Vol. VI. No. 49 November 2010
Editor’s note
Publisher & Managing Director Sankaranarayanan
sankar@sterlingp.ae
MANAGING Editor K Raveendran
ravi@sterlingp.ae
Editor C L Jose
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consulting Editor Matein Khalid
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Director Finance Anandi Ramachandran
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GENERAL MANAGER Radhika Natu
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Editorial Contributing Editors Anand Vardhan Vanit Sethi Manju Ramanan
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DESIGN Ujwala Ranade
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ACCOUNTS Sujay Raj Circulation Supervisor Printing
sujay@sterlingp.ae Ibrahim A. Hameed
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Amlak’s bail-out key to market Indeed, we have started seeing signs of recovery. This is not just echoing the views expressed by International Monetary Fund (IMF) or World Bank or studies doled out by financial institutions through their periodical research papers. Not only the corporate houses, even individuals now get to feel this positive change. Whether it be the crowd seen on the roads or malls, or the huge responses to bond/sukuk issues launched by the UAE companies, all these point to the fact that the downturn has bottomed out in the UAE. But as we have attributed as the main reason for the slow-down in the UAE, especially Dubai, the property sector needs to recover from its more than two-year-old slump to accelerate the growth and sustain the steam. Though the valuation of properties has become attractive on any given standards, getting finance now poses the biggest challenge for the aspiring buyers. It was heartening to learn that Tamweel has been bailed out by Dubai Islamic Bank (DIB) helping the latter enter the mortgage market once again. It remains a fact that together with Amlak Finance, the Islamic mortgage financier duo controls almost two-third of the mortgage market in the country. This highlights a big market reality that Amlak also needs to enter the market in order to accomplish the mission of market recovery. Dubai’s recovery depends a lot on the recovery of the real estate sector. We are sure the authorities would certainly do something to address this.
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CL Jose
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CONTENTS
COVER STORY 11
Amlak needs a roof over it
Stand-alone finance company a wrong model in today’s market
HOT PICK 8 Are bank deposits really guaranteed? Confusion prevails
INTERVIEW 14 Islamic firms will dominate market in 5 years Dr Hussain Hamid Hassan 42 REAL ESTATE Dubai pins down Abu Dhabi property market 46 TRENDS Meet the bank customer of 2012
2 BANKING & BUSINESS REVIEW
November 2010
ROUND UP
Impairment loss reshuffles Spreads to tighten bank profit rankings G T he two years of global economic downturn and a couple of corporate troubles that hit the UAE banks have reshuffled the bank rankings in the country in terms of profit, which saw National Bank of Abu Dhabi (NBAD) taking the numero uno position once again. The Abu Dhabi-based NBAD was followed by another Abu Dhabi bank, First Gulf Bank (FGB) pushing the largest bank hitherto, in terms of profit and assets – Emirates NBD, into the third slot in profit when the banks announced their 2010 nine-months results and other financial details in the last couple of weeks. Interestingly, the rankings in profit were the same even when the first half results of the current year were released three months ago. More importantly, NBAD is fast catching up with Emirates NBD on the asset rankings also with the difference between the asset size of these two banks has already narrowed down to just above Dh70 billion. Following the merger between National Bank of Dubai (NBD) and Emirates Bank International (EBI), Emirates NBD had emerged the unquestionable number one in terms of assets as well as profit by posting a net profit of Dh3.681 billion for 2008 when NBAD finished a close second with Dh3.018 billion in net profit, and this was followed by First Gulf Bank with Dh2.997 billion. One shouldn’t forget the picture of 2007 when ADCB was leading the show in profit along with NBAD. But thereafter the ever-increasing impairment losses brought the bank down to a slot way behind all the front-runners. The year 2009 saw NBAD maintaining the same level of profit at Dh3.019 billion whereas FGB overtook the former by netting a net profit of Dh3.312 billion, close behind Emirates NBD which boasted a net profit of Dh3.342 billion for that year. However the picture took an overhaul during 2010, which saw both NBAD and First Gulf Bank establishing their positions as the largest profit makers in the UAE’s banking sector. However, Emirates NBD maintained high operating profit through these years proving that the impairment losses have taken a heavy toll on their prospects during the current year. ADCB which posted a relatively low net profit of Dh1.358 billion for 2008, ended up with a dismal show in 2009 when the bank posted a loss of Dh512.799 million – a scene rarely witnessed in the UAE’s banking sector in the recent history. The bank had to be satisfied with a low net profit of Dh19 million for the 9 months ending September end, 2010.
4 BANKING & BUSINESS REVIEW
November 2010
lobal sales of sukuk are down 22 per cent at $11.8 billion as of mid-October, from the same period in 2009, according to data compiled by agencies. Debt in developing markets has outperformed Islamic bonds in 2010, returning 16.5 per cent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows. The difference between the average yield for emerging- market sukuk and the London interbank offered rate has narrowed 19 basis points during October to 354, according to the HSBC/ NASDAQ Dubai US Dollar Sukuk Index. The spread has shrunk 114 basis points this year.
Survey shows expat Brits keen on savings A recent survey conducted by Lloyds TSB International has revealed that the majority of British expats living in the UAE are aware of the importance of a maintaining a varied financial portfolio. The survey shows that whilst 92 per cent of British expats have a current account and 53 per cent have a savings account in the UAE, nearly 60 per cent also maintain an offshore savings account. These findings indicate that customers are willing to keep savings in both their current country of residence as well as offshore. The survey was conducted online by FreshMinds with 412 expats of British nationality living in France, HK, Spain, South Africa, UAE and the United States. Richard Musty, managing director of Lloyds TSB Middle East said, “The recent economic downturn has highlighted the importance of having a responsible attitude to managing your finances. We are already seeing a clear increase in deposits and a reduction in the number of requests for new loans. This indicates that British expats have a good understanding of their finances. They are making the most of the positive options living abroad presents such as exchange rates and appreciate the importance of maintaining a combination of financial options on and off shore.” The survey of British expats, living in the UAE, also shows that when banking offshore, their confidence in sterling is high in comparison with other currencies, with 50 per cent of respondents believing that sterling is the strongest currency for their savings. Only 4 per cent polled selected the Euro. Jakob Pfaudler, managing drector of Lloyds TSB International commenting from a UK perspective, said it is reassuring to see so many British expats are confident in the future of sterling which, after depreciating over the past few years, has stabilised.
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E&Y to hire 2,000 for MENA in 2011
More than $40b netted until mid-October
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rnst & Young MENA plans to hire at least 2,000 new people to fulfill ambitious growth plans in 2011. These new recruits, according to a statement from E&Y, will be across all four service lines: Assurance, Tax, Transactions and Advisory. Already the largest of the Big 4 professional services organisations in the region by size of revenues and numbers of staff and offices, this will add to its 4,200 people across 20 offices in 15 countries in the Middle East and North Africa. Over 3,000 Ernst & Young partners from across Europe, the Middle East, India and Africa (EMEIA) met in Paris recently to discuss future plans for growth and areas of further investment. Mark Otty, EMEIA managing partner, Ernst & Young, said the company’s global integration has enabled it to operate more effectively across country borders. “Realising this competitive advantage means bringing it to life for our people and our clients. The year 2010 also marked the fourth year of our previously announced $1 billion global investment initiatives. Underlining the shift in global economic power, much of our new investment has been earmarked for emerging markets and the programme exceeded expectations, with more than $1.2 billion ultimately invested,” he added. Ernst & Young earlier announced combined global revenues of $21.3 billion for the fiscal year ended June 30, 2010. Global revenues in the second half of the financial year increased by 5.3 per cent in dollar terms. This year, Ernst & Young says it expects to support the global economic recovery by increasing its recruitment of new people in full-year 2011, including recruiting heavily in the emerging markets, with over a 1,000 people in Africa, 2,000-plus in the Middle East & North Africa, 2,500 in India and China and more than 1,000 in Russia. The 2010 Universum global recruitment survey of nearly 130,000 students, released earlier this month, placed Ernst & Young as number three among all employers worldwide and as the most attractive place for graduates to work in more markets than any of its competitors.
6 BANKING & BUSINESS REVIEW
Huge demand for emerging market bonds
November 2010
I
nvestors poured a net $1.5 billion into emerging-market bond funds in the second week of October, bringing the inflows until mid-October to $41 billion, according to a report from EPFR Global, a Cambridge, Massachusettsbased research company. Qatar Islamic Bank SAQ received orders for $6 billion as it sold $750 million of Islamic debt on September 30. Dubai’s government sold $1.25 billion of bonds in September and Emaar Properties, the UAE’s biggest property developer, raised $500 million from selling convertible bonds in non-Islamic sales. Dubai Electricity & Water Authority (Dewa), the government-run utility, sold $2 billion of non-Islamic senior unsecured debt a few weeks ago in its largest dollar-denominated bond sale. Islamic Development Bank (IDB), a Jeddah-based multilateral lender, plans to sell $1 billion of bonds this quarter under a $3.5 billion sukuk programme, Vice President Abdul Aziz Al Hinai had said in August. Saudi Arabian Oil Company, based in Dhahran, and Total SA, based in Paris, plan to sell $1 billion in sukuk this year, Simon Eedle, global head of Islamic banking at Credit Agricole SA, the lead arranger of the sale, said a few weeks ago.
ENBD sets up two firms in Jersey E
mirates NBD has set up a new company- Emirates NBD Auto Finance Limited (APC), incorporated under the Companies (Jersey) Law, 1991 and registered in Jersey. This was mentioned as part of the notes to consolidated statements for the bank’s 9-month period ending September 30, 2010 The principal activity of the company is to purchase portfolios of loan receivables through the issuance of notes. The same day, another company, Emirates NBD Auto Financing Ltd (Repack), was also incorporated under the Companies (Jersey) Law, 1991 and registered in Jersey. “The principal activity of the second company, Repack, is to invest in notes and securities through the issuance of notes. APC and Repack are consolidated within the Group in compliance with SIC Interpretation 12 – Consolidation – special purpose entities,” the notes have mentioned.
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HOT PICK
Are bank deposits really guaranteed? Confusion prevails over a scheme that never took off By Amit Chettupuzha 8 BANKING & BUSINESS REVIEW
November 2010
A
recent speech by Sultan bin Nasser Al Suwaidi, the Governor of the Central Bank of UAE, delivered at a seminar in Dubai, has once again sparked discussions about the bank deposit guarantee scheme. While the announcement by Al Suwaidi that the government scheme to protect or guarantee deposits parked with the UAE banks will be in operation only until 2011 went largely unnoticed, bankers seem to be divided over whether there offically exists any scheme called deposit protection within the banking regime. “This has not been put to test as no one has sought the ‘so-called guarantee’ from the bank and we don’t know how this would have worked,” a banker told BBR. BBR also reached out to a few other bankers, including those representing or even heading foreign banks to understand what the real shape of the guarantee scheme looked like. What really confounded BBR was a statement that appeared as part of the Base Prospectus Supplement dated September 27, 2010, issued by the Dubai Government department at the time of its bond issue. It unambiguously states that there is no deposit guarantee scheme in the country.
Sultan bin Nasser Al Suwaidi
Law remains unapproved
It reads as follows: “There is currently no formal deposit protection scheme in the UAE. While no bank has, so far, been permitted to fail, during the 1980s and early 1990s, a number of them were restructured by the authorities. In October 2008, in response to the global financial crisis, the UAE federal government announced that it intended to guarantee the deposits of all UAE banks and foreign banks with core operations in the UAE. Thereafter, in May 2009, the UAE’s Federal National Council (FNC) approved a draft law guaranteeing federal deposits although the law remains unapproved. BBR in a bid to get a clearer picture on the issue approached several large banks including HSBC, Standard Chartered Bank, National Bank of Abu Dhabi (NBAD), Mashreqbank, Citigroup, to name a few, on certain basic questions such as: • Is there a deposit guarantee scheme by UAE Government or Central Bank in place? • If so, have you been officially intimated on this by the authorities concerned? • Are you offering guarantee for the deposits being placed with your bank? • If yes, are you issuing any certificates to this end? Though officials of many banks privately confided that they have not yet been intimated on this officially through a circular, no banks contacted by this magazine responded to the queries.
BANKING & BUSINESS REVIEW
November 2010
9
An official release from Emirates News Agency (WAM) reported on May 20, 2009: The Federal National Council (FNC) passed a federal bill on bank deposit guarantee yesterday after debate (discussions) between the Minister of State for Financial Affairs Obeid Al Tayer and Governor of the UAE Central Bank Sultan Al Suweidi. The house committee for financial, economic and industrial affairs said the federal draft law aims at boosting confidence on sound financial situation and reduce conventional risks in the function of the banking system. It said the issue of the bill fits well with current conditions born out of the international financial crisis. Al Tayer said the legislation whose enforceability ends in 2012 guarantees deposits and spur financial firms to deal with banks. “It will also bolster the financial situation and attract foreign capital,” he added. “The aim is to protect national economy and state’s rights and assure international financial institutions,” he said.
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November 2010
To a question whether there is a legal framework to support a deposit guarantee in place, Emmanuel Volland, Senior Director - Ratings Analytical - Financial Institutions Standard & Poor’s (S&P) said he hasn’t heard of such a framework that is in place. “We understand that, as of today, there is no legal framework behind the guarantee of deposits in the UAE. At the same time, various officials have mentioned that bank deposits would be guaranteed, helping to maintain confidence among depositors,” Volland said. He also added that, overall, it is relatively rare that sovereigns decide to guarantee all deposits through a formal legal framework. “One noticeable exception in the Gulf region is Kuwait that passed a specific Law in November 2008,” he said. However, IMF believes there is a formal deposit guarantee in place in the UAE. In response to a query on the same issue, Taline Koranchelian, Mission Chief to UAE, Middle East and Central Asia Department, IMF, stated that in response to the global financial crisis, the Central Bank of UAE announced a three-year blanket federal government guarantees on all bank liabilities (deposits and inter-bank loans) in September 2008. He added that this scheme would end in 2011, but so far no bank has failed. “Deposit guarantees have been a standard response to the crisis in several countries both in the region (e.g., Kuwait, Saudi Arabia) as well as internationally, as a tool to restore confidence,” Koranchelian elaborated further. At the height of the credit boom witnessed through 2004 to 2008, banks have been aggressive on lending and the period witnessed a loan growth upwards of 30 per cent, at times reaching about 40 per cent. However, this fell to single-digits during the global liquidity crisis that started impacting this region towards the last quarter of 2008. “We need to control this kind of fluctuation in the credit markets,” Al Suwaidi had said at that meeting, where he made the mention on the expiry of deposit guarantee scheme. “The UAE will continue guaranteeing bank deposits until 2011 when the three year guarantee will come to a close,” Al Suwaidi had said. The three quarters of the current year ending September 30 saw marginal growth in the inflow of deposits into the banking system. The aggregate deposits grew at a rate of 3.7 per cent between September end, 2009 and September end, 2010 – from Dh977.2 billion to Dh1.013 trillion.
C OV ER STORY
Amlak needs a
roof over it
Stand-alone finance company a wrong model in today’s market By c l Jose
T
he home finance business is perhaps the biggest casualty of Dubai’s property crash, barring the real estate sector itself. Dominated by the two Islamic mortgage companies of Tamweel and Amlak, the UAE’s mortgage industry has virtually got stuck in the rut left behind by developers abandoning their projects post haste. The developers were rather lucky to extricate themselves, but the two companies had the ignominy of having virtually financed very risky assets, finding them-
selves in a crippling liquidity crunch. So grave was their situation that there were question marks over their very survival, which prompted the two companies to initiate the process for a merger with the blessings of the government. The plan bandied around was that the merged entity would get a banking licence that could help them raise retail deposits and then carry on. Two years passed without the merger process getting anywhere while trading in the shares of the two companies on the Dubai Fi-
BANKING & BUSINESS REVIEW
November 2010
11
nancial Market stood suspended. It was at this juncture that Dubai Islamic Bank stepped into the rescue act and bailed out Tamweel by raising its ownership in the ailing firm to 57.33 per cent. Tamweel is now back in business, as stated by Varun Sood, Chief Executive Officer, Home Finance Division of DIB. Sood said that beginning November 1, 2010, Tamweel would offer up to 80 per cent financing of the current value of ready residential properties in Dubai and Abu Dhabi. Demonstrating its commitment to meeting the needs of end users, the company said it would extend finance to salaried and selfemployed residents who meet the required eligibility criteria. Assuming that the Tamweel side of the story is clear, now another vital question remains to be answered is: Who will save Amlak Finance? Working with Amlak numbers, it emerges that the company needs to find a massive Dh12 billion within the next five months. Interestingly, the Amlak Finance third quarter financials (2010) released on October 16 (well after the decision on Tamweel in September) has expressed its hopes on the merger talks. The report says: “The Government Committee for Amlak’s affairs continues to explore the possibilities of a ‘merger’ and balance sheet restructuring of the company. This has entailed a full review and assessment of the company’s business operations and liquidity position providing guidance to the company’s management and regulators where necessary, with a view to making recommendations to the UAE Government on the company’s long-term stability, liquidity and assets and liabilities management requirements.” Everyone for sure knows that a merger between Amlak and Tamweel is ruled out. Tamweel had a DIB to save it, but will Dubai Bank play a similar role in helping out Amlak Finance? This is a valid question as both these entities have a common strategic shareholder in Emaar Properties, which owns more than 45 per cent in Amlak and 30 per cent in Dubai Bank, which is also an Islamic bank. “I don’t think any Islamic bank singlehandedly would be in a position to put in the required funding for Amlak, especially Dubai Bank,” says Mohammad Yasin, the chief investment officer of the Abu-Dhabi-
12 BANKING & BUSINESS REVIEW
based CAPM Investments. BBR’s analysis of Dubai Bank’s financials for 2009 (no statistics was available for 2010 until this issue went to the press) shows that the bank has posted a loss to the tune of Dh290.642 million for the year 2009 as against a net profit of Dh226.09 for the previous year. During the same period, the bank has seen Dh73 million impair-
2010 has been estimated to be Dh9.693 billion and by March end 2011, this could be in the region of Dh12 billion, meaning that the company needs to raise about Dh12 billion within five months from now, if Amlak Finance fails to attract fresh deposits or is unable to roll over the existing deposits beyond the contractual period. “This is quite unlikely in the present
The net liquidity gap of Amlak by the end of this year has been estimated at Dh9.693 billion and by the end of March 2011, this could be in the region of Dh12 billion ment losses on balances and deposits with banks, Dh371 million impairment losses on Islamic funding and investment assets and Dh100 million losses on available for sale (AFS) investments – all contributing to the loss after having made a Dh613.732 million net operating income. Dubai Bank, which sits on a networth (total equity) of Dh1.725 billion, has cash balances with Central Bank to the tune of Dh1.475 billion. There is a ‘disturbing’ concentration of risk on the asset book of Dubai Bank as, according to the notes to the financials of Dubai Bank, five parties represent almost half of the Islamic financing and investments portfolio of the bank as of December end, 2009. The maturity analysis of third quarter assets and liabilities of Amlak Finance, which along with Tamweel controlled almost 65 per cent of the UAE’s mortgage market, points to a huge liquidity gap in its books. The net liquidity gap by December end
The lack of a natural source of long-term funding is certainly an issue in this market for any mortgage finance player
November 2010
market situation as financial institutions, irrespective of their size or standing, are running frantically for liquidity,” said an analyst. The best possible way for Amlak would be to become part of a bank like what Tamweel did. “Since the funds requirement is substantial, the best possible way will be for more than one Islamic bank to get together to buy Amlak’s assets,” Yasin noted.
Amlak, Tamweel model can’t work The Amlak-Tamweel model, a stand-alone finance company, is difficult to work in this market, especially at a bad time like this, according to finance experts. Mortgage finance needs long-term deposits, which has always been a tough thing in the GCC market even at the best of times (prior to recession). Moreover, finance companies are not allowed to tap deposits from individuals making it a harder option for them to access deposits. “You cannot expect banks to park longterm deposits with Amlak or Tamweel when long-term funding doors are closed or rendered highly priced for them. There is no yield curve that can project long-term interest rates in this market, making it further difficult for banks to park long term deposits. Securitisation can become hardly an option during this time as Dubai Government itself had to pay more than 6.5 per cent to raise funds from the markets recently,” analysts say.
Mortgages are by their nature longterm assets, while corporate or retail deposit funding is short term. Consequently, if there is something that spooks the deposit market, it is difficult to ensure that mortgage companies have enough liquidity to meet their obligations. Responding to BBR queries on the topic, Raj Madha, Senior Banking Analyst, Rasmala Investment Bank, said even in good times, profitability is weak for mortgage and the mortgage finance companies are raising high cost financing on corporate/wholesale markets at a much higher rate than the banks, and lending it to the mortgage market at a price which has to be competitive with the banks. “Consequently spreads are high, and with little chance of cross-selling other products, the chance for good returns is lost. Overall, returns during a buoyant market are inadequate and in a bad market, these are even harder,” Madha added. According to him, if the companies were to act just as originators, syndicating out risk and funding, either to the markets or to the public sector, then it becomes a perfectly viable proposition. “That, of course, would be a challenge in itself, espe-
Tamweel has announced plans to offer up to 80 per cent financing of the current value of ready residential properties in Dubai and Abu Dhabi Mae or Freddie Mac, which are backed or sponsored by the US Government. “Dubai had tried its hands on a similar venture some time in 2005 by establishing Emirates National Securitisation Corporation (ENSeC),” Mahalingam recalls. In fact, ENSeC had successfully closed the first-ever, AAA rated, asset-backed securitisation to come out of the UAE about that time. ENSeC Home Finance Pool I Ltd, a company organised by ENSeC, issued $350 million floating rate, secured notes, due 2104. Madha also subscribes to this view. “The government could take an active role in providing liquidity for long-term financ-
Analysts say the panacea to the development of a successful mortgage market is the creation of a government backed or sponsored refinancing corporation on the lines of Fannie Mae, Ginnie Mae or Freddie Mac of the US cially given the concentrated risk, the lack of long-term funding, and the volatility of local property markets, but some of that will change,” Madha pointed out. The lack of a natural source of long-term funding is certainly an issue in this market. Pension and life assurance funds are never going to have the same penetration here as they have in the West, primarily due to the lack of taxation. Ramesh Mahalingam, a senior finance expert based in Dubai, believes the panacea to the development of a successful mortgage market is the creation of a governmentbacked or sponsored refinancing corporation on the lines of Fannie Mae, Ginnie
ing. However, the most critical thing is to reduce the uncertainty in the property market. The banks are perfectly capable of providing more mortgage financing, and I believe they will, as the economics of the business stabilise. Only when the banks are beginning to reach a ceiling (regulatory or self-imposed) does there need to be some institutional adjustment to make mortgage funding more freely available,” he said further. He also expressed hope that the property companies would do a better job of controlling supply. “We need to see health comes back to the job market as it plays a key role of drivers of more mortgage finance,” he added.
Back in business
Tamweel recently announced the relaunch of its core activities. The Islamic mortgage finance company said that following the recent announcement on a significant increase in the equity stake in the company by Dubai Islamic Bank, the company was now well positioned to support the country’s real estate sector. Tamweel said that beginning November 1, 2010, the company will offer up to 80 per cent financing of the current value of ready residential properties in Dubai and Abu Dhabi. Demonstrating its commitment to meeting the needs of end users, the company said it was extending finance to salaried and self-employed residents who meet the required eligibility criteria. “Tamweel is back in business,” said Varun Sood, Chief Executive Officer, Home Finance Division. “While the past two years have been extremely challenging for the company – during a period of unprecedented turmoil in the global real estate and financial services sectors – we have persevered. All of us at Tamweel are grateful for the support of our stakeholders over that period. “With a renewed focus on prudence and conservatism, we are focused on booking a high-quality portfolio of select customers and properties,” he said. “Today, our mission is to contribute to the stability and growth of the UAE real estate market, and to ensure that individuals can avail of the same high standard of products and services that made Tamweel a benchmark for the home finance industry.” Sood concluded: “We would especially like to thank the Government of Dubai, under the guidance of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of UAE and Ruler of Dubai and the UAE Government-appointed Steering Committee for facilitating the return of Tamweel to the market.”
BANKING & BUSINESS REVIEW
November 2010
13
ISL AMIC BANKING SPECIAL
Dr Hussain Hamid Hassan
14 BANKING & BUSINESS REVIEW
November 2010
Islamic firms will dominate market in
5 years
Dr Hussain Hamid Hassan, eminent scholar and chairman of a number of Islamic financial institutions, has always been considered the living authority on Islamic finance in the region. He serves on the Sharia’h boards of most of the leading Islamic financial institutions in the UAE, including Dar Al Sharia’h – the Sharia’h board of Dubai Islamic Bank (DIB), and is presently the chairman of the United Sharia’h Board in the UAE. Islamic finance, being in its infancy, is obvioulsy evolving by the day, and the process involves a lot of brainstorming among the scholars, who set standards for this relatively new branch of finance. Hence views expressed by Dr Hussain, a doyen of scholars in Islamic finance, go a long way in forming opinion in the industry. Excerpts from an interview Editor CL Jose did with Dr Hussain Hamid Hassan on how the Islamic institutions fared during recession.
BANKING & BUSINESS REVIEW
November 2010
15
BBR: Do you think the Islamic institutions have been able to weather the crisis better than their conventional counterparts? Dr Hussain: It has been proved beyond doubt the world over that the coneventional financial system has failed during the crisis and I strongly believe it is high time the Islamic system was tried and tested globally as an alternative to the vulnerable financial [conventional] system. BBR: Do you believe the crisis has exposed the weaknesses of the conventional system, and hence the region will witness faster growth in Islamic finance in the future? Dr Hussain: Not only I believe, I have started seeing the new trend emerging from the behaviour of the players in the industry, investors and business people. The participants in the industry have started increasingly reposing faith in ‘equity-based’ financial system, where the risk is limited and shared among the participants. Now the concerns are not woven around lesser profit, but about how to avert a gross loss. The current crisis has shown us how the assets are fast losing their value. Though the crisis has started off as a financial issue, the after-effects have had their impact on the economy itself. BBR: Do you think Dubai is now coming out of its issue? Dr Hussain: Dubai’s issue is more of liquidity-linked. Its base is strong and hence it can come off its pains once its liquidity issues are sorted out; Which is happening now, as anyone can see. BBR: We are now hearing about banks, Islamic banks, talking about mergers. What is your view on this? Dr Hussain: To become big means to become strong and this is not applicable to Islamic banks alone, but all fi-
16 BANKING & BUSINESS REVIEW
Sukuk outstanding should be off-balance sheet item Though there have been some shortcomings in the structuring of sukuks, gradually, the authorities concerned have been addressing this key issue effectively. In future securitisation, the real [legal] title will go to the sukuk holders. Earlier, though the title was on sukuk holders in terms of documentation, but when it comes to practice, it has been regarded as a debt from the sukuk holders. “Now with this crucial change being imminent, the sukuk Ijara will not sit on the balance sheet of the issuer, and hence will be considered as an off-balance sheet item. Unlike in the case of conventional bond, sukuk Ijara cannot be a liability of the sukuk issuer. The returns are coming from the rental, and this is not considered as interest,” Dr Hussain points out. According to him, the recovery of sukuk market has started and the market has before it examples to prove that. There have been sukuks issued by financial institutions from Qatar, Kuwait, Turkey, UAE, etc during the last few months. “I know that some institutions from Singapore also are currently working on sukuks,” he says. Some Saudi institutions are also working on large sukuks denominated in riyals, according to sources. The market, according to Dr Hussain, will grow to the level of 2007 when the sukuk market has seen its peak.
Standardisation of Islamic rules Dr Hussain says the Islamic financial services industry in Kuala Lumpur (Malaysia), Bahrain’s standard setting organisation, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and other Sharia’h bodies are working on how the Islamic finance industry can be practically standardised. “I am of the strong view that Islamic finance is still evolving and in the coming five years, the standardisation will be complete,” he says.
November 2010
nancial institutions, including finance companies and Takaful (Islamlic insurance), which itself is a sort of Islamic bank. I would love to see large financial institutions operating from the region. But I should, at the same time, warn that mergers should not thwart competition in the industry. We need competition to push innovation which, in turn, helps establish quality of service to the customers. BBR: Do you think more convetional banks will convert themselves into Islamic entities in the new context? Dr Hussain: No, I don’t think so, as there is no need for that. But on the contrary, more new Islamic entities will get established in the market, like what we have been witnessing in the past couple of years. I strongly believe that within five years from now, the region will have more number of Islamic
institutions than the conventional ones. We have been seeing steady growth in the shareholders’ equity, profit, dividend distribution and asset base in the Islamic institutions during the last decade. BBR: There were reports and you yourself have said that UAE will set up an academy for Islamic studies. What is the status of this move? Dr Hussain: Yes, it is true. We are currently working on that. Dubai will in the near future itself, set up this with the cooperation of prominent Sharia’h bodies led by Dar Al Sharia’h, the subsidiary of Dubai Islamic Bank (DIB). This academy, once set up, will have facilities to offer training in Islamic studies at different levels. The academy will, to a good extent, be able to address the issue of shortage of Islamic scholars in the market. We are planning to forge tie-ups with some European Universities, which can play a meaningful role in bringing world-standard study schemes and faculties to the region. Mind you, France already has an academy for Islamic studies. BBR: Are you currently involved in conversion of any conventional banks into Islamic? Dr Hussain: The most current one is the conversion of Bahrain Saudi Bank, for which the conversion processes are currently on. We have already submitted the plan and recommendations for the conversion process, and it is likely to be completed very soon. We will soon see branches, or new Islamic banks themselves, getting established in some Arab countries including Libya, Tunisia and Algeria. BBR: Islamic banks have been very active in mortgage financing. Obviously, these banks have been affected by the downturn in the real estate sec-
tor. Going forward, what is next? Dr Hussain: Anyone would guess that this would have been the case with any mortgage financiers. But with various options available through the Shariah routes, Islamic banks were able to tide over this issue. Islamic institutions were able to restructure these mortgages by changing the Murabaha (if any) contracts into Ijara. By resorting to this, these institutions could take over the ownership (in Murabaha, the property title is with the client) from the parties and reschedule the financing from Murabaha into Ijara. Since Ijara involves leasing, the contract can be made of longer term and the institutions (mortgage financier) will continue to receive the rentals from the client until the title is transferred to the party. While the Murabaha contracts are profit-based and of shorter term, Ijara deals are rental-based and relatively longer in term. The rentals are benchmarked against Libor or Eibor as the case may be.
BBR: So do you mean to say that many Murabaha contracts have been converted into Ijara contracts during this recession period? Dr Hussain: Yes, at least 25 per cent Murabaha mortgage contracts have been converted into long-term Ijara contracts since the recession shook the real estate market in the country. So I would put it this way: because of Sharia’h, most Islamic institutions were able to restructure their mortgage contracts without suffering any noticeable losses. BBR: What option does the mortgage company have if the client fails to pay even under Ijara plan? Dr Hussain: Under Ijara, the ownership is with the mortgage financier and the property is rented out to the client and hence the company can take the property back if something goes wrong. Contrary to this, in Murabaha, the title is in the name of the client. In Ijara, flexibility in term and instalments is possible.
Islamic CDs and liquidity window The Central Bank of UAE is finalising an Islamic certificates of deposits (CDs) regime, which will function on the theory of profit, instead of interest as in the case of conventional CDs. “We can now place our (Islamic banks) surplus through Islamic instruments and withdraw funds without disturbing Islamic rules. This will not only help improve liquidity within Islamic banks, but will also help improve their bottom-line by way of returns from CDs,” Dr Hussain says. In fact, lots of money, even running into billions of dirhams, used to get parked with the Central Bank without any return. The Central Bank is also said to be working on an Islamic liquidity window, which can be used by Islamic banks in case of emergency fund requirement. This has also not been available for Islamic banks as the system basically works on interest. “As of now, liquidity is the biggest challenge for Islamic banks as all liquidity windows are interest-linked, and now with the Central Bank facility in the offing, Islamic banks stand to gain a lot,” Dr Hussein who is also the chairman of the United Sharia’h Board in the UAE, points out.
BANKING & BUSINESS REVIEW
November 2010
17
ISL AMIC BANKING SPECIAL
NBC eyes new initiatives Sukuk portfolio is profit driver, says CEO Mohammed Qasim Al Ali By C L Jose
Mohammed Qasim Al Ali
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November 2010
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he sukuk portfolio has been the main strength behind the success of National Bonds Corporation (NBC), despite the fact that controversies still chase the structuring of this instrument. According to Mohammed Qasim Al Ali, chief executive officer of National Bonds, investments in sukuk yielded a minimum of 10 per cent return at a time when protecting the investments itself poses a challenge. Notwithstanding the rumours taking rounds in the market that, like many other investors, National Bonds also may have burnt its fingers in real estate market, the corporation is absolutely comfortable with its real estate portfolio. “No, it is not true. Real estate constitutes hardly 20 per cent of our investment portfolio and this itself will shrink once Skycourts, our mega project in real estate, is handed over,” Al Ali told BBR. In fact, NBC claims to have made a profit in this project also. NBC has also restricted its investments in stock market to a very minimal, Al Ali said. National Bonds was established in 2006 when the region was speeding towards the height of its boom period. The state Investment Corporation of Dubai (ICD) owns 50 per cent of the corporation, with each of the other local shareholders -- Emaar Properties, Dubai Holding and Dubai Bank -- holding 16.6 per cent. Though the company was set up with an initial paid-up capital of Dh150 million, this has grown substantially over the years and the corporation now boasts a decent capital base. During this period, more than Dh50 million worth of prizes have been disbursed among the NBC subscribers, whose total tally is nearing the 600,000-mark. Al Ali makes it a point to attribute the whole credit for the success of NBC’s investments so far to Shariah principles,
which have established clear-cut codes for investment. “Of course, there are certain principles, which guide all our deeds, whether investments or distribution of returns to subscribers,” Al Ali explained. NBC is bound by Shariah laws, which insist that at least 50 per cent of the corporation’s investments should be kept in cash or money market instruments. “This has helped the corporation maintain liquidity, which is paramount to an entity such as NBC that takes money from the public,” the NBC chief explained.
Scull when these tapped the market. Noting that it has paid a cumulative return in the region of 22 per cent until now, with the average clocking around 5.5 per cent to its subscribers, NBC claims to have given them a return which is better than that offered by any bank. Moreover, the liquidity of this investment is comparable to that of a savings account with a bank. “We would say this is a very good savings scheme with a 30 days liquidity whereby the subscribers can withdraw their money partially or fully,” Al Ali reminds.
“Real estate constitutes hardly 20 per cent of our investment portfolio and this itself will shrink once our mega Skycourts project is handed over” The rest of the investments can be in real estate, sukuks or similar instruments. NBC’s cash investments are in deposits with Islamic institutions, money market income generating instruments such as wakala, sukuk, etc. “But as I said before, we make good returns from sukuks, where we are an active player, especially for the papers issued by the UAE entities,” he added. With the expertise gathered, NBC has plans to gradually enter other markets as well. Though the corporation currently trades only in UAE’s sukuk market, according to the CEO, it is in the process of short-listing other GCC markets where it can enter in the future. Around 15 per cent of NBC’s investments are in sukuk, which has always paid good returns. Though the corporation has been very cautious about investing in stocks, it has participated in the IPOs of Ajman Bank and Drake &
Real Estate
Al Ali explained that the corporation has not invested heavily into real estate. Its lone project, Skycourts, launched in 2006, is all set to be handed over to customers soon. Skycourts is a residential development being completed in Dubailand, the multi-billion dollar theme project. National Bonds had transferred the development and management rights of Skycourts and Flamingo Creek to Deyaar earlier in 2008. Deyaar has since returned the management of the Skycourts project to its owner National Bonds. “Once Skycourts is handed over, we will book a revenue and a corresponding profit through that and once the deal is over, the size of NBC’s real estate portfolio will fall far below 20 per cent,” Al Ali pointed out. The company has converted most of its current real estate portfolio into rent generating investments. “Of course, we had been into trading in
Though the corporation currently trades only in the UAE’s sukuk market, according to the CEO, it is in the process of short-listing other GCC markets where it can enter in the future
BANKING & BUSINESS REVIEW
November 2010
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real estate until 2008 end when the sector was booming, but thereafter we have quit that business,” he added. NBC claims that it has been able to exit the risky real estate assets unscathed at the right time. On the issue of geographical diversification, Al Ali says at the moment the company will stick to UAE rather than enter untested territories. “This is not a favourable time to do all these things as the company is committed to giving good returns to its valued patrons”. Al Ali also explains the impracticality associated with NBC’s entry into private equity business. “We are a savings scheme and liquidity is of utmost importance to us. We need to keep a good amount of our funds in liquid assets and until we grow to a comfortable size, we cannot think of parking funds in private equity.” Al Ali says the corporation has prepared a white paper on the possibility of
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The success of NBC’s investments is attributed to Shariah principles, which have established clear-cut codes for investment
establishing a finance company. “The market is dying for such companies”. It has to be a 100 per cent subsidiary, and hence the corporation may join hands with a third party who need not be necessarily from the UAE, he suggested. The size of the company will also depend on the appetite of the third party who joins the new venture. Once the finance company materializes, the company hopes to tap the huge corporate deposit market. NBC, which is by far the biggest raffle
November 2010
draw now, has a distribution network of 600 points of sale (POS). With very strong corporate governance, Deutsche Bank is NBC’s administrator and KPMG is the internal auditor. The company is planning to come out with innovative and short-term more secured investment schemes. It is in talks with corporates to launch a group investment scheme for their employees with an objective to inculcate savings habit in them.
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ISL AMIC BANKING SPECIAL
‘Last Mover’ advantage Ajman Bank CEO says the bank has a near zero-toxic book By Rajni.C
A
jman Bank is now enjoying the ‘last mover’ advantage, as it is the newest of all banking institutions currently operating within the UAE. “Entering the business (real banking operations) late has helped us in building up a book that is near-zero toxic. More importantly, as we move through the recession, we are now able to assess different aspects of risks involved in banking,” said Mubashar H. Khokhar, CEO of Ajman Bank in an exclusive interview with BBR. But that doesn’t mean that Ajman Bank is sitting quiet. “We are very active now as if no recession has affected us,” he added. Ajman Bank has created a new region putting together the operations of Abu Dhabi and neighbouring Al Ain and put the new Deputy Chief Executive Officer in charge of the operations there. Khokkar has also created a strong team to support activities of the bank. It was a few weeks ago that the bank announced the appointment of Mohamed Amiri as Deputy Chief Executive Officer. A UAE financial services veteran, who has held management positions at both Shariah-compliant and conventional banks, Amiri brings more than two decades of industry experience to his new role at Ajman Bank. Khokhar said Amiri joined the bank at a time when the bank was rapidly expanding its physical branch network and range of products and services. Another key appointment was of Akram Khan as head of the bank’s corporate banking division. With 22
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years corporate banking experience in the Gulf region at well-known international and regional banks, Akram Khan will lead Ajman Bank’s corporate banking division to the next stage of its development in the market. Prior to this, Akram Khan was with Dubai Islamic Bank for five years as its senior vice president and head of wholesale corporate banking.
banking knowledge and practice in the UAE and a culture of excellence within Ajman Bank itself. On the new trend in financing, the Ajman Bank CEO said the liquidity situation has improved substantially during the last couple of months. “The market will soon see a number of syndicated deals taking shape with large and reputed groups standing to attract the banks
UAE is overcrowded for banking and I am sure some small or medium-sized banks will have to merge with larger and healthy banks, and Islamic is no exception to this. Globally also, the banking sector has been seeing consolidation taking place in a big way Network expansion
Ajman Bank has expanded its branch network from four a few months ago to seven and is all set to add one more by the year-end by when the ATM number is also expected to grow from the present 35 to 50. A major initiative embarked on by the bank this year is the new UAE-wide education program under the patronage of Sheikh Ammar bin Humaid Al Nuaimi, Crown Prince of Ajman and Chairman of Ajman Bank. The ‘Sheikh Ammar Banking Excellence Program’ has been developed in collaboration with New York-headquartered Edcomm Group Banker’s Academy to promote
November 2010
in the initial phase’” said Khokhar. The signs are very clear. The inter-bank rate has been coming down gradually, banks are liquid now, and are slowly loosening up their purse for corporates, if not for the retail.
Time ripe for consolidation
Khokhar said the market might see consolidation in the banking sector. There is no denying the fact that several banks have taken hits in the last two years. “UAE is overcrowded for banking and I am sure some small or medium-sized banks will have to merge with larger and healthy banks, and Islamic is no exception to this. Globally also, the banking
sector has been seeing consolidation taking place in a big way,” he added. However, Khokhar ruled out the possibility of Ajman Bank being bought out by any other institutions in the near term. “We are new in this market and this has helped us in enjoying a healthy asset book. Our capital base is sound and we as a bank are not averse to exploring good opportunities available in the market,” he said. He feels Islamic banks are likely to come across good opportunities as there are banks with same client base and follow the same business model philosophy. Tamweel has set the ball rolling as DIB has decided to take over that institution, which has been the UAE’s market leader in Islamic mortgage. “It is a fact that there are problems in the Islamic mortgage market and the DIB move will certainly help sort out Tamweel’s problems to a good extent,” he added. One thing Khokhar stressed in his interview was that Islamic banks are relatively better placed on the liquidity front compared with their conventional counterparts. “While many large conventional banks are stuck with higher-thanpermitted lending-deposits ratio, at above 100 per cent, Islamic banks enjoy a much healthy ratio. According to him, while the bank is in the process of structuring innovative trade finance products, it is also planning to enter the real estate financing in a big way through Musharaka deals. On the issue of the much-debated standardisation in Islamic finance, Khokhar is of the view that before the market welcomes more Islamic banks, there is a great need for the industry to standardise and codify the principles on which the Islamic finance or banking is based. “This has to be taken at the level of regulators – Central Banks. There are several Shariah boards, and they issue different Fatwas, of which many are at variance on so many counts. Having said this, I should acknowledge that 90 per cent of these Fatwas are standard; only ten per cent need further standardisation.” he added. The products that face the challenge of standardisation include Tawrooqs (which is close to Murabhaha), Sukuks, Arboun (options), etc. There are divergent views expressed on these products by different Islamic scholars through their Fatwas.
Mubashar H. Khokhar
Financial Performance “Until now, Ajman Bank has not been able to report profit. I would say that we want to do it this year itself. We are currently making huge investments. We are young and we have not built up toxic assets. We are investing in our people, consultants, technology and our branches. The message is that our vision is to bring human touch to modern banking though the ‘present’ is driven by technology. “If you compare our performance between two quarters, we have done well. Between the two past quarters, our revenues have gone up by 27 per cent; our cost has come down by three per cent despite the substantial investments we made during this period. Our assets have grown by 58 per cent. We are all set to announce some big deals. We are open to insurance business, but for the time being, we are focused on banking, especially investing in real estate financing. We will have some innovative products in trade finance soon.”
BANKING & BUSINESS REVIEW
November 2010
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ISL AMIC BANKING SPECIAL
Badr Al Islami set to roll out
standardized products Lengthy process, but a good deal of work already done, says CEO By Amit Chettupuzha
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bsence of standardization within the product offerings has been identified as one of the biggest challenges Islamic finance the world over faces now. And this has been one of the most debated shortcomings of Islamic finance. Though scholars defend this with their oft-repeated argument that it is only a couple of decades since this branch of ethical finance has come into existence as against the long-staying conventional finance, the leaders have long been working towards standardizing the business model and the product offerings with Islamic finance. The absence of standardization has necessitated the need for large number of scholars to endorse each class of new product offering or each big deal a bank or finance company signs up. But Badr Al Islami, one of UAE’s leading Islamic finance companies, which is also the Islamic subsidiary of Mashreqbank, has to a good extent succeeded in its endeavour towards this goal. “We are finalizing standardization in several Shariah-compliant products. We started the work more
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than two years back and before long, we are sure that the bank will have a range of products ready – for both small and medium enterprises (SME) sector and retail, to be offered out- ofthe-shelf,” said Moinuddin Malim, chief executive of Badr Al Islami, during an interview with BBR. Badr Al Islami was established by Mashreqbank in 2006 and now holds two licences – one for the Islamic finance company and the other for the Islamic subsidiary of Mashreqbank. Moinuddin explains the benefit of
having two licences thus:“While a finance company cannot accept retail deposits, a bank subsidiary can. At the same time, the finance company licence allows us to take the title of an asset, which is very important while doing home mortgage business – especially Ijara finance.”. With the investment banking activity coming under pressure during the post-recession period, many banks have shifted their focus onto the SME sector and commercial banking activities and this has necessitated the Islamic banks
With the investment banking activity coming under pressure during the post-recession period, many banks have shifted their focus onto the SME sector and commercial banking activities and this has necessitated the Islamic banks to speed up the process of standardization of products
November 2010
to speed up the process of standardization of products. “It is a lengthy process as it involves preparing product menu, structuring guidelines, documentation and final approval, but we have completed a great amount of work on this,” he added. Moinuddin said his bank has already re-launched its home mortgage offering. The standard products list will have retail, SME, personal finance, credit cards, etc. He believes a lot more needs to be done jointly among Islamic banks to achieve the desirable goal of standardization within the industry. He indicated that Badr Al Islami was currently in talks with other institutions on structuring more innovative products that can support the treasury needs within the bank. The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have recently launched the ISDA/IIFM Tahawwut (Hedging) Master Agreement. “The development is a breakthrough in Islamic finance and risk management, and marks the introduction of the first globally standardized documentation for privately negotiated Islamic hedging products,” he added. The mid-2000s saw a large number of conventional banks in the UAE seeking Islamic subsidiary licence, and Mashreqbank was among the first to get such a licence from the Central Bank. Today, most large local banks in the UAE have Islamic banking subsidiary licences. Interestingly, most international banks run Islamic windows, which allow them to sell Islamic products. According to estimates within the industry, auto finance and home mortgage are dominated by Islamic finance, which is said to be growing faster than its conventional counterpart in the country. Mashreqbank is one of the largest and oldest private sector banks in the GCC and has presence in almost all
Moinuddin Malim
Moinuddin believes a lot more needs to be done jointly among Islamic banks to achieve the desirable goal of standardization within the industry
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November 2010
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One of the major internal challenges for Badr was about effectively using the Islamic platform to change its operating model from business-driven to product-driven
GCC markets. “We have banking arrangements in Saudi Arabia, whereas Oman business can be done from the UAE offices,” Moinuddin said. Currently, Badr Al Islami controls more than three per cent of the market asset share, which constitutes more than ten per cent of the Mashreqbank group book, he said. Again, Badr Al Islami is the first entity to be approved by the Real Estate Regulatory Authority (RERA) to open Escrow account, and it still continues to be the market leader in this space. One of the major internal challenges for Badr was about effectively using the Islamic platform to change its operating model from business-driven to product-driven. Moinuddin says: “We realized that this could be achieved by having increased focus on products rather than on sheer business.” He said it has entrusted the role of ‘relationship building and business development’ to the Mashreq people so that Badr can focus more on products. Badr’s Shariah board, consisting of members from different parts of the GCC, believes that there is no harm in the conventional side of the bank selling Islamic products. Badr has done a lot of work to facilitate this. “We trained more than 400 sales, direct sales and customer service officers to deal with Islamic products. So, all branches have counters for Islamic products and you will meet Shariah certified officers to deal with you, whichever branch you visit,” Moinuddin points out.
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Needed a retail market for sukuks Islamic banks in the UAE want authorities to create a retail market for sukuks as this can give an opportunity for individuals to participate in sukuk issues. Though UAE has witnessed several sukuk issues in the past few years, these have mostly targeted institutions in the local market, regional markets and overseas. In the last couple of months the market saw Dubai Government, Dubai Electricity and Water Authority (Dewa) issuing sukuks that were hugely oversubscribed. According to Badr Al Islami chief executive Moinuddin Malim, sukuks would help individuals to create a balanced investment portfolio. “When it comes to a local retail investor what is his investment horizon? Either invest in limited stocks or keep his funds in banks as deposits, or buy insurance products or real estate. All these are typical cyclical investment avenues, and hence sukuks or bonds could fill the role of a negative cyclical investment product in their portfolio,” Moinduddin points out. For a retail investor who wants to have a risk-adjusted portfolio, he needs to have a balanced product mix. “That is the reason whey the need to develop a bond market is very important in today’s market conditions.” However, for a domestic sukuk/bond market to nurture and grow, the presence of local rating agencies is key as they are the ones who can give guidance to the individual investors on the quality of the issuers. In a very important move, Central Bank is addressing a long-overdue need of Islamic banks by establishing a framework for Islamic certificates of deposits (CDs). This, according to Moinuddin, will not only help Islamic banks in making a return on their surplus kept with the Central Bank, but at the same time, encourage them to accept greater amount of deposits. Sources told BBR that the Central Bank is also working on a liquidity window structure for Islamic banks. The smarket is fast picking up in the UAE and the region. Badr Al Islami is currently working closely on a few mandates in the GCC. According to Moinuddin, it is not that long before we could see the initial public offering (IPO) market also making a come back in the country. Islamic finance is growing and maturing with more and more product offerings and innovative structuring.
November 2010
STR ATEGY
Small is not beautiful RBS says new strategy to fetch more fee income as the bank focuses on core businesses By CL Jose
The year 2011 is expected to see so many debt capital market deals where RBS hopes to play a big role, meaning that, going forward, the fee income is going to be a bigger driver for RBS’ revenue Simon Penney
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November 2010
R
BS has withdrawn from retail business in the Middle East as of October 1, 2010. The move comes as part of a global strategy of focusing on its core business. The deal to sell the retail operations to ADCB has already been wrapped up and this has brought down the size of the RBS balance sheet to almost half. Through the deal, ADCB acquired three branches from RBS along with 250,000 customers. The RBS new business strategy seeks to achieve a surge in fee income as the bank focuses on big-ticket businesses. “I believe we will have more fee income than interest income in 2011 as there are a lot of investment banking deals lined up for us for the next 6 to 12 months,” Simon Penney, RBS Chief Executive Officer for the Middle East and Africa region, told BBR in an interview. He said the year 2011 will see so many debt capital market deals where RBS is likely to play a big role, meaning that, going forward, the fee income is going to be a bigger driver for RBS’ profitability. Asuming that the global markets are likely to see signs of recovery, the next year is expected to be a big year. There will be less activity in the M&A and the focus is going to be refinancing of outstanding loans and new fund raising, according to market experts. Next year is going to be massive in refinancing with $60 billion worth of deals coming up for refinancing in the GCC, Pen-
ney said. Dubai alone will account for about $12 billion refinancing in total during this period. “We will be there in some of the deals, and refinancing may bring in new players to the market. This doesn’t mean that there won’t be any fresh lending taking place next year, but the action is going to be dominated by refinancing. The next 6 o 12 months will be marked by refinancing of outstanding debts,” Penney added.
To a question why RBS wanted to quit the retail business, Penney said: “The sale of retail does not point to any lack of faith or urge to grow in the region, but rather the move was designed to help us focus more on investment banking and wholesale banking in the region in line with the global strategy of selling businesses that are not our core.” With the sole focus now shifting on
RBS will have a relatively large investment banking team of about 200 people in the Middle East, though 90 per cent of this will be deployed in the UAE alone More fee income
“I think we could see IPO activity also picking up in 2011 and this will lead to a general pick-up in the market activity, which by definition is more fee income for us also,” he added. RBS will have a relatively large investment banking team of about 200 people in the Middle East, though 90 per cent of this will be deployed in the UAE alone. The vast majority of the 1200-strong retail team has been transferred to ADCB along with the retail operations.
to the investment banking and corporate business, the scale of business on the corporate side will witness a substantial growth from the current level. The pure lending will certainly come down. “I believe RBS used to have a disproportionate volume of lending on its book and this has to be addressed soon,” Penney pointed out. He said RBS has been huge lenders in the regional market, not necessarily from the local balance sheet, but from the London balance sheet. The bank’s head office has
BANKING & BUSINESS REVIEW
November 2010
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made large dollar lending to Dubai. In fact, the local balance sheet is a tiny portion of the aggregate balance sheet of RBS, he said. It is obvious that the new business philosophy with the bank will naturally see the balance sheet shrinking going forward. Banks in general had maintained large balance sheets prior to recession and hence entered the crisis with bloated books; and post-crisis, the banks have been de-leveraging and pruning their balance sheets. “We are following the same philosophy. So by definition, de-leveraging essentially means that we will be lending less,” the RBS regional chief explained. Without dwelling much on the Dubai World crisis and its after-math, Penney said, “I think most foreign banks must have lent to the Dubai World mostly dollar lending.” With the banks and Dubai World having signed on the debt restructuring terms, there is a very good amount of certainty as to how much each banks need to provide for. Different banks will have their own ways of approach and policies on provisioning. “However, from what I heard, read and understood, the provisioning levels could be in the range of 10 to 20 per cent. I am just giving an indication and this need not be necessarily what we are going to provide for ourselves,” he underlines. Many banks have already set aside this, as a best practice followed during bad times, though may not be in the form of specific provisions. “Anyway I don’t want to give you any numbers, estimates or guess on our exposure to Dubai World,” he added. Penney said the ADCB deal was a profit-making one for RBS and the bank hopes to book a reasonable profit from this during the last quarter as technically the deal was concluded after September this year. “Anyway, I don’t want to quantify it now.” Penney feels it was not only a good deal for RBS, but for ADCB as well. Noting that RBS had a good first half, he said the investment banking business will remain profitable. “If you look at the debt capital market business, RBS has been very active in this
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region,” he said. RBS participated in the bond sales of Dubai Electricity and Water Authority (Dewa), which were oversubscribed many times. It was one of the book-runners for the $3.5 billion Qatari Diar Finance’s dual issue and a few other deals in the region. Between now and the coming few months, RBS hopes to come up with close to half a dozen transactions in bond market in significant sizes. This could include sovereigns that fall in the billion-dollar class. The total funds to be raised through these issues, according to the bank estimates, are likely to be anywhere in the region of $6 billion to $10 billion. The issuers include more of sovereign and sovereign-related entities but with fewer private sector corporates, according to Penney.
would now deal with only large clients with turnover of upwards of $1billion and clients with cross-border businesses and those who have the full range of investment banking needs. This may sound to be in stark contrast with the ‘new-found’ enthusiasm of the region’s majority of banks that have been increasingly shifting their focus to small and medium enterprises (SMEs) sector as the pricing is quite attractive there and the risk relatively less in that sector. RBS believes it will make much better business sense if it elects to deal with clients that have international M&A needs and international debt capital markets requirements. Penney has more reasons to defend his bank’s stand. “The pace of lending, as you know, will slow down until the
“The sale of retail does not point to any lack of faith or urge to grow in the region, but rather the move was designed to help us focus more on investment banking and wholesale banking in the region in line with the global strategy of selling businesses that are not our core”
Penney stressed that UAE operations were significant to the bank and the Middle East was fast growing to become one of the bank’s core hubs. The commitment to the region will be no less than before, and Dubai World episode has not diluted this even to a small measure, he said. “RBS has long-term ambitions in the region,” he added. As part of the new strategy, the shape of the clientele is also expected to undergo a drastic change in number and profile. In order to confine its operations to high-end investment banking clients in the Middle East, RBS may slowly move away from the small and medium businesses (SMEs). It was reported earlier that RBS
November 2010
old loans on the book are repaid. And obviously, it will be no one’s aim to increase lending at least for the time being,” the RBS official notes. The bank will have the whole range of investment banking products that obviously include M&A, private equity, capital markets, debt capital markets, lending, providing researches on equity markets, trading in forex, cash management and trade, etc. In the GCC, RBS has branches in Abu Dhabi, Dubai and Sharjah, all licenced by Central Bank of the UAE. The bank has a wholesale banking branch in Qatar Financial Centre (QFC). The branches in Abu Dhabi, Dubai and Qatar also run the bank’s wealth management under the brand name of RBS Coutts.
Central Bank in talks with Eleven new standards AAOIFI on Shariah Standards
Khairul Nizam
T
he Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is in talks with UAE Central Bank and Islamic financial institutions in the emirates to make AAOIFI standards a regulatory requirement for IFIs operating from the UAE. AAOIFI is the official body responsible for creating and establishing standards for the Islamic institutions the world over. Talking to BBR on the sidelines of a function organised to launch 11 new Shariah standards, Khairul Nizam, assistant general secretary of AAOIFI, said the organisation has now 200 institutional members from 40 countries, where these standards are followed. Though it is not obligatory on the part of the UAE Islamic institutions, as is the case with many institutions from other countries, to follow these standards, all institutions are currently following these without fail. “And hence the question whether it has been made mandatory in the UAE doesn’t arise,” Nizam told BBR. The ten jurisdictions that have made AAOIFI standards a regulatory requirement include Dubai International Financial Centre (DIFC), Bahrain, Qatar and Pakistan. Nizam said though the decision whether these standards are required to be followed has been left to the market, the Shariah boards in the UAE encourage the UAE institutions, including eight banks to follow them, and this has really resulted in all institutions adopting these standards. Though AAOIFI is responsible for setting standards in five areas including audit, accountancy, ethics and governance, the recent launch of 11 new standards was for Shariah.
These standards were launched recently by the Dubai-based Shariah consultancy Minhaj and AAOIFI jointly. The main aim behind the launch of these new standards is to help the regional and global Islamic financial institutions (FIs) tackle contemporary issues of banking, finance and investment, according these institutions. Officials with Minhaj and AAOIFI said the new Islamic norms have been conceived in the wake of the challenges faced by the Islamic FIs in the current times and paves the way for them to sort out a variety of issues in the light of Islamic jurisprudence. According to Sheikh Dr Abdul Sattar Abu Ghuddah, Minhaj chairman, the new Shariah standards would have great positive impact on the growth of the Islamic financial industry. “Moreover, the launch of these standards is also a salient indication of the constant evolution of Islamic banking and finance with contemporary focus, particularly in the aftermath of the global financial crisis,” he added. He said the 11 new standards are intended to address issues relating to uncertainty (gharar) in financial transactions and arbitration, endowments (waqf), labour leasing (ijarah), zakah, contingent obligations, credit facilities, online financial transactions, pledge (rahn), investment accounts and profit distribution, and Islamic reinsurance. “These laws also have brought in greater harmonisation to the Shariah principles, which will help further the growth of the Islamic banking and finance,” Sheikh Abu Ghuddah said. AAOIFI’s Nizam noted that despite the economic meltdown, the Islamic finance and banking sector has shown considerable resilience and has kept a pace of growth. “This has been possible because we have adapted to the economic changes and innovate on Shariah principles to the benefit of the Islamic society and economy across the world. The new standards are launched in this perspective,” he added. He said more than 90 per cent of the Islamic banks around the world go by the AAOFI standards. “The new standards will contribute to the growth and evolution of Islamic financial industry, which now has Shariah-compliant assets estimated at $1.275 trillion. The industry is growing at an average annual rate of 15-20 per cent and the positive trend will continue despite economic fluctuations thanks to the in-built prudence in Shariah principles,” Nizam added.
BANKING & BUSINESS REVIEW
November 2010
31
UPDATE
‘We still remain active in lending’ Bank has always supported borrowers and even new corporates, says CEO By BBR Staff
B
ank of Baroda (BoB) has made steady progress in the last three to four years, with the business growing manifold. Being the only Indian bank with fullfledged branch operations present in the country, the bank believes it has a bigger role to play in this market. That must be the reason why BoB remained active during the recession when many preferred to go slow on lending. “The bank has always supported its borrowers and even extended financial support to new corporates when many other banks were finding it difficult to support even their existing corporates,” Ashok Gupta, chief executive officer (CEO) of the bank for GCC, told the BBR in an interview. Gupta detailed the bank’s expansion plans for the bank in the GCC. Excerpts from the interview: How did Bank of Baroda (BoB) perform in the difficult times of recession? What is your outlook for the current year? Bank of Baroda (BoB) as a whole has performed exceedingly well. In spite of the global turmoil, the bank has shown a robust growth of 24 per cent in global business and 37 per cent in global net profit and has become the third largest bank in India. In the UAE, where the impact of the turmoil was higher, the performance of
32 BANKING & BUSINESS REVIEW
Chief Executive Ashok K. Gupta
During the last three years, the total business of the bank has grown close to five times, which is an extraordinary performance, particularly keeping in view the impact of financial crisis on the financial services sector in the UAE
November 2010
the bank has been even better. During the last three years, the total business of the bank has grown close to five times. This is an extraordinary performance, particularly keeping in view the impact of financial crisis had on the financial services sector, especially banking, in the UAE. During the current year also, the bank has done exceedingly well and has posted a growth of over 36.21 per cent. How did you manage to forge ahead despite the unfavorable economic environment? A complete strategic overhaul and cultural change has been brought into the working of the bank by making it very vibrant, efficient, highly customer-centric, proactive and visible, so as to completely change the functioning and image of the bank. Banking operations were restructured on different lines of business and specialised outfits created for each of them, like Retail Banking Shoppe, SME Loan Factory, Syndication Centre, Corporate Banking unit, Trade Finance, etc. We have achieved exceptional results, mainly due to a combination of various factors such as a highly customer-centric approach, continuous addition of new products and services, improvement in customer services and deliveries, increase in delivery channels and expansion of the bank along with substantial increase in visibility and focused marketing. All these have repositioned the bank, leading to significant improvement in the bank’s image and this has resulted in our customers reposing their increased confidence in our bank. Are you active in lending now? Do you take part in large syndications? Can you name some deals where you have already participated in? Bank of Baroda is quite active in lending and has started separate outfits to cater to the requirements of different segments i.e. individuals (Retail Banking Shoppe), small & medium enterprises (SME Loan Factory), corporates (Corporate Banking Unit) and large corporates (Syndication Centre). In addition, the bank has a full-fledged Trade Finance Department, Treasury Operations to meet other requirements of corporates/large corpo-
rates. The bank has various tailor-made products to meet the requirements of all segments of our clientele. The liquidity position of the bank continues to remain sound and the bank has even extended loans to the companies at the peak of the financial crisis. The bank has always supported its borrowers and even extended financial support to new corporates when other banks were finding it difficult to support even their existing corporates. BoB is an important player in the syndication market. We are arranging/underwriting syndicated loans and even participating in syndicated loans arranged by other banks. BoB has been part of various prestigious syndicated loan transactions in the country and other parts of the world. Some of these transactions include Emirates Steel Industries (EIS), Allana International, Dewa, First Gulf Bank (FGB), Gems Group, RAK Ceramics and JBF RAK. The bank is also acting as an Arranger for some syndicated loans/club deals. In addition, the bank is also active in arranging syndicated loans for Indian corporates here.
BoB is continuously studying the market trends and requirements of the borrowers and devising products to suit them accordingly. SME units certainly will enjoy the feeling of having the right banking partner, once they are in the safe company of Bank of Baroda. What are your expansion plans for UAE and GCC? In UAE, Bank of Baroda is present for last 36 years. It is the only Indian bank in the UAE offering the entire range of products and services through its six branches (Bur Dubai, Deira, Abu Dhabi, Shajrah, Ras Al Khaimah, Al Ain) and four Customer Service Centres (Jebel Ali, Mussaffa, Al Qusais, RAKIA). The Bank is opening its fifth Customer Service Centre on the Sheikh Zayed Road very shortly. The bank is further expanding its reach by opening two more Customer Service Centres (CSCs) at National Paints in Sharjah industrial area, and Karama Dubai). In addition to this, we have plan to open two more CSCs in Sharjah (Near Ajman and Hamriya Free Zone) and Kalba (near Fujairah). In GCC, we plan to have a presence in
BoB is an important player in the syndication market, arranging and underwriting syndicated loans and even participating in syndicated loans arranged by other banks
How strong is your SME business? Bank of Baroda is very active in financing SMEs in the UAE. With a view to focusing on SMEs and provide them with specialised and focused services, BoB has established a specialised outfit – SME Loan Factory. This is an exclusive outfit for meeting all kinds of banking and financial requirements of the SMEs in a very professional, time-bound, reliable and flexible manner. We at BoB fully understand and appreciate the requirements of SMEs and offer them suitable financial solutions to take care of those requirements.
Kuwait, Qatar and Saudi Arabia, thereby aiming to become the only Indian bank present to be present in all GCC countries. Are there new products in the offing? We keep offering new products and services for our customers. We have a lot of plans for the future. These include remittance through mobile, Gold Lounge Services for our high networth individuals (HNI) customers, Wealth Management Services, online trading of shares, debit cards & credit cards, bill payment, remittance through ATMs, etc.
BANKING & BUSINESS REVIEW
November 2010
33
UPDATE
SBI spreading wings in GCC CEO says business has already hit billion-dollar mark By BBR Staff
O
ver the past one year or so, several Indian banks have established presence in the UAE through the setting up of representative offices or opening branch operations within Dubai International Financial Centre (DIFC) from where they are allowed to do wholesale banking in foreign currency. The list of banks that have set up DIFC offices in the last two years includes State Bank of India (SBI), Punjab National Bank (PNB), Axis Bank, IDBI Bank and Hinduja Bank (ME) Ltd. SBI has been the leader in this respect. Having completed more than 18 months in this market, SBI has set its target to enter other GCC markets such as Saudi Arabia, Qatar, etc, and add more offices in Bahrain where the bank already has two offices up and running - one offshore banking unit and another one for full range of commercial banking operations. It has also plans to establish presence in Qatar by setting up office in Qatar Financial Centre (QFC). A.J Vidyasagar, chief executive, SBI DIFC branch, told BBR that his bank, which also has a full-fledged branch operation in Muscat, has set its eyes on a GCC expansion. He said SBI is all set to make its entry into Saudi Arabia towards January next year, by setting up an office in the kingdom’s commercial capital, Jeddah. “The business is fast growing in the region and I am sure the growth will speed up in the coming years for us also,” Vidyasagar said. SBI, the largest Indian bank with more than 15,000 branches, including 80 overseas branches in 35 countries, and more than 200,000 employees, made
34 BANKING & BUSINESS REVIEW
A. J Vidyasagar
DIFC-based banks like SBI while lending to the UAE corporates cannot create charge on collateral as these banks are not regulated by the UAE Central Bank
November 2010
its entry into Dubai International Financial Centre (DIFC) as a Category 4 entity in 2007. In early 2009, the bank got the Category 1 licence, which allows it to do wholesale transactions in foreign currency early 2009. “I am proud to state that our business has crossed the $1 billion mark (Dh3.67 billion) during the more than 18 months we operated from here,” Vidyasagar said. More importantly, this one-anda-half years’ time was one of the most dreaded periods for banks in general, when most institutions preferred to go slow on their business, thanks to the recession.
Issues on collateral security
The biggest problem facing the DIFCbased banks, according to Vidyasagar, is about creating charge on collateral while lending. As of now, banks like SBI, which are into lending to the UAE corporates, cannot create charge on collateral as these banks are not regulated by the Central Bank of UAE. “What we do right now is seek the help of any of the UAE banks regulated by the Central Bank to function as security agent. But this involves fee, which is not that small. But we don’t have a choice if we have to be in this market,” Vidyasagar said. “This is not only time-consuming and cumbersome but also expensive, and will certainly have a bearing on our profitability.”
NRI services
SBI DIFC branch will soon offer the full range of non-resident Indians (NRI) services to Indians residing here though this doesn’t include physical transactions. As this will involve a lot of work, the bank will require more staff to attend to the large flow of customers expected to visit the branch. “We have asked for additional staff though some can be recruited from this market itself,” Vidyasagar said. He said this is going to be a big business, given the large number of Indians living in the UAE. The new mandate will be given to the banks operating from DIFC once the regulator, DFSA, completes the formalities for establish-
ing a representative office regime within DIFC. However, it is learnt that the banks that already enjoy a licence from DFSA need not acquire an additional licence to carry out the representative office job. This means that banks like SBI with a Category 1 licence will be able to do all the rep office functions from the same office. Vidyasagar said this will not only help the large section of NRIs here but will also help the bank capture a good amount of business. The key incentive for SBI in this market is the presence of hundreds of Indian companies that feel comfortable to deal with an Indian bank because of the banking relations they have back in India. “This doesn’t ever mean that we
cated deals. Though SBI doesn’t underwrite loans in this market right now, it has plans to take on underwriting also in the future. “In fact, we are currently working on a few initiatives that include the scope for doing underwriting,” he added. Vidyasagar is full of enthusiasm for Dubai and UAE. He said the recent developments point to the positive growth Dubai is headed for. The recent bond issues are testimony to that, he asserts. Bonds issued by Dubai Government and Dubai Electricity and Water Authority (Dewa) were well-received by the local, regional and overseas investors resulting in multifold over-subscription in these issues. This shows the growing appetite for
DIFC-based banks are expected to be given the mandate for establishing a representative office regime within DIFC without the need to secure any additional licence, which means these banks can perform the rep office functions from the same premises
have a bias for Indian companies. We are always open to lending to any companies irrespective of where the company hails from,” Vidyasagar stressed. As of now, SBI is participating in many corporate deals where the bank feels comfortable about the risk. It is a fact that recession has prompted banks to tread a cautious path. As a strategy, SBI chief said, his bank is open to all sectors and all sizes of loans. “Having said this, like many other institutions, currently we are going slow on the real estate sector,” he added. The business for SBI in this market can be divided into four categories – suppliers credit, bilateral deals, participation in syndicated deals and buyer’s credit. Right from the beginning, SBI has been active in lending through bilateral deals and participation in big syndi-
Dubai risk regionally and globally. The interesting part is that Dubai is not even rated by international rating agencies. Things are improving for the DIFC banks as well. Recently, DIFC officials have announced that the Centre will rationalise the cost of operations for the DIFC entities. In the CEO Connect meeting some time back, DIFC authorities explained the new DIFC strategy for growth as one of the leading financial centres in the world. “I believe it is time for more Indian banks to come here and establish their presence. There are lots of Indian businesses not only in the mainland but also in various free zones including the Jebel Ali Free Zone. Indian banks should see this as an opportunity and play a more meaningful and dominant role in helping build up this economy,” Vidyasagar suggested.
BANKING & BUSINESS REVIEW
November 2010
35
UPDATE
DGCX set for more contracts No plan to drop inactive commodities, says CEO
Eric Hasham
“Of course, there is hedging taking place through futures trading. But certainly, there is a lot of trading taking place for investment purpose also�
36 BANKING & BUSINESS REVIEW
November 2010
D
ubai Gold & Commodities Exchange (DGCX), the only commodities exchange in the region, is all set to add a few more contracts to its ever-growing list. Currently 11 futures, including seven currencies, trade on the platform of DGCX, which is regulated by Securities and Commodities Authority (SCA), the watchdog for Dubai Financial Market (ADX) and Abu Dhabi Securities Market (ADX). Eric Hasham, the exchange’s chief executive, told BBR that the addition of new contracts is likely to happen within a few months. “I don’t want to name the contracts right now. We will announce when they are ready,” he said. DGCX also enjoys the distinction of being the only regulated exchange outside India, where rupee contracts are traded with guaranteed settlement. “The INR/dollar futures contract is witnessing new interest from businesses, arbitrageurs and investors. This is spurred by the contract’s higher liquidity, competitive trading costs, the settlement guarantee and reduced counter-party risk,” said Hasham. More importantly, DGCX remains open after Indian exchanges are closed, giving the Dubai-based exchange an added advantage of facilitating trade
through extended hours as it operates from 8.30 am to 11.30 pm (10 am to 1am Indian Standard Time) as far as those who reside in India are concerned. “Hence these contracts are available to a wide range of international participants and non-resident Indians (NRIs),” he further adds. While the Indian Rupee contract size is 2 million rupees (approximately $45,000) on DGCX, the minimum
up to twelve months forward. Outside India, Singapore is the only market for rupee futures, offering non-deliverable contracts through over-the-counter (OTC) trading. Stating that DGCX has done very well in relation to expectations, Hasham says his exchange has established a number of records in terms of futures trading. “Take for example the case of Swiss francs, which has seen enviable
Steel was physically delivered on futures trading, and unlike currencies, where the futures trading is predominantly used for hedging and investment and also by speculators, steel futures are used very much as a hedging tool by the construction industry
non-deliverable forward (NDF) contract size is approximately $100,000. The Indian Rupee futures contract is cash-settled in US dollars, based on the reference rate published by the Reserve Bank of India (RBI), India’s regulator, on the last day of trading and monthly ‘expiries’ on the contracts are available
levels of trading on DGCX. Maybe, Swiss franc is viewed today as a safe haven currency, compared with many others, especially when many governments are said to be controlling their currencies’ value as per their wish. Swiss franc may be one of the very few currencies that is viewed as neutral in
BANKING & BUSINESS REVIEW
November 2010
37
maining ones being trading members. Hasham said the exchange is getting membership enquiries from both brokers and traders. Broker members and Trade members are eligible to apply for Regular Membership of the Dubai Commodities Clearing Corporation (DCCC), which entitles them to clear DGCX transactions. In addition, financial institutions which propose to clear DGCX transactions, but do not wish to trade either as a principal or for clients, may apply for Special Membership of DCCC. Applicants for Clearing Membership are required to meet minimum Net Current Tangible Assets (NCTA) conditionss and open a ‘Settlement Account’ with any one of the Approved
Options trading
Though DGCX has options trading up and running in gold, volumes are very small. Hasham said the exchange does not have any immediate plans to introduce options in any other commodities. “Options are complex tools compared with futures, and trading in options needs a lot of market expertise. As of now we are focusing on futures and we believe a lot more is to be done in futures in terms of introducing newer contracts,” he said. Options are linked to the underlying futures and so the exchange needs to develop more liquid futures before it could seriously consider options.
DGCX remains open after Indian exchanges are closed, giving the Dubai-based exchange an added advantage of facilitating trade through extended hours this context,” Hasham explains. DGCX believes that its platform is used for hedging risk by both traders as well as by investors. UAE is a sought-after hub for trading and hence goods and money keep moving in and out. “Of course, there is hedging taking place through futures trading. But certainly, there is a lot of trading taking place for investment purpose also,” Hasham said. The DGCX chief sounded comfortable with the pace of growth at the exchange. The exchange is there to support the members and investors and hence all new initiatives will have these investors in mind, he said. DGCX has made it a point to regularly hold discussions with its members to get their feedback on what they want, the region wants and the clients want from the exchange. DGCX has over 200 members, out of which majority are broker members - maybe 140 broker members - the re-
38 BANKING & BUSINESS REVIEW
Clearing Banks of the DCCC. The clearing banks include Emirates NBD, Standard Chartered, Bank of Baroda and HSBC. International banks such as JP Morgan, Newedge, a 50/50 joint venture between Société Générale and Calyon, are currently trading members on DGCX. Though there are a few contracts such as steel and fuel oil (Fujairah Oil) that have failed to make any mark in trading so far, Hasham is against delisting them. “Steel used to be active until about three y ears ago, when construction was active in the emirate. However, we do not have any plan to drop these commodities from the list of trading commodities on DGCX,” he said In fact, the management is currently in touch with the market participants to explore what more can be done to revive these steel and fuel oil futures. “If you look at the history of even large and established exchanges,
November 2010
we find there were futures that were not successful also,” he points out. Steel, Hasham points out, is very dependent on the market realities. Steel had very high demand in UAE, especially in Dubai, when it was going through a construction boom. Steel was physically delivered on futures trading, and unlike currencies, where the futures trading is predominantly used for hedging and investment and also by speculators, steel futures are used very much as a hedging tool by the construction industry. However, the exchange is seeing increased interest coming in steel, and once the construction industry picks up, steel futures are likely to see action coming back. But Hasham says that the fuel oil scenario is different. Though fuel oil is more complicated and difficult to deal with, the exchange is working on it and is confident that a solution will be found before long. When it comes to the performance
on the exchange, gold is considered to be one of the forerunners. “Gold had been the best performer until recently, when Indian rupee futures overtook this precious metal in the volume of trade,” Hasham said.
Physical settlement
Many of these futures trading on DGCX are physically settled, including gold, silver, steel and fuel oil. Most of the currencies are cash-settled and in the case of Indian rupee, it is done in dollar against an official index from Reserve Bank of India (RBI) on the last trading day. DGCX has arrangements in place to physi-
cally deliver gold and silver, and for that the exchange has dedicated warehouses and delivery agents. Crude oil future, on the other hand, is cash-settled.
Three currency futures set records on same day Daily volume records were set by three DGCX currency futures contracts on October 19, 2010, contributing to one of the most active months of trading for the exchange. October has seen several trading days with daily volumes surpassing 10,000 contracts and the third highest overall daily volume of 15,350 contracts.
Continuing its ongoing growth, the DGCX Indian Rupee futures contract traded a record 6,043 contracts worth $270.61 million on October 19, beating the previous high of 5,376 contracts worth $242.83 million. On the same day, two of the new currency futures contracts launched in June this year also achieved record highs: Canadian Dollar futures traded a record 606 contracts worth $29 million eclipsing the previous peak of 528 lots worth $26 million while Australian Dollar traded 498 contracts worth $24 million surpassing the previous record of 285 contracts worth $12 million. On October 19, DGCX also recorded the third highest-ever total daily volume of 15,350 contracts valued at $786 million.
JRG joins hands with UAE Exchange
J
To offer cash management & transfer system
RG International DMCC unveiled a multi-currency cash management and transfer system in partnership with UAE Exchange, offering investors on Dubai Gold and Commodities Exchange (DGCX) a fully-compliant, flexible and transparent funds transfer mechanism which can be accessed from anywhere in the world through UAE Exchange branches. Launching the Global Cash Management and Transfer (GCMT) system, JRG International, one of the leading commodity brokerage entities from the UAE and trading & clearing member of DGCX, said the new initiative was in line with its strategic objective of bringing cutting-edge financial solutions to the investor community following the global financial meltdown. Y. Sudhir Kumar Shetty, COO - Global Operations, UAE Exchange, said the partnership with JRG Y. Sudhir Kumar Shetty
International on GCMT system comes as a value addition to UAE Exchange’s existing remittance services; it is also a new step ahead for the exchange in expanding its reach to the investor community across the world. Sajith Kumar P.K, Director and CEO, JRG International, dubbed the GCMT system as yet another radical financial solution from the JRG International portfolio, developed to support and nurture confidence among the investor community at a time when the financial world was passing through a tumultuous phase. “By combining transparency and quick efficiency to fund transfers, GCMT aims to complement the growth potential of online commodity/Forex trading on DGCX. In this endeavour, we have partnered with the UAE Exchange because of their capability in seamless fund transfer,” Kumar added.” Sajith Kumar P.K
BANKING & BUSINESS REVIEW
November 2010
39
UPDATE
Abdullah brothers owe
Dh614m to Damas Gold valued at about $35.95 a gram in deal
40 BANKING & BUSINESS REVIEW
November 2010
D
amas has declared in a statement sent to Nasdaq Dubai that the net amount to be repaid by Abdullah brothers to the company in accordance with the Settlement Agreement is Dh614 million. The Amendment and Gold Fixing Agreement between Damas and Abdullah Brothers sent to Nasdaq Dubai on October 28, three days before Abdullah brothers were supposed to pay Dh400 million ($110 million), has waived the terms of payment and agreed to extend the payment date by three months until January, 31, 2011. The total dues of Dh614 million, owed by Abdullah brothers, have been arrived at by adding Dh358 million, which Abdullah brothers owe to the company in cash and Dh256 million as the value of 1,940,250 grams of gold withdrawn by them from Damas. Interestingly, the gold has been valued at $35.95 a gram against a spot price of about $42.90 prevailing on October 28, 2010 when the statement was sent to Nasdaq Dubai where the shares of Damas remain listed. The statement has said that Damas and Abdullah brothers have agreed to fix the price of 1,940,250 grams of gold to reflect the total amount outstanding and payable by the Abdullah brothers. “As per the fixed price, Abdullah brothers have undertaken to pay Dh256 million in terms of the price of gold withdrawn by them. The price of gold has been fixed after evaluation of several factors including the price of gold prevailing at the time of withdrawal and certain benchmark transactions that have taken place in the records of Damas thereafter,” the statement sent to the market adds In fact, the cash component owed by Abdullah brothers to Damas has been scaled down from Dh365 million to Dh358 million in the meantime. “Damas notes that the amount of Dh365 million, which was referenced in the Enforceable Undertaking as the cash amount owing by the Abdullah
Brothers to Damas, is now reflected to be Dh358 million after considering certain historical recoveries from Abdullah Brothers, which have been accounted for in the financial statements of Damas,” the statement has further noted. The statement also noted that if the Cascade Agreement is not signed on or before January 31, 2011, the amount of Dh400 million ($110 million) will become payable immediately by Abdullah brothers, and the remaining balance will become payable in accordance with the payment periods described in the announcement made on November 4, 2009. Damas has further noted in the statement that though it expects the Cascade Agreement to be signed before January 31, 2011, there is no certainty that any such agreement will be signed on or before such date or at all. “If the Cascade Agreement is signed, the terms of any final signed agreement will be reported to shareholders in more detail pursuant to Damas’ obligations,” it added.
Settlement
Following the news of misappropriation of huge funds of Damas by Abdullah brothers, Damas announced on October 25, 2009 that it had entered into a settlement agreement (‘Settlement
Agreement’) with the Abdullah Brothers under which the Abdullah brothers had undertaken to repay to Damas an amount in respect of certain transactions between the Abdullah brothers and Damas. On November 4, 2009, Damas announced that the Abdullah brothers had undertaken to repay to Damas an amount of $55 million within six months, an aggregate of $110 million (Dh400 million) within 12 months, and an aggregate of $165 million within 18 months. The balance in excess of the $165 million, if any, would have to be paid within 24 months, by November 2011. On March 21, 2010, Damas had agreed that the total amount owed to the company by the Abdullah brothers was approximately Dh365 million in cash plus the value of approximately 1,940,250 grams of gold, the price of which was to be fixed on a date agreed by Damas and the Abdullah brothers. On September, 19, 2010, Damas announced that it was in the final stages of negotiating a Cascade Agreement with, amongst others, the Abdullah brothers, which would provide the legal framework for an orderly liquidation and realisation of cash proceeds from the sale of the assets of the Abdullah brothers and two companies - Damas Real Estate and Damas Investments Ltd, owned by the Abdullah brothers.
BANKING & BUSINESS REVIEW
November 2010
41
RE AL ESTATE
Dubai pins down Abu Dhabi property market
Reports say commuter effect has a big say on Capital’s real estate outlook
42 BANKING & BUSINESS REVIEW
November 2010
M
arket conditions in Dubai continue to have a negative impact on Abu Dhabi due to the complex inter-relationship between the two markets. Other than selective relationship lending, liquidity remains tight and many developers are experiencing cash-flow issues, according to one of the latest reports of Jones Lang LaSalle on the UAE market outlook. New supply has entered the Abu Dhabi residential market in Q3 2010, including the Al Bandar project on Raha Beach. However, the market continues to experience an overall under-supply situation, particularly in the lower to mid-market segments, with multiple households sharing and significant numbers commuting from Dubai. While developers have scaled back many projects since the end of 2008, the additional supply entering the market has seen average rentals and sale prices decline in most sectors over Q3 2010 as
While developers have scaled back many projects since the end of 2008, the additional supply entering the market has seen average rentals and sale prices decline in most sectors as the market continues to adjust
Jesse Downs
the market continues to adjust from the unsustainable levels of performance recorded during 2008 and 2009, the report points out. JLL says there is a mismatch between supply and demand. For affordable and middle market segments, there is a significant under-supply, whereas the upper segments of the market are becoming over-supplied. There remains substantial latent demand for affordable to middle income housing due to multiple households sharing a single residential unit and many Abu Dhabi employees com-
muting from Dubai and therefore new supply of affordable to middle income housing will be quickly absorbed, it says. The residential sales market has faced a major correction since end 2008. Despite the introduction of more flexible payment plans and more competitive finance rates, transactional activity remains limited and sale prices continued to fall, JLL points out. Rents have declined slightly from Q2, while quoted rents in new delivered apartments on Raha Beach are higher than the market average given the loca-
For affordable and middle market segments, there is a significant under-supply, whereas the upper segments of the market are becoming over-supplied
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tion and type of development. Rents peaked at unrealistic levels in 2008 and have subsequently declined. Average apartment rentals have experienced a year on year decrease of 16 per cent, while some areas have decreased by 30 per cent. Around 3,000 new residential units have been delivered in Q3 2010. However, there is still a market wide under-supply with multiple household sharing and significant numbers commuting from Dubai. While developers have announced substantial completions by year end, JLL has taken a risk-adjusted view expecting that circa 3,500 units will be delivered by end of 2010. The consultancy feels that the majority of existing residential supply is low quality with a relatively high proportion being shared villas. Despite a continued decrease in rents, relatively stable sale prices and limited transactions, Abu Dhabi’s residential market will continue to be under-supplied in overall terms for the coming years, it says. While the resident population of the Abu Dhabi metropolitan area (970,000 in 2009) remains relatively low, it is expected to increase at a rapid rate (5.2 per cent annually up to 2013. But it stresses that decreased rentals for lower to middle market housing will have a positive impact on demand. More supply is required to satisfy latent demand for lower to middle market and corporate housing. The total current stock of 182,000 residential units is expected to reach 251,000 units by the end of 2013. Project cancellations and construction delays have decreased future supply estimates by around 60% since Q2 2008. The agency estimates that apartments will comprise around 77 per cent of the total supply of residential units by the end of 2013, with a significant decrease in the number of residential units within shared villas. The previous boom in residential sales and prices (driven by speculative investment rather than end-user
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demand), came to an abrupt halt at the end of 2008, with prices having reached over Dh3,000 per sq ft in some developments. The market has since witnessed a major fall in pricing, with average prices continuing to fall to Dh1,100 per sq ft in Q3 2010. JLL points out that the introduction of flexible payment plans and more competitive finance rates have sought to stimulate residential purchases. However, transactional activity remains limited due to low confidence levels from consumers and investors. It points out that Abu Dhabi’s residential rental rates peaked at unrealistically high levels during 2008 due to booming demand and limited supply, compounded by the impact of the rent cap.
kets in the UAE are relatively interchangeable, which creates greater fluidity in demand and pricing trends,” says Jesse Downs, Director of Research & Advisory Services at Landmark Advisory. Cumulative analysis of both markets indicates an average vacancy rate of 10% in 2010, which gradually increases to peak at 12 per cent in 2012. According to Jesse, “While all housing supply in Dubai is not a perfect substitute for Abu Dhabi housing demand, the current vacancy rates in areas preferred by Abu Dhabi commuters are within range of these estimates. These figures tell a more robust story than when simply evaluating each market in isolation. Importantly, Abu Dhabi companies also benefit through the availability of affordable and often higher quality
Despite the introduction of more flexible payment plans and more competitive finance rates, transactional activity remains limited and sale prices continue to fall While there remains a very wide rental disparity, recently delivered buildings and increasing vacancies in existing good quality buildings have resulted in a decrease of 13 per cent to 18 per cent in average rentals. Forthcoming over–supply in the upper segment of the market is expected to result in a continued decline in average rentals. Lower and mid-market segments will remain expensive relative to affordability due to an overall shortage of supply in these segments. The commuter effect is the theme of yet another report, with Landmark Advisories suggesting that the phenomenon calls for an aggregate evaluation of the two markets together. “Even if the supply-demand patterns differ between Abu Dhabi and Dubai, the two main residential mar-
November 2010
housing alternatives for staff.” In Dubai, Landmark Advisory found that the apartment sale prices and rents continued to erode on the back of increasing supply with average quarterly declines of 6.3 per cent and 5.8 per cent respectively. In terms of residential volumes, sales and rents diverged, with sales volumes down 30 per cent on a quarterly basis and rental volumes up approximately 25 per cent. “Various factors continue to push Dubai residential sale prices and volumes down like increasing supply and the existing limitations on the residency visas for property owners. Equally important, limited mortgage activity means investors continue driving demand,” Jesse points out. “The widespread expectation of additional price erosion keeps many
investors on the sidelines waiting for opportunistic investments. In some cases this is a fallacy. Although we expect the average residential sale price to continue to decline into 2012, high quality, well position properties in well designed communities with limited supply pipeline are expected to remain relatively stable”, she says. In Abu Dhabi, the asked apartment sale prices fell by 9 per cent, but the actual transaction prices remain relatively unchanged amid low transaction volumes in Q3 2010. Villa transaction sale prices fell by 6 per cent. “The decline in listed sale prices in the capital shows that investor expectations increasingly reflect market realities. Sale volumes, especially for apartments, remain low because of further handover delays and regulatory uncertainty. Once projects like Marina Square commence handover and a title deed system is implemented, we expect volumes to improve,” Jesse points out. Turning to the commercial office market, Landmark’s Q410 report found that both Abu Dhabi and Dubai continue to face supply pipelines that will virtually double the existing supply in both cities. In Abu Dhabi, office sale prices declined 4 per cent, while lease rates declined 6 per cent. In Dubai, capitalization rates for offices continue to increase as office sale prices declined 6.2 per cent, while lease rates declined 11 per cent. “Albeit at a more modest rate, companies are still drawn to Dubai by the high quality of infrastructure and taxfree status. Price, rent and supply trends create challenges for existing owners of offices space in Dubai, but this also creates opportunities by augmenting the existing attractiveness of Dubai as a national, regional and global hub,” says Jesse Downs. According to JLL, office rents in Abu Dhabi are expected to continue to fall inline with increasing vacancies, and the gap between Grade A and B rents is expected to widen. Decreased rentals will have a positive impact on demand creating opportunities for tenants to
upgrade their space without increasing costs, JLL says. Abu Dhabi’s office market performance will continue to be affected by market conditions in Dubai due to an abundance of supply, lower property rentals and more developed urban infrastructure in Dubai, it says.
supply entered the market in Q3, although new supply will increase significantly over the next few quarters, it says. Quoted rents have not changed from last quarter and few deals were completed. Average Grade A rentals are Dh2,200 per sqm and average Grade B & C are Dh1,300. The annual decrease is around 21 per cent. JLL points out that the newly commenced standalone office buildings benefit from lower construction costs and can therefore justify lower rental levels, resulting in a two-tier market emerging. The consultancy estimates the total office stock across the Abu Dhabi Metropolitan area to be approximately 2.2 million sqm, with an additional 1.6 million sqm of new supply is expected to enter the market by end of 2012, over 50 per cent of which will be within largescale mixed use projects and tower buildings.Currently there is a shortage of Grade A office space and a significant proportion of new supply will not meet
The lower rentals for lower to middle market housing are expected to have a positive impact on demand as more supply is required to satisfy latent demand for lower to middle market and corporate housing in Abu Dhabi
The report refers to evidence of companies looking to upsize operations in Abu Dhabi and says this trend will continue as the attractiveness of Abu Dhabi increases. Office vacancy rates remain the same as Q2 at 8 per dent as no major
international Grade A standards. While there is latent demand from occupiers upgrading their office space and increasing their Abu Dhabi presence, the office market is expected to enter into over-supply by the end of 2010, JLL points out.
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TRENDS
Meet the
bank customer of Customer loyalty to banks at all-time lows, says Accenture report
T
he bank customer in 2012 will be less loyal and harder to please, but banks that can understand their customers deeply and respond to them nimbly stand to gain significant ground over the competition, laying the groundwork for sustainable growth, profitability and high performance, says an Accenture report on customer loyalty in the banking sector. The report, authored by Accenture’s Global Banking Managing Director Noel Gordon, Global Managing Director for Strategy Financial Services Piercarlo Gera and Financial Services senior executive Dorothy Armstrong, stresses that the future of banks rests increasingly on sustainable long-term relationships with high-quality customers. Accenture says customer loyalty to banks is at all-time lows, but the good news is that the time is right for those with superior customer experience and cost-to-serve management to win new business. But to do so, banks need to build trust-based cus-
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The good news is that the time is right for those with superior customer experience and cost-toserve management to win new business
November 2010
tomer relationships, invest continually in understanding and meeting fast-changing customer demands, employ technology to create winning customer experiences cost-effectively, continue their focus on cost reduction and develop new business models that eliminate silos between banks and the other companies bank customers do business with, it says. They also must provide the transparent, simple, lowcost products customers demand and work harder to keep those customers coming back. The report points out that in the wake of the financial crisis, the expectations of bank customers have undergone a significant transformation, marked most notably by a renewed willingness to shop around. Accenture research based on interviews with 50 global banking executives and an analysis of proprietary and public consumer data showed that 46 percent of bank customers are more open to sourcing products from different suppliers as a result of the current economic environment. In addition, two-thirds of the executives surveyed identified shopping around, decreased loyalty and price sensitivity as the key changes they had observed in customer behavior. Importantly, more than half of the senior executives Accenture spoke to had seen customer trust in banking brands drop. Surveys indicate that service expectations have risen faster across most sectors in the past 18 months than in the previous five years, and that during the past year two-thirds of global consumers switched service providers. In retail banking and financial services specifically, 9 per cent of consumers have switched in the past six to 12 months, and an additional 13 per cent intend to switch in the next six to 12 months. Twenty-six percent stayed with the same provider but moved some accounts or added new
providers, while 11 percent intended to adopt new providers in the future, survey results showed. Accenture says these challenges lead to price commoditization, unbundling of higher-margin products to satisfy customer demands for transparency and potentially higher coststo-serve as banks enhance service. “In a world of shrinking margins, these developments are significant. Nearly 70 per cent of retail banking senior executives believe these changes in customer behavior will last for more than three years. The key question, then, is what exactly do today’s bank customers want?,” the report said.
banks that can offer a more attractive proposition to discontented post-crisis customers. Because these customers are more likely to switch banks than before, banks that can satisfy them have an enhanced opportunity to win their business. As winning banks move from dependence on short-term arbitrage of high-risk segments to maximizing the value of long-term relationships with high-quality customers, they will need to make their business models attractive to those customers over longer time frames. Transparency and trust will be the underpinnings of the new contract with the customer, which ul-
Two-thirds of bank executives covered by a survey identified shopping around, decreased loyalty and price sensitivity as the key changes they had observed in customer behavior in the post financial crisis period
According to Accenture research, customers want not only value for money; but also the ability to choose independently among simple products; and a super-responsive bank that is flawless in execution, offers the latest technology with multiple access points and is an institution they can respect and trust.
New horizon
The report stresses that falling profits are becoming a fact of life for today’s banks. In the past year, 46 per cent of retail banking executives said their institution has experienced a loss of customer profitability of 5-15 per cent, and an additional 11 per cent experienced a drop of more than 15 per cent. Despite the gloomy figures, Accenture sees a substantial opportunity for
timately can place banks firmly on the path to sustainability, the report says. While banks need to cultivate these top-flight, longer-term customer relationships, Accenture research suggests that these target customers may have other plans. They are fundamentally more volatile, more confident in their ability to make financial decisions, more price-conscious, more demanding of an innovative multichannel customer experience, less reluctant to punish banks when service is poor and less trusting in their institutions overall. Accenture says today’s customers are living in a complex world and facing myriad choices, and there is a real opportunity for banks to help make sense of that complexity. It believes there are several levers a bank can use
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to gain wallet share among these volatile, demanding and confident customers. Accenture believes that by creating the self-defining customer, the crisis has intensified the need for banks to adapt their business models to meet the demands of those customers, and that going forward the business model will be the primary factor in a customer’s decision when he or she chooses a financial services provider. It sees a new world for banking in which the customer has more power. It also underscores that banks have a rare opportunity to create and drive the next generation of financial services. As banks mobilize to seize this opportunity, Accenture believes it is imperative for them to tackle shortto medium-term revenue rebuilding, precise understanding of customer behaviors and the type of services they value, as well as a transformed approach to segment marketing and faultless execution. Banks risk losing their ownership of consumer relationships to other parts of the ecosystem and must shape their strategies and expand their operating models to take advantage of new consumer communities. Based on the bank executive interviews and research, Accenture believes that rebuilding bank profitability depends on a new contract between banks and their customers. “The customer in 2012 will be more fickle, flexible and prone to flight. Banks that understand and respond to this new customer demand-driven dynamic can position themselves to be the institution of choice and earn the loyalty of a new breed of customers—something that will prove critical to achieving sustainable growth, profitability and high performance in the years ahead,” it says.
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In retail banking and financial services specifically, 9 per cent of consumers have switched in the past six to 12 months, and an additional 13 per cent intend to switch in the next six to 12 months
November 2010