and latest telecommunication experience. It also offers a better lifestyle, reducing workforce attrition and a multicultural personnel base. DOZ sees the bigger markets such as India and China as an option to complement an organisation’s BPO in markets around the world.” The DOZ-Frost & Sullivan research has revealed that the UAE and the MENA region are considered attractive destinations due to their better quality of life, high levels of international compliance and availability of foreign language professionals. The industry’s growth trend is also attributed to a change in business practices, largely due to the financial crisis that has encouraged organisations to
UAE and the MENA region are considered attractive destinations due to their better quality of life, high levels of international compliance and availability of foreign language professionals outsource. In the MENA region, the UAE is the second largest outsourcing market, after Egypt. Dubai has particularly emerged as a preferred destination due to its prime location offering easy access to the entire Middle East, Africa and Asia. Lindsay McDonald, Consultant, Middle East and North Africa-Information and Communication Technologies, Frost & Sullivan, said: “The entire outsourcing industry was based on low cost activities. But now clients are ready to pay a premium if they are assured of high quality services. Due to this trend, governments of wellestablished outsourcing destinations are in the process of re-aligning their outsourcing industry and its development strategies.” The UAE has shown a similar development cycle that is experienced globally in the past by venturing into specialised services such as customer care and management services. This
is a primary reason for DOZ’s success in attracting companies with a business focus on the Middle East, India, Africa, as well as Central and Eastern European nations such as Poland, Russia, Hungary, Czech Republic and Croatia. DOZ provides a comprehensive purpose-built infrastructure to both captive and non-captive companies looking to set up in the region, control costs and gain efficiencies by leveraging the talents, technology and expertise in the UAE. DOZ currently hosts a number of companies in diverse sectors such as banking and finance, accounting, IT, payroll processing, engineering, research and development as well as design. Current companies operating in DOZ include Nokia Siemens Networks, Emirates airline, AXA Insurance, du, Mashreq, Arab Bank, First Data, Cupola, Larsen & Toubro (L&T), Infotech Ltd, Al Futtaim Willis, and the Jumeirah Group.
Dubai has particularly emerged as a preferred destination due to its prime location, offering easy access to the entire Middle East, Africa and Asia
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ISLAMIC FINANCE
Oman opens its doors to Islamic finance Prospects for $6 billion worth Sharia’h compliant assets
N
ow that Oman has also decided to embrace Islamic banking as the last member from the GCC to do so. An estimate done by a leading consultancy shows that a successful rollout of Islamic banking system could easily see the industry in Oman gaining up to $6 billion in Islamic assets over next few years. Total banking assets in Oman in 2010 were estimated to be $42 billion. Shari’a-compliant financial institutions, which are expected to commence operation in the country within a short period, are expected to capture a substantial share of this market and of total banking assets within a few years, according to Ernst & Young’s Islamic Financial Services Group (IFSG). Ashar Nazim, Executive Director and Head of Islamic Financial Services, Ernst & Young MENA said the Islamic banking opportunity could be substantial as we expect the industry to reflect its performance in other GCC markets. “As an indication of how Islamic banking would evolve in Oman, we can look at the UAE market, where it has captured a significant share in a short period of time. New Islamic banks and Islamic banking
New Islamic banks and Islamic banking windows in conventional banks are set to capture a significant share of the market over the coming months 38 BANKING & BUSINESS REVIEW
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Oman is expected to benefit from the most notable development in the Islamic finance market in 2010 - the growth of the Sukuk market windows in conventional banks are set to capture a significant share of the market over the coming months,” Nazim said. Global Shari’a-compliant assets are estimated to have crossed $1 trillion in 2010, growing at a sustainable 15-30 per cent per annum. Nazim said that given the size of the local market, early movers are set to create a strong advantage in both Islamic banking and takaful, adding that the next 18 months could materially change the competitive landscape in favour of Islamic windows and banks.
Islamic windows The Central Bank of Oman has permitted conventional banks to operate their Islamic banking business through a ‘window’ operation. As a result, the market could see a number of conventional banks entering the Islamic finance space in the next couple of years. Ahmed Al Esry, Senior Director, Tax, Ernst & Young Oman, said: “The Islamic banking window operation is accepted as a successful model and in many markets such as Saudi Arabia, where Islamic windows account for nearly half of the Shari’a assets, and UAE where they have an 11 per cent share. Given the similarities in the demographic landscape and appetite for these services, we see great potential in the Omani market for Islamic offerings. Successful Islamic windows understand the various Shari’a implications on the banking business and are able to apply its requirements in their strategy, operations, product, and governance and risk management functions.” The concept of Islamic banking window requires the conventional financial institution to have a distinct operational infrastructure for its Islamic business. Compliance is monitored by the regulator as well as the Shari’a authorities and further strengthened through independent Shari’a audits conducted by professional firms.
Local sukuks to aid growth Oman is expected to benefit from the most notable development in the Islamic finance market in 2010 - the growth of the Sukuk market. Sukuks are the Shari’a-compliant form of conventional bonds and have a growing acceptability in international markets. Omani Sukuk instruments could be used for financing infrastructure projects and stimulating corporate activity, which would add to the growth of Oman’s buoyant economy.
Banks charge card payments at exchanges Fee varies between Dh3 and Dh5 The payment against credit card has become much easier with the scores of money exchange houses having come forward offering the service of accepting credit card payments on behalf of the respective issuer banks. But if anyone still believes this service comes free, he/she has got it wrong. Many banks have started charging this service and the figure may hide itself in the corner of your next statement; in many cases, without being noticed. The fee could vary between Dh3 to 5 per transaction. Some say this is a more innovative and creative revenue model than the ‘negative option’ offered on credit shield, which is a big revenue earner for credit card issuers. One guy who religiously monitors the credit card statements stumbled upon this charge and decided to check with the bank-which happened to be a Abhu Dhabi centred bank. The bank told him that it was just passing on the fee the money exchange house charges against this payment. Talking to Banking & Business Review (BBR), Sudhir Shetty, COO – global operations at UAE Exchange said there is no new charge introduced by his exchange against this service- or for that matter, by any other exchanges, as far he knows. “We cannot collect any charges from the credit card holders as we don’t have any relation with them. We just collect the remittances and pass them over to the banks. We started this service about seven years ago and are still continuing with the same service fee arrangement that we signed up with the banks then,” Shetty told BBR.
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CORPORATE
Apicorp to increase capital to $1.5b
Ahmad Bin Hamad Al Nuaimi
T
he Arab Petroleum Investments Corporation’s (APICORP) Extraordinary General Assembly (EGM) meeting held in Cairo recently unanimously decided to increase the multilateral bank’s subscribed capital by 173 per cent from $550 million to $1.5 billion. APICORP is owned by the ten member states of the Organisation of Arab Petroleum Exporting Countries (OAPEC). The government of UAE has a 17 per cent stake in APICORP. An extraordinary meeting of the bank’s general assembly also resolved to double its authorised capital from $1.2 billion to $2.4 billion. In addition, APICORP’s paid-up capital was increased 36 per cent from $550 million to $750 million by capitalising retained earnings of $200 million into 200,000 shares distributed pro rata to member shareholders. This is the highest such distribution since the founding of APICORP, 35 years ago. Ahmad Bin Hamad Al-Nuaimi, Chief Executive and General Manager of APICORP said the capital increase reflected the confidence of member states in APICORP’s ability to catalyse growth and value creation in the region’s oil and gas industry. “While the increased capital will contribute to our target of doubling our direct investment portfolio by the end of our current five year plan, from a more long-term strategic perspective, it gives us the ability to significantly expand our investment
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and financing horizons and our role in the sector. The support from the shareholders has considerably helped APICORP in proactively exploring opportunities for supporting oil and gas projects that can add value to both the energy sector and the region’s economy,” he added. Shareholder states have previously supported APICORP with three capital increases in 1981, 1996 and 2003. In 2008, shareholders pledged $1billion in deposit facilities. “Furthermore, APICORP’s shareholders have waived receiving dividends consecutively for the last three years including 2010, which is akin to injection of capital, and that demonstrates the shareholders unwavering support to further bolster the Corporation’s capital base,” he further said. The latest capital increase follows the announcement of APICORP’s 2010 annual results, which saw the institution’s annual net profit surging 62 per cent from 2009
to reach $95 million. Total assets for the period rose to $4.3 billion, a 5 per cent increase over their 2009 levels of $4.1 billion while total shareholders’ equity rose by 13 per cent to reach $1.1 billion. Meanwhile, at the end of the first quarter of 2011, APICORP recorded a net income of $39.3 million, while total assets and total shareholders’ equity reached $4.42 billion and $1.16 billion respectively. In 2010, APICORP had set into motion a diversification strategy aimed at mobilising funds for a new phase of investments. In line with this strategy, APICORP completed its landmark SAR 2 billion ($533 million) debut bond issuance in October last year which was met with exceptional demand from a varied investor audience. To further its expansion and diversification plans, APICORP is exploring opportunities in shipping, petroleum tank farms, refining and related infrastructure investments. In addition to investing, APICORP is also looking at financing, advising and structuring vital energy projects.
To further its expansion and diversification plans, APICORP is exploring opportunities in shipping, petroleum tank farms, refining and related infrastructure investments
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CAPITAL MARKETS
Middle East IPOs raised Dh80m in Q1 Region witnesses one of the worst quarters in 5 years
T
he Middle East’s capital market also stayed action-less during the first quarter of 2011 with the region raising only a measly $21.7 million (Dh80 million) through IPOs in the first quarter, down 94.8 per cent from the $420.4 million it raised in the first quarter of 2010. The Ernst & Young’s Middle East IPO Update also found that the regional markets raised only 0.45 per cent of global IPO funds in Q1 2011. Nine IPOs that expected to raise around $4.7 billion altogether were postponed or withdrawn in the Europe, Middle East and Africa region during March 2011, the largest monthly estimated volume since October 2008. One IPO each in Syria and the UAE saw the lowest quarterly fund raising in MENA through the IPO route over the past five years. The Middle East Exchange Company in Syria raised $3.1 million and the Insurance House in Abu Dhabi, UAE raised $ 18.6 million. Phil Gandier, MENA Head of Transaction Advisory Services, Ernst & Young said that the regional IPO market has fallen to its lowest level in five years during the last quarter. “Besides the significant developments across the region, the main factor driving the market down has been weak investor sentiment due to under-performing stock markets and risk aversion,” he added. This downward trend, according to Gandier, could be reversed if some of the announced and open IPOs firm up their plans and choose to list. He added that the IPO of the National Takaful Company (Wataniya) in the UAE, which came in the second quarter and was oversubscribed seven times, demonstrates that investors may have begun warming up to the primary markets.
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June 2011
Nine IPOs, expected to raise around $4.7 billion altogether, were postponed or withdrawn in the Europe and MENA during March 2011
But the global IPO picture is robust In the United States, PE-backed listings drove global IPO activity in the first quarter of 2011, with the New York Stock Exchange (NYSE) taking the lead among world exchanges for the first time in two years. While the US exchanges began closing the gap on Chinese IPO dominance (32 per cent), the Greater Chinese exchanges raised more than a third of total capital raised (52 per cent) globally. In the first three months of the year, global IPO activity saw 290 deals worth $46.1 billion, down 14 per cent by capital raised compared with the same period last year. For the first time since 2008, the NYSE took the lead among world exchanges, raising $13.8b (29.8 per cent) of the total capital, followed by the $11.2billion (24.3 per cent) capital raised on the Shenzhen Stock Exchange, ($5.6billion), Singapore (12.2 per cent), and ($4.5billon), Shanghai (9.8 per cent).
IPOs in the US boosted by PE exits In the first quarter, the NYSE, NASDAQ and AMEX exchanges raised $15billion combined, driven by smaller companies, particularly in the health care and energy sectors. The United States PE investors continue to exit earlier leveraged investments, including America’s largest hospital chain operator, HCA Holdings Inc, which raised $4.3 billion in March, the largest PE-backed IPO in history. Bolstered by rising oil prices, energy company Kinder Morgan completed a $3.3 billion IPO, the third largest PE-backed deal ever.
Asia issuers continue to lead China and Hong Kong issuers continued to lead global IPO activity with 111 deals (accounting for 38.3 per cent of total deals globally); valued at $23.9 billion (52 per cent of global fund raised). The largest global IPO
For the first time since 2008, the NYSE took the lead among world exchanges, raising 29.8 per cent of the total capital in the first quarter was the $5.5 billion Singapore listing of Hong-Kong based transportation conglomerate, Hutchison Port Holdings, reflecting an upturn in global trade and container traffic following the global financial crisis. The second largest IPO in Asia (and the fifth largest globally) was the $1.4billion Shanghai listing of clean energy company, Sinovel Wind Group Co Ltd, maker of wind turbines.
Latin America raises more capital than Europe Fuelled by high rates of GDP growth, domestic consumption, foreign capital inflows, and infrastructure investment, Brazil, Argentina and Mexico raised $2.7billion in seven IPOs globally. Latin America’s largest economy, Brazil conducted five IPOs, raising an impressive $2.1billion as local companies tapped the stock market to finance expansion plans. By contrast, Europe raised just $2.5billion in 51 listings, well below the $ 8.4billion in 48 deals raised over the same period last year. Although European IPO pipelines remain packed with companies keen for public capital, sovereign debt concerns and global uncertainty continue to hamper valuations and dampen European in-
vestor appetites.
Industrial, materials sectors dominate During the quarter ending March 31, the industrials sector (particularly transportation and machinery companies), raised the most funds ($12.6billion). This was followed by the energy sector ($7.9billion in 23 deals) and healthcare sector ($6.2billion in 29 deals). By number of deals, the leading sectors were the materials sector (60 deals valued at $4.6billion), industrials sector (48 deals) and technology sector (35 deals worth $2.8billion).
Future outlook Concludes Gregory K. Ericksen, Global Vice Chair for Strategic Growth Markets for Ernst & Young, “Recent turmoil in the Middle East and Japan has unsettled broader stock market indexes, spooked investors, and slowed down the pace of new issuances in March. However, investors have been waiting for some time now to invest their capital, and the IPO market is still open for the right growth story and realistic valuation.
Investors have been waiting for some time now to invest their capital, and the IPO market is still open for the right growth story and realistic valuation
BANKING & BUSINESS REVIEW
June 2011 43
ANALYTICS
Increasing relevance of Analytics Analytics in a post-crisis banking environment By Amr Elsaadani and Oliver Reppel
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nalytics is the process of using quantitative methods to derive actionable insights and outcomes from data. Analytics has been deployed for decades; however, in the current business environment analytics is evolving fast and the nature of analytics is shifting. With ever-increasing competition, in an attempt to differentiate themselves, banks in the GCC region have begun to shift their focus to better understand their customer base in order to retain and increase profitable customers, cross sell and up-sell to them all while keeping risks as low as possible. Customers in general have become more demanding, better informed and less loyal to certain brands. As these shifts in customer segments, priorities and behaviours reshape the banking landscape, gaining a firm grasp of what customers want and then knowing how to address demand profitably have become essential. The discipline of analytics allows marketers to build strong capabilities in segmentation and customer insight. Deployed effectively, advanced customer analytics allow marketers to play a more integral, strategic role by setting and steering the growth agenda. Analytical tools can help companies create customer loyalty, improve return on marketing investment and generate new revenue streams. As managers become more flu-
Amr Elsadaani
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ent and comfortable with analytics, they can address progressively more sophisticated questions about customers, such as those in Figure 1. A path to differentiation among high performers then, is to move up the analytical curve, so that they can use predictive analyses to gain insights into what a company should do in response to changing customer scenarios. This involves not just a competence with technical tools, but also an organizational focus on adjusting business processes to put the insights to the best use. The increasing importance of customer centric strategies, combined with advances in the technologies available, has led a new generation of analytical leaders to demand more insights about customers before making final decisions on target segments, price points, product features, service levels and channel partners. Investments into customer centric analytics can be used to drive: • A foundation for highly-targeted marketing • Improvements in the return on investments (ROI) of marketing campaigns • Improved cross-selling through segmentation schemes that reveal growth potential of specific groups • Decreased customer churn by isolating loyalty drivers and optimising retention offerings • Improved decision-making through dashboard reporting that integrates business intelligence • Anticipated shifts in customer priorities Based on Accenture’s experiences, we have defined an approach that is both pragmatic and effective. Getting customer centricity off the ground does not require a large upfront investment. Instead, a firm can make real and substantial progress by
Analytical tools can help companies create customer loyalty, improve return on marketing investment and generate new revenue streams extracting its existing client data, and applying relevant, targeted analytics quickly and at relatively low cost. The momentum behind the resulting ongoing improvement in client relationships and profitability can then be built up progressively over time. Our experiences show that four key steps can enable financial institutions to begin the journey towards putting clients back at the heart of their business. The four steps are: • Conduct basic analytics to understand clients’ needs and buying behaviours • Group clients into segments reflecting behaviour and need • Re-align your product offering and delivery channels to support client needs and profitability • Initiate actions to enhance your parent brand progressively over time
The investment into analytics pays off Accenture Research undertook a study to compare companies that invested in advanced analytical capabilities compared with those that didn’t, and found that those that invested in analytics, significantly outperformed the market over time. The study also revealed that companies that invested heavily in analytics outperformed the S&P 500 by 64 per cent on an average and recovered quicker during economic downturns.
The challenge of turning data into actionable insights has become exponentially more difficult even as it becomes more essential. The deluge of data promises to increase from new sources such as social-networking websites, mobile devices and built-in sensors, placing strain on providing data that is consistent and of high quality. A well-recognised critical success factor of any analytics program is to ensure that the data that is being analysed has undergone a data cleansing and verification process. To ensure actionable and accurate customer insights, the old adage of garbage in, garbage out should always be kept in mind throughout any analytics endeavour and should be managed by an adequate data governance model. In conclusion, in the new banking environment, it is essential that banks embrace analytics if they want to keep in line with, or ahead of the changing customer landscape. Customers themselves value offerings that precisely address their needs and desires, and all else equal, they will seek out providers whose offerings provide the best fit. Whatever the customer issues at hand, analytics can help to solve it. (While Amr Elsaadani is currently managing director, Financial Services, Accenture Middle East; Oliver Reppel is an executive within Accenture’s Middle East Financial Services Operating Group. The views expressed need not be necessarily that of the company they represent)
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June 2011 45
COLUMN
Homma’s relevance By Uday Gupt
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or a guy whose creations move trillions of dollars worldwide every trading day, Munehisa Homma keeps a remarkably low profile. It helps, of course, that Homma lived and died in Japan about two hundred and fifty years ago, and CNBC-Bloomberg appearances are therefore somewhat difficult to orchestrate. It helps too that until a couple of decades ago, his creations remained sequestered deep within the business district of Chuo, Tokyo, the preserve of the Japanese equity trading fraternity. In 1991 a seminal book introduced his techniques to the rest of the world in
English. So diffident about the acceptance of Homma’s methods was Steve Nison, who authored that book that he made the techniques free-to-use. Nison needn’t have worried. From a standing start in the mid 1990’s, Homma’s creations, Japanese Candlestick Charting Techniques (now usually shortened to ‘Candlesticks’, ‘Candles’ or just ‘C’s’) have become by far, the single most used pricecharting technique worldwide. Most traders who move and shake the many-trillions-a-day commoditycurrency-equity-bond markets use price charts to some degree: it is fair to say therefore that Homma’s crea-
THE TWO BASIC CANDLESTICK TYPES
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tions move at least a part of those trillions at least in part. Spare a thought though, for Nison: any sort of deal for the thinnest wafer of royalties would have catapulted him into a permanent spot in the top 25 rich list of Forbes-Fortune. The construction of a Candlestick is intuitively simple, so much so that a glance at the attached drawing is probably a quicker primer than the paragraph that follows. A slim rectangle encloses the space between the opening and closing prices of a ‘session’. Above and below this rectangle, attached ‘wicks’ represent the limits to which prices have travelled during the session. A white (or green, or any other optimistic, happy colour) Candlestick session is one in which prices close above opening prices; a black (or red, or depressing, sad colour) Candlestick session, the opposite. A ‘session’ can be any fixed period: a second, a minute, 10 minutes, an hour or anything for that matter. Put Candles from several sessions together, and voila: there’s the Candlestick Chart. In their essentials, Candlesticks are no different from bar charts, the hot favourite among chartists before Nison shook their world. Developed in the US much after Homma, two notches, representing the opening and closing prices, are marked off on these charts on a short vertical line representing the session’s price range. Candlesticks are basically just bar charts with the space between the notches blown out into a rectangle and coloured. The visual difference from that simple twist, however, is huge: just compare the attached graphs for the same price range. The impact gap between Candlesticks and the traditional line graph is even bigger. Fifty years after Homma, another world-dominator, Napoleon Bonaparte, would concoct the precursor of that now-hackneyed
A BAR CHART AND HOMMA FOR THE SAME DATA
phrase, ‘a picture is worth a thousand words’. He might have been speaking of Homma’s invention: Candlesticks might not have quite bridged the gap between the written word and art; but they certainly did make the leap from geometry to drawing. Traders making split second decisions prefer Candlestick Charts for precisely the story-like quality that they have: the Candlesticks ranged
out, advancing and retreating, like an army on maneuvers, the upper wicks the imprints of unsuccessful attacks on higher prices and the lower wicks, successful defenses of lower prices. If that prose is unfortunately purple, there is a reason: it represents exactly what Homma intended of his charts. Watch this space for developments.
BANKING & BUSINESS REVIEW
June 2011 47
AUTO
New Volkswagen Golf R with 255bhp Consumes just 8.4 litres as DSG
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he new Golf R is here and was revealed to the region at the Qatar Motor Show a few weeks back. At 188 kW/255 bhp it is the most powerful version of the model series ever built. At the same time, it is the most fuel-efficient Golf R of all time – 21 per cent more fuel-efficient than the previous model. It’s a high-class sports car with compact-class fuel economy. The GTI and R32 have both proved very popular cars in this region, and a similar success is expected for the Golf R. The Golf R sprints from 0 to 100 km/h in just 5.7 seconds. While the retired Golf R32 processed 10.7 litres fuel per 100 kilometres, the new Golf R only needs 8.4 litres – 2.3 litres less! Accordingly, CO2 emissions are reduced from 255 to 195 g/km.
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