#191 - January 2017

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JANUARY 2017 | ISSUE 191

Preserving excellence Mubarak Abdullah Al-Khafrah, Chairman of Alawwal Bank

Preserving excellence

Engr. Mubarak Abdullah Al-Khafrah, Chairman of Alawwal Bank

10 A tripartite pact

page 3-4 contents 191.indd 1

12 The final countdown

22 Adjusting to a new environment

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Dubai Technology and Media Free Zone Authority

“Alawwal speaks to both our legacy as the first bank in Saudi, and to our future.”

34 Revolutionising retail banking 23/01/2017 13:26

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CONTENTS

JANUARY 2017 | ISSUE 191

Editor’s Letter

D

News Analysis

A new dawn

8

News bites

22

THE MARKETS 10 A tripartite pact LEGAL FOCUS 12 The final countdown COVER STORY 16 Preserving excellence COUNTRY SPOTLIGHT—UAE 22 Adjusting to a new environment 26 Fujairah emerging www.bankerme.com

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| ISSUE 189

Omar Bouhadiba, Managing Director of ibq

10 2017—a perspective

14 The golden triangle

24 Qatar in the clear—for now

Preserving excellence

Engr. Muba Abdullah Chairman ofrak Alawwal BankAl-Khafrah,

Get the next issue Banker MiddleofEast before it is published.

Full details at: www.bankerme.com

42 A means to an end

10 A tripartite pact

Zone Authority

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and Media Free

The cautious optimist

“There is enough still going on for the banks to keep growing. The key is to stick to fundamentals, manage risk, and stay close to your clients.”

Dubai Technology and Media Free Zone Authority

Zone Authority and Media Free Dubai Technology

forum: 72 Business defence front line the compliance

and to our future.”

of Alawwal Bank

teach 54 The need to tricks old dogs new

“Alawwal speaks both our legacy as to the first bank in Saudi,

Al-Khafrah, Chairman

30 Kuwait on stable ground

Get the next issue ofEast Banker Middle before it is published.

Full details at: m www.bankerme.co

Mubarak Abdullah

s , CEO of ADS Securitie Philippe Ghanem 6 Middle East in the middle

Preserving excellence

The cautious optimist Omar Bouhadiba, Managing Director of ibq

CEO of ADS Securities

global “I am optimistic about off than growth. We are betterare much we think—businesses have healthier, and regulators job levelling done a very good the playing field.”

GCC Conqueringrld and the wo

| ISSUE 191

Dubai Technology

NOVEMBER 2016

www.bankerme.com

JANUARY 2017

DECEMBER 2016 | ISSUE 190

12 The final countdow

n

22 Adjusting to a new environme

nt

34 Revolution ising retail banking

Get the next issue of Banker Middle East before it is published.

Editor

BankerMENA

6

Philippe Ghanem,

Nabilah Annuar

16

and the world

Nabilah Annuar

6

Conquering GCC

espite having gone through a challenging year in 2016, the financial sector in the MENA region fared relatively well.

Governments rolled out fiscal and economic measures to diversify its revenues and adapt to a new normal in oil prices, banks have also played their part, focusing on gaining both wallet and market share.

Throughout the year banks have made it a priority to focus on digitisation across their businesses and operations, and this is a theme that is also expected to continue this year. Although financial institutions did not perform as well as they did in previous years, the losses made this year were not as bad as they could have been.

As oil prices saw a recovery at the end of last year, and is expected to stabilise above $50 per barrel over the medium term, market sentiments have shifted in an optimistic direction. Stock prices also recovered towards the end of 2016 and kicked off on a high note at the beginning of January as liquidity constraints softened and volumes increased. The adjustments triggered by the fall in oil prices in the course of 2014 have now made substantial progress. With the US economy on a steady growth path and China clear on avoiding a hard landing, the outlook for 2017 appears to be brighter.

This month’s issue provides both a retrospective and a prospective view of the industry. As spirits are renewed for the New Year, we take a look at the developments that have transpired in 2016 and how they will pan out this year.

We bring to you an exclusive piece on IFRS 9 by IASB’s very own Vice-Chair, Sue Lloyd (pg. 12). The cover story interviews the Chairman of Alawwal Bank, exploring the bank’s rebranding journey and its goals for 2017 (pg. 16). The country focus this month is on UAE (pg. 22), taking a look at the financial and economic challenges faced by this diversified market.

Having seen several rebranding exercises by banks in the region (covered in last month’s issue), another interesting feature is on branding (pg. 28), discussing how colours influence the mass market.

With a breadth of pertinent issues discussed, we wish you a productive read.

CPI Financial

Full details at: www.bankerme.com Follow us on Twitter: @bankermena

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CONTENTS

JANUARY 2017 | ISSUE 191

BRANDING 28 What’s in a colour? www.bankerme.com

IN DEPTH 34 Revolutionising retail banking TECHNOLOGY 42 Designing a self-protecting app to secure our

28

modern mobile kingdoms

Chief Executive Officer ROBIN AMLÔT robin@cpifinancial.net Tel: +971 4 391 4681

Managing Editor GEORGINA ENZER georgina@cpifinancial.net Tel: +971 4 391 3728

Chief Commercial Officer OMER HUSSAIN omer@cpifinancial.net Tel: +971 4 391 5419

46 The rise of open banking PERSONALITY 50 Geoff Cook, Chief Executive, Jersey Finance

Chairman SALEH AL AKRABI

42

EDITORIAL editorial@cpifinancial.net

ADVERTISING sales@cpifinancial.net

Editor - Banker Middle East Sales Director - Banker Africa NABILAH ANNUAR JON DESPRES nabilah.annuar@cpifinancial.net jon@cpifinancial.net Tel: +971 4 391 3726 Tel: +971 4 433 5321 Editors MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716 WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718 JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024

Business Development NIKHIL NIDHAN nikhil@cpifinancial.net Tel: +971 4 391 3717 DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526 MOHAMED MAKSOUD mohamed@cpifinancial.net Tel: +971 4 433 5320

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NEWS ANALYSIS

A new dawn Having experienced the interesting events that have played out in 2016, it’s time to look ahead to see what this year will bring

T

he year 2016 was undoubtedly an eventful year not only for the global economy, but for the Middle East as well. Widely dubbed as a year of adjustments, the region has had to make various regulatory, economic and fiscal amendments to its existing policies in order to align to the new level in oil prices.

2016—A REVIEW

On a macroeconomic scale, apart from being affected by depressed oil prices, the region also had to deal with a sluggish global economy that had minor periodical market shocks due to Brexit, the US Presidential elections and the US Federal Reserve rate hikes.

These macro factors however, did not have a directly substantial impact on the region’s economy.

In facing the reality of lower revenues, several GCC governments such as Saudi Arabia rolled out a nation-wide transformation programme

6 page 6-7 News Analysis 191.indd 6

that touched all layers of the economy.

Apart from opening its stock exchange to foreign investors the government also issued a $17.5 billion bond sale, a record breaking debt capital market instrument for an emerging market.

Capital market activity last year almost doubled compared to 2015 in MENA primarily due to sovereign issues by the GCC that were aimed at plugging the budget deficit. Gulf nations raised over $70 million in bond issuances last year primarily made up by Saudi Arabia, UAE ($5 billion) and Qatar ($9 billion). Other GCC countries are said to be waiting to tap the capital markets as they intend to observe the outcome of Saudi’s bond issuance first. They have made announcements indicating government initiatives to diversify their respective economies focusing on other sectors such as tourism and trade.

Another interesting development across the industry was the announcement of the mergers between National Bank of Abu Dhabi and FGB in

the UAE, as well as the three-way merger between Masraf Al Rayan, International Bank of Qatar and Barwa Bank in Qatar.

This was preceded by the failed merger talks between Bank Sohar and Bank Dhofar. The banking landscape in the Middle East is currently experiencing a wave of consolidation as financial institutions resort to making alliances in order to maintain a cost-efficient business. In the past 12 months, the market has seen several banks undergo restructuring exercises and cutting down staff as they ensure their survival.

These retrenchments occur both in local and international banks across the GCC. Internally, banks have had to address multiple issues over the year such as stringent regulations, cybersecurity and gaining market share. Financial institutions have had to assess and realign their businesses to adhere to IFRS 9 and Basel III within the stipulated timeframe. They’ve also had to tighten the security of their core systems to combat money laundering,

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23/01/2017 08:33

terrorism financing as well as other cybercriminal threats that have plagued the financial world.

Apart from these, the main theme for banks in 2016 was staying relevant in the 21st century. All banks across the board in MENA have embarked on a digital revolution tackling issues form both the front and their backend operations. Multiple institutions engaged tech providers to assist them in recalibrating their systems, providing the latest, straight-forward and simplest digital banking avenues for their customers. In standing out from the rest banks have also moved towards providing personalised banking services for customers, evaluating the usage of Big Data to track patterns, pre-empt financial decisions and cater to the specific needs of each customer.

Financial institutions definitely went through a rather exceptional year.

Challenging times bring unexpected opportunities. Let’s see what 2017 has in store for us.

MOVING FORWARD

The New Year brings new goals and renewed motivation. The sentiment going into 2017, like 2016, is rather mixed.

Industry players have indicated that 2017 will be equally as challenging if not worse. With oil prices not expected to recover until 2018, nor will global macroeconomic conditions. Many believe that 2017 will be a year of endurance and survival.

Against a backdrop of broadly balanced risks to MENA’s economic outlook, the panel of analysts at FocusEconomics maintained their GDP forecasts for the region at 2.3 per cent in 2016. For 2017, GDP growth in the region is expected to accelerate to 2.8 per cent. Of the rest of the major economies in the region, Egypt and Qatar will likely grow the fastest, with projected expansions of 3.4 per cent and 3.3 per cent respectively. Saudi Arabia’s GDP is expected to grow one per cent in 2016 and will accelerate to 1.2 per cent this year. The UAE is estimated to see its GDP accelerating to 2.6 per cent, while Egypt is projected to see a 3.6 per cent in the 2017 financial year.

However, not all seems bleak.

Moody’s Investors Service in a recent report has provided a stable outlook for 2017 on the banking sectors in the GCC. The outlook reflects the rating

2017 Gulf Cooperation Council Banking Outlook-Stable

2017 Gulf Cooperation Council Banking Outlook-Stable STABLE

NEGATIVE What could change outlook to negative »

Oil prices persistently below our medium-term expectations of 45$/bbl in 2017 and 50$/bbl in 2018 (Brent crude) and significant government spending cuts

»

Weakening of confidence impacting economic growth and loan performance

»

Deterioration of sovereign credit profiles could directly affect supported bank ratings

»

Tail risks from ongoing regional and domestic political tensions

»

POSITIVE

Stabilization of oil prices, albeit at a low level, and resilient non-oil sectors moderate pressures from fiscal reforms and spending cuts as governments rein in deficits. Real GDP growth will remain positive at %2.0

»

Strong capital buffers supported by robust pre-provision earnings generation

»

Asset quality will remain solid as increasing problem loan formation is largely offset by the resolution of large volumes of soured legacy exposures and more selective lending. High single borrower and single sector loan concentrations remain a concern

»

Deposit growth is slowing but market funding reliance remains limited and liquid asset buffers are high

»

Willingness of authorities to support troubled banks will remain intact, although their capacity to do so has diminished slightly

What could change outlook to positive »

Recovery in oil prices, increase in public spending and economic growth

»

Substantive reductions in borrower, industry and depositor concentrations in banks

Our stable outlook indicates our expectations for the fundamental credit conditions driving the banks in the Gulf CooperationCouncil countries over the next 18-12 months. Because Moody’s ourSource: outlooks represent our forward-looking view on credit conditions that factor into our ratings, a negative (positive)outlook suggests that negative (positive) rating actions are more likely on average. However, the outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of the rating outlooks of issuers in the country or sector, but rather our assessment of the main direction of credit fundamentals within the country, region or sector.

2017 Outlook - Gulf Cooperation Council Banks

agency’s expectation of their resilience to persistent economic and funding pressures. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in the GCC over the next 12-18 months.

Asset quality is likely to remain solid across the GCC, with the rating agency forecasting non-performing loan ratios to remain at three to four per cent in 2017. Despite the formation of new problem loans as a result of slowing economic activity and tightening liquidity in the region—particularly in the construction, real estate and SME segment—the ongoing resolution of significant legacy exposures in some systems and better collateral will moderate the impact.

In Moody’s view, profitability will remain sound, although it is likely to decline slightly as a result of slowing credit growth. The rating agency expects net interest margins to remain at around two to three per cent, with net income/tangible assets at around 1.5 to two per cent.

Lower oil revenues are leading to a decline or slowdown in government and related entity deposits and lower economic growth also means broad reductions in corporate and retail deposit inflows. However, recent international bond and Sukuk issuances from Abu Dhabi, Oman, Qatar and Saudi Arabia have helped to moderate funding pressures, and most regional banks maintain material levels of liquid assets, eligible as collateral at central banks in case of need.

Moody’s also expects that GCC governments’ willingness to provide support to banks in case of need remains high, even if their fiscal capacity is facing pressure, which could result in more selectivity in their support to banks.

2017 looks to be an exciting one for the financial sector. It would be interesting to see how markets develop and adapt to challenging conditions this year.

2

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7 23/01/2017 08:32

NEWS

BITES GDP growth in the GCC to average at

Kuwait faces first fiscal deficit since 1998 The latest IMF country report for Kuwait reports that the sustained decline in oil prices led to a deterioration in fiscal reserves. The balance declined from a surplus of over 2.4 per cent of GDP in 2014 to a deficit of about 18 per cent of GDP (about KWD 6 billion) in 2015 leading to a need for financing for the first time since 1998.

Despite efforts to contain government spending, the fiscal and external accounts have deteriorated markedly and budget financing needs have emerged, stated the report. The authorities’ principal measure of the fiscal balance—which excludes mandatory transfers to the Future Generations Fund (FGF) and investment income and better reflects the Government’s gross financing challenge—has swung into a large deficit (17.5 per cent of GDP in 2016/17). Even when including investment income and before transfers to the FGF, fiscal surpluses have vanished.

To finance the deficit Kuwait has drawn on the General Reserves Fund (GRF), and to a lesser extent domestic bond issues. With oil prices projected to remain low, the fiscal balance is projected to remain in deficit, and financing needs will remain large in the coming years according to the report.

However the IMF adds that Kuwait is well positioned to mitigate the impact of lower oil prices on the economy. Nonoil growth is expected to regain momentum to about four per cent over the medium term supported by a continued improvement in project implementation under the five-year Development Plan. But low oil prices call for steadfast implementation of reforms with the IMF expressing support for the government’s six-pillar strategy focused on reforming public finances and promoting a greater role for the private sector in generating growth and jobs for nationals.

The financial sector has remained sound and credit conditions favourable.

As of June 2016, banks featured high capitalisation (capital adequacy ratio of 17.9 per cent), robust profitability (return on assets of 1 per cent), low nonperforming loans (ratio of 2.4 per cent), and high loan-loss provisioning (206 per cent coverage). Bank liquidity has been comfortable. Credit to the private sector has been increasing at a solid pace, driven mainly by instalment loans.

1.6

%

for the 2017-18 period SAUDI ARABIA to see a

1

%

GDP growth QATAR to see a

3.3

%

GDP growth

BAHRAIN to see a

3

%

GDP growth KUWAIT to see a

Entity

Abu Dhabi

Bahrain Egypt

Lebanon

Kuwait Ras Al Khaimah Turkey Saudi Arabia Qatar

LT IDR/LT Rtg (FC)

AA

BB+

B

B-

ST IDR/ST Rtg (FC)

F1+

B B B

LT IDR/LT ST IDR/ST Rtg (LC) Rtg (LC)

AA

F1+

B

B

BB+ B-

page 8 News Bites 191.indd 8

B B

AA+

BBB+

B

B-

UAE

Bahrain Egypt

Lebanon

F1+

AA

F1+

AA+

A

F1

A

F1

AA+

UAE

BBB-

F3

BBB-

F3

BBB

AA-

F1+

AA-

F1+

AA+

AA

F1+

AA

F1+

AA+

Turkey Saudi Arabia Qatar

Under Review

8

Country Country Ceiling

AA

KEY

UR

2.7

%

RATINGS REVIEW

Positive Negative Evolving Stable

OUTLOOK

Kuwait

WATCH

GDP growth

OMAN to see a

2.5

%

GDP growth

UAE to see a

2.8

%

GDP growth

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23/01/2017 08:43

NEWS BITES

OPEC oil output falls first time in seven months in December Oil production from the OPEC slumped 280,000 barrels per day (b/d) in December, due to hefty falls in Nigeria and Saudi Arabia, according to a survey of OPEC and oil industry officials and analysts by S&P Global Platts. This was a month before the group’s pledge to rein in production.

OPEC’s 13 members saw their collective December output fall to 32.85 million b/d from 33.13 million b/d in November. Including Indonesia, which suspended its membership at the organisation’s last meeting, total December output was 33.57 million b/d, also down 280,000 b/d.

The producer group has agreed to cut 1.2 million b/d from its October output level for six months starting from 1 January 2017, and freeze production at around 32.5 million b/d, with the total including Indonesia.

As part of global efforts to curb the crude supply glut, 11 non-OPEC countries led by Russia have also agreed to cut output by 558,000 b/d in the first half of 2017, with Russia shouldering the majority of that burden, with a 300,000 b/d reduction.

The December slide comes after OPEC reached a new production record in November and is the first fall in seven months as Saudi Arabia provides an encouraging sign that it is set to lead the cuts by example.

However, the main protagonist responsible for the fall in total output was Nigeria, which is exempt from the cut agreement, as it recovers from renewed militancy in the oil rich Niger Delta, while Iraq, OPEC’s second-biggest producer, saw its exports rise sharply. Nigerian production fell to 1.44 million b/d from 1.68 million b/d in November, as planned maintenance halved loadings of its key export grade Agbami.

The fall was exacerbated by a shorter export programme, while strikes carried out by ExxonMobil employees resulted in deferrals of at least four cargoes of grades like Qua Iboe and Erha, aggravating the decline.

In the middle of recent economic uncertainties, trust in banking sector remains strong

Overall Impression

70% (2015)

72% (2016)

Overall impression about Banking industry remains steady in 2016.

UBF’s Initiative to Support SMEs

Trust Index

70% (2015)

Change in Perception

(2016)

Trust Index has remained strong and stable

(Aware) (Highly appreciate)

Sample size: 1,530 adults (aged 18+) in the UAE Margin of sampling error +/- 3 % @ 95% CI

(Worsened)

(Improved)

Key Market Challenges

a.

75% 85%

b.

Customer Charter

c.

64% 79%

41%

Consumers who say their view of banks has improved are thrice the number who feel it has worsened

Awareness on Issues

Mobile Wallet

72% 67%

13%

68%

Educate the customers and set the right expectations upfront Offer investors better returns, help them grow their wealth Move from Customer Satisfaction to Customer Delight through world class customer service

Negative outlook on GCC sovereigns due to subdued growth and fiscal pressures Moody’s in a recent report, has provided a negative outlook on sovereign creditworthiness in the GCC for 2017. The view reflects continued headwinds from subdued growth and challenges to further fiscal and structural reforms.

The rating agency expects real GDP growth in the GCC in 2017-18 to remain weak by historical standards with an average of 1.6 per cent, and ranging from 0.7 per cent for Saudi Arabia to 3.3 per cent for Qatar. Furthermore, it is estimated that the GCC’s aggregate fiscal deficit will narrow to 7.5 per cent of GDP in 2017 and 4.9 per cent in 2018, from 8.8 per cent of GDP in 2016 and 8.7 per cent of GDP in 2015, mainly as a result of higher oil prices.

Challenges to fiscal deficit reduction stem from potential slipping of fiscal consolidation measures in the face of social pressures.

Fiscal deficits will remain sizeable in Saudi Arabia, Bahrain and Oman given challenges to further consolidation from comparatively lower per capita incomes than in the higherrated GCC members and potential social tensions. The UAE, Qatar, and Kuwait will likely record relatively low fiscal deficits of three to four per cent of GDP in 2017.

Debt issuance volumes will be lower in 2017 and 2018 compared to 2016, helped by the expected reduction in fiscal deficits. The debt-to-GDP ratio across the GCC is likely to rise to 31.6 per cent by 2018 from just 10.5 per cent in 2014, adding another $154 billion in government debt in 2017 and 2018.

Qatar and Bahrain will likely continue to rely solely on market funding whereas Saudi Arabia, Oman, the UAE and Kuwait will issue debt and make use of government reserves.

Saudi Arabia and Bahrain is expected record the largest increase in debt between 2016 and 2018, with the government debt-to-GDP ratio rising by around 14 percentage points.

Lower debt increases of around eight to nine percentage points of GDP are expected for Oman and Kuwait.

The debt burdens of the UAE and Qatar, on the other hand, are expected to stabilise in 2017—having pre-financed part of their 2017 deficits—and decline in 2018. GCCwide government financial assets are likely to decline to $2.1 trillion by the end of 2017, down from $2.4 trillion in 2014. This will lead to a weakening net asset position for all GCC sovereigns but most pronounced in Saudi Arabia and Oman.

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9

THE MARKETS

A tripartite pact Masraf Al Rayan, Barwa Bank and International Bank of Qatar to create largest Islamic bank in Qatar in a potential merger which could materialise in the next six months

M

asraf Al Rayan, Barwa Bank and International Bank of Qatar (ibq) have announced in December 2016 through a joint statement that they have entered into initial negotiations for a potential merger.

Speaking off the record, a source close to the merger expects the consolidation to materialise six months down the road, following positive negotiations.

CREATING SUSTAINABILITY

A successful amalgamation between the three banks will create the largest Shari’ah compliant bank in Qatar and the third largest Shari’ah compliant bank in the Middle East with assets worth more than QAR 160 billion ($43.92 billion) and a share capital of more than QAR 22 billion ($6.04 billion). It would also aggregate in the combined entity the key strengths of the three banks, particularly in the areas of retail and private banking, services to corporations and government institutions, Sukuk capital markets as well as wealth and asset management.

Commenting on the significance of the potential merger, Mohamed Damak, Global Head of Islamic Finance, S&P Global Ratings, said, “I think the merger is a step in the right direction

10

as it might help in consolidating the banking system in Qatar which we view as highly competitive especially on intermediation margins that dropped by more than 80 bps since 2011. In the currently less supportive economic environment, the announcement made by these banks shows that shareholders of the Qatari banks are looking at their cost base and trying to look for some synergies and cost reduction opportunities. If the merger goes through it will result in creating a significant player in Qatar with a market share of 13-14 per cent that would be able to compete head-on with other large players and to exploit the opportunities offered by Islamic banking in Qatar and more generally in other GCC countries.”

The proposed merger is subject to the approval of the Qatar Central Bank (QCB), the Qatar Financial Markets Authority, the Ministry of Economy and Commerce, and other relevant official bodies. The union is also contingent upon the shareholder approvals of Masraf Al Rayan, Barwa Bank and ibq after the completion of detailed legal and financial due diligence on all three banks.

The merged institution would operate in compliance with Shari’ah principles. This will mean that

conventional bank ibq will have to conduct an overhaul of its business to become Shari’ah compliant. This is in line with ibq’s expansion agenda revealed in the cover story December 2016 issue of Banker Middle East where Omar Bouhadiba, Managing Director of ibq said, “ibq’s expansion plans are very clear: organic and domestic.”

According to data from QCB, the country’s banking system has $330 billion in total assets. The combined entity will possess approximately $44 billion in assets, commanding up to 14 per cent market share of the entire banking system. This puts the bank in the market position and balance sheet to compete with conventional banks, particularly on larger deals where many Islamic banks lack sufficient scale.

If completed, the merger would make the combined bank the fourth largest Islamic bank in the world (excluding Iran) and sixth largest including Iran— according to industry reports—behind industry heavyweights, Al Rajhi Bank, National Commercial Bank and Kuwait Finance House.

STRENGTH IN NUMBERS

The Islamic banking sector in Qatar has posted a steady growth. According to a recent report by Fitch Ratings, the Islamic banking growth rate was

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page 10-11 The Markets 191.indd 10

23/01/2017 08:45

Assets ($ ‘000) 22,809,404

22,003,920 18,282,318

12,418,027

10,493,824

9,238,153

8,766,487

8,484,093

7,878,558

2015

2014

Barwa Bank

2013

International Bank of Qatar

16,930,875 8,843,663 6,939,511 2012 Masraf Al Rayan

Liabilities ($ ‘000) 7,558,747

7,236,353

5,832,006 3,170,841 4,027,739

2,934,469

2015

2014

Barwa Bank

6,656,280

7,681,093

3,029,224

2,578,968

2,284,683

1,641,505

2013

International Bank of Qatar

2012 Masraf Al Rayan

Revenue ($ ‘000) 916,857

521,868

209,743 2015

845,500 525,459

239,055 2014

739,846

696,843 Barwa Bank

424,682

249,795 2013

335,405 244,776

International Bank of Qatar Masraf Al Rayan

2012

Net Profit ($ ‘000) 556,631

200,005 109,912 2015

554,173

195,913

477,765

152,007

159,188

138,431

2014

2013

Bank

Currency

417,552 144,126

Barwa Bank International Bank of Qatar Masraf Al Rayan

7.2 per cent, while conventional banks grew at about 6.5 per cent in 1H16.

This was mainly due to higher retail and real estate financing. Islamic banks accounted for 25.2 per cent of total financing at end-1H16, against 25 per cent at end-2015 (including Qatar National Bank’s acquisition of Turkey’s Finansbank, Islamic banks had 23 per cent at end-1H16).

Despite high financing growth, Islamic banks in the country remain well-capitalised with an average Fitch Core Capital ratio of 18.3 per cent at end-2015. Comfortable capital buffers are believed to be needed in light of the banks’ high financing book concentration and exposure to real estate.

In spite of its healthy capitalisation, some deterioration is expected in terms of asset quality. The average Islamic bank impaired loan ratio was 1.1 per cent at end-1H16, lower than the conventional bank average of 2.1 per cent, due to high financing growth.

Islamic financial institutions in the country have relatively narrow investment options. Due to limited Shari’ah-compliant investment opportunities, liquidity is usually deployed in short-term placements with other Islamic banks. In 2016, the government issued Sukuk to domestic Islamic banks, which gave them access to a broader range of liquid assets, with better yields.

Fitch expects profitability to remain healthy, but margins to be pressured by tighter market liquidity, which will increase banks’ funding costs.

94,841 2012 Figures

tier one capital

regulatory capital

Risk weighted assets

capital adequacy ratio

Barwa Bank

QAR

‘000

5,109,557

5,470,126

32,901,664

16.6%

International Bank of Qatar

QAR

‘000

4,048,574

4,048,574

25,089,820

16.1%

Masraf Al Rayan

QAR

‘000

10,670,083

10,672,403

57,552,128

18.5%

Source: CPI Financial

www.bankerme.com

page 10-11 The Markets 191.indd 11

11 23/01/2017 08:46

LEGAL FOCUS

The final countdown Sue Lloyd, Vice-Chair of the International Accounting Standards Board explains the workings of the impairment element of the IFRS 9 standard

non-financial institutions. As companies and financial institutions are on the final stretch with their preparations to implement the new standard, now is a good time to recap on the main changes it will bring.

THE NEW STANDARD

Sue Lloyd

I

n 2018, a new accounting standard that will have a significant effect on the financial statements of financial institutions will come into force. The new standard is called IFRS 9 Financial Instruments and is also relevant to many

12

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IFRS 9 replaces a standard called IAS 39 Financial Instruments: Recognition and Measurement and is the International Accounting Standards Board’s (the Board) main response to the financial crisis. It brings together the following aspects of accounting for financial instruments: classification and measurement, impairment and hedge accounting. It is the impairment (or loan loss provisioning) element of the standard that has received most attention—and is what I will focus on in this article.

IAS 39 (and other accounting standards for loan loss provisioning around the world) was criticised during the financial crisis. The reason is that it included an incurred loss provisioning model that only required—and allowed—financial institutions to put aside provisions

for loan losses when there was hard evidence that losses were occurring.

Even when losses could be recognised, they were only allowed to be measured taking into account historical data and current information, for example current information about house prices. They were not allowed to be measured using forward-looking intelligence. So a bank could forecast that house prices would fall and that this would result in a hit on their mortgage books but they could not use this information to inform the loan loss accounting.

In practise, that typically meant that many financial institutions did not book losses on loans until people started missing their payment deadlines. Even when the banks’ economic forecasts suggested that markets were taking a turn for the worse, the provisions put aside by the banks for potential losses did not increase—because none of the bad events that the banks expected to happen, had actually happened yet. That meant that by the time impairments showed up in the financial statements, it was old news to the market. As a result, banks were

Source: IFRS

criticised for recognising loan losses ‘too little, too late’.

Now, that may sound crazy. But there is a reason for it. When IAS 39 was brought in, it tried to fix another problem, namely that provisions for potential loan losses were built up in good times and that these provisions were released to smooth profits in bad times, masking information about worsening credit conditions. The aim was to put a stop to this so-called cookiejar accounting.

FROM INCURRED TO EXPECTED

The development of a new financial instruments standard was encouraged by the G20, the Financial Stability Board and others. The Board completed IFRS 9 in 2014. The overall objective of the standard is for the accounting in the future to provide better information to those who use financial statements and allow them to make more informed investment decisions. In particular, the objective is to ensure more timely information is provided about changes in credit loss expectations.

The most significant changes stemming from IFRS 9 will be in the way banks account for loan losses. The old incurred loan loss model in IAS 39 is replaced with a forward-looking expected loan loss model in IFRS 9.

It will require financial institutions and other companies to estimate and account for expected credit losses by recognising loan loss provisions from when they first lend money or invest in a financial instrument, for example a bond. When measuring loan loss provisions, they will also be required to take into account all the relevant available information they have. That means they will not only use historical and current information, as was the case with IAS 39, but reasonable and supportable forward-looking information too.

Consequently, if a bank expects credit conditions to decline over the life of the loan, this must be reflected in their loan loss calculations immediately. Every reporting period, loan loss provisions will be required to be updated for changes in expectations. This is likely to result in greater loan loss provisions. In

addition to improving the timeliness of loan loss recognition, IFRS 9 will also provide information that will enable investors and others to better understand changes in the credit risk performance of financial instruments.

THREE ‘BUCKETS’

To show changes in credit risk performance, financial institutions will account for loan losses differently, depending on how the financial assets are performing. But common for all is that some loan losses will be booked from the inception of the loan, regardless of performance.

With IFRS 9, financial assets will fall into three ‘buckets’ (or stages)— loans performing as expected when originated, loans performing worse than expected and nonperforming loans.

If a loan is performing as expected (Stage 1), the bank will book an expected loss provision that reflects a portion of the total losses expected over the life of a loan. If a loan goes from performing as (or better than) expected to significantly worse than expected cont. on page 14

www.bankerme.com

13

LEGAL FOCUS

Source: IFRS

cont. from page 13

(Stage 2)—or there is a significantly increased credit risk, the bank will have to increase loan loss provisions to reflect the full credit loss expected to occur over the life of the loan. The bank has now suffered an economic loss and this is reflected in the accounting. Similarly, if a loan is not performing, the bank will provision for a full lifetime loss.

We believe that this change between Stage 1 and Stage 2 is important, as it will provide investors with information about changes in the credit risk exposure of a loan. If lifetime losses were booked on all loans immediately, this change would not be visible.

Improved disclosures in the notes to

14

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the accounts as well as this change from incurred to expected loan loss provisioning will give investors a much richer data set than they had previously.

EARLY INDICATIONS

When a new standard has been issued by the board, a company is required to provide specific disclosures in its financial statements even before it applies that Standard. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires companies to assess and disclose information on the possible impact a new standard will have on its financial statements. For the financial instruments standard, this could include guidance on how

provisions are expected to change as a result of applying IFRS 9.

Most banks are far down the road with their preparations already and we know that the credit risk function in banks are working very closely with the accounting divisions to get ready for the new standard. A positive sideeffect of the standard is thus that there is more collaboration within banks.

Now, implementing a new standard such as IFRS 9 is a massive task for companies. We appreciate that, which is why we have provided plenty of time to transition from the old to the new. We have also provided a range of implementation support, including educational materials.

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COVER INTERVIEW

Preserving excellence Speaking exclusively to Nabilah Annuar, Editor, Banker Middle East, Engr. Mubarak Abdullah Al-Khafrah, Chairman of Alawwal Bank discusses the significance of the bank’s recent rebranding exercise and its focus for 2017

16

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W

hat is Alawwal Bank’s growth strategy for 2017?

Our strategy remains unchanged and we remain focused on creating value for our customers and shareholders. While the operating environment has seen some challenges over the last year, we have experienced growth in key areas, while adhering to prudent risk management practises.

In 2016 we committed to growing our physical footprint and as a direct result of our efforts, we have 65 branches and 540 ATMs across Saudi Arabia. In addition, we have seen a significant increase in mobile banking penetration with 64 per cent of our retail customers now using our online platforms.

Saudi Hollandi rebranded itself to Alawwal Bank in December. What drove this rebranding exercise?

In today’s fast-paced commercial environment, we cannot afford to stand still. While the bank’s past is important, we must embrace the multiple opportunities our future presents. The new brand reflects how we bring a new energy and vitality to banking; one that aligns to the needs of our customers—both our current and the next generation of Saudis; the young, ambitious citizens who will build on the past successes of our nation.

What does the rebranding mean for the bank?

A new generation of Saudis and technology is a key driver of Alawwal Bank’s strategy in 2017.

Technology is a huge growth area for us, as the way banks used to operate is no longer ‘fit for purpose.’ The banking sector needs to change, to operate a different business model to meet the needs of the modern world.

— Engr. Mubarak Abdullah Al-Khafrah

Alawwal Bank’s rebranding demonstrates that we are thinking about the future—a future that involves new ways of banking and new customer thinking. In order to do this we have developed a more distinctive and recognisable brand that both visually and verbally connects with our current and future customers.

Alawwal—‘The First’—speaks to both our legacy as the first bank in Saudi, and to our future. It speaks to our renewed commitment to continually innovate and improve the services we provide through the latest banking technology and by empowering our people to succeed.

What is Alawwal Bank’s focus for 2017?

As a bank, we are transforming to meet the needs of a new generation of Saudis, and to achieve this, technology remains a key driver of the bank’s strategy in 2017.

We have a history of technology innovations, from our state-of-the art mobile banking platform to our multichannel banking approach. Our continued investment in technology will help to deliver unrivalled services to our customers through even more digital channels. cont. overleaf

www.bankerme.com

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17 23/01/2017 08:50

COVER INTERVIEW

cont. from page 17

By combining traditional banking services and technological innovation, we aim to provide our customers with a reliable and efficient banking service.

How does the bank plan to expand this year?

We will continue to grow organically as a bank in 2017.

Over the years we have built a legacy of being a trusted, well-established banking partner and as the world changes, so must we to remain relevant in an ever-changing world.

This is why we are committed to providing our customers with more digital products in 2017. Technology is a huge growth area for us, as the way banks used to operate is no longer ‘fit for purpose.’ The banking sector needs to change, to operate a different business model to meet the needs of the modern world.

Much like Alawwal Bank, Saudi Arabia is changing and Vision 2030 creates a new purpose for the Kingdom. We are fully aligned with this vision, a vision that presents a raft of opportunities for us in both corporate and retail banking.

What can the market expect from the bank in 2017?

The world is changing, now everyone is connected and demands instant action. As part of our transformation, we aim to provide our customers with integrated, instant banking services. Our focus for 2017 is to place greater emphasis on digital products and payments.

We have a number of exciting product and service announcements in the pipeline which we hope to announce shortly.

With tightening liquidity in the GCC market, will we see Alawwal Bank tap the debt capital market for funding?

Liquidity in the Saudi banking industry remains adequate on both a regional and a global scale, albeit the decrease compared to previous years’ levels. However, Alawwal Bank has been active in the debt capital market, and as part of our continuous efforts to diversify the sources of funding, we keep the debt capital market as one of the options of available sources for long term funding.

In light of the recent US Fed interest rate hike, how do you see this affecting Alawwal Bank and the rest of the GCC banks in 2017?

Overall, the recent increase in interest rates is likely to have a positive impact on Alawwal Bank and other Saudi Banks in the medium term, as financial institutions in the country have large customer deposits—most of which are non-interest bearing. However, under the current economic conditions, the growth of liquidity has become slow,

Alawwal Bank recently launched its watch banking service, completing a full suite of mobile banking solutions available on all electronic devices.

Despite fluctuating energy prices, we are likely to see a rise in the number of merges and acquisitions in the Kingdom, further opportunities in project finance, retail and corporate banking. In 2017, we also expect to see an increased focus from banks on digital channels, services and products. This is a huge area of growth for the banking sector, and with the relentless speed of technology innovations, the banking sector has no choice but to evolve or risk being left behind.

— Engr. Mubarak Abdullah Al-Khafrah

cont. on page 20

18

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23/01/2017 08:49

bleed guide.indd 1 bleed guide.indd 1

15/12/2016 11:46 13/11/2016 16:19

COVER INTERVIEW

cont. from page 18

leading to a higher cost of funding. Thus, the full benefit of rising interest rates would not be expected to fully materialise in the very short term.

As the banking sector enters an era of more stringent and proactive regulations, what is the bank’s approach to this?

The Kingdom of Saudi Arabia is at the forefront of adopting stringent financial regulation. SAMA is regarded as one of the most proactive and advanced regulators, adhering to a very high standard of compliance monitoring.

Alawwal Bank is committed to meeting all regulatory requirements and maintains healthy and strong capital and liquidity positions as a result.

In today’s fast-paced commercial environment, we cannot afford to stand still. While the bank’s past is important, we must embrace the multiple opportunities our future presents. The new brand reflects how we bring a new energy and vitality to banking.

— Engr. Mubarak Abdullah Al-Khafrah As a bank, it is our responsibility to protect our customers and shareholders’ interests, and complying with regulatory changes makes us better equipped to succeed and deliver the best services possible to our customers.

What is your outlook on the region’s banking and finance sector for 2017?

Across the GCC, countries are focused on diversification and reducing their reliance on oil GDP. This will undoubtedly create new opportunities for all sectors operating across the Gulf.

In Saudi Arabia, the 2020 National Transformation programme and 2030 Saudi Vision will provide growth and opportunity for the local economy and the banking industry. Despite fluctuating energy prices, we are likely to see a rise in the number of merges and acquisitions in the Kingdom, further opportunities in project finance, retail and corporate banking.

In 2017, we also expect to see an increased focus from banks on digital channels, services and products. This is a huge area of growth for the banking sector, and with the relentless speed of technology innovations, the banking sector has no choice but to evolve or risk being left behind.

20

Engr. Mubarak Abdullah Al-Khafrah

Alawwal Bank Alawwal Bank was the first bank to operate in the Kingdom, opening its doors in 1926 as the de facto central bank and issuing the first Riyal two years later. Over the years it has played an integral role in supporting generations in the Kingdom and the growth of the Saudi economy.

The bank has always put its customers first and remains committed to improving their individual banking experiences by delivering service excellence and increasingly advanced technologies. The bank introduced the first smart credit card to the market, and continue to integrate new technologies at its branches and operations.

Having maintained a strong capital base for the past 90 years, the bank is consistently among the Kingdom’s leading banks in earnings growth and return on average equity. Today, the bank rapidly evolves to solidify its position as an industry leader and a force for positive change across the Kingdom.

With ambitious plans in place to redefine what banking can be for businesses and individuals, the future is bright for Alawwal Bank, its people and its customers.

Alawwal Bank was voted as the Best Cash Management and Best SME Customer Service in Saudi Arabia for the Banker Middle East KSA Product Awards.

Source: Alawwal Bank

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23/01/2017 08:48

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COUNTRY SPOTLIGHT

Adjusting to a new environment Waleed Barhaji, Business Head of Consumer Finance at Noor Bank discusses the UAE’s macroeconomic environment and developments that have taken place in the country’s banking sector

T

o examine the performance of retail banks so far, we need to first understand the economic conditions globally, as well as locally. Despite the UAE’s relatively solid economic performance, less regional and global demand will negatively affect the export-oriented service sector, which is fundamental to the overall performance of the non-oil segments.

ECONOMIC OUTLOOK

Waleed Barhaji, Business Head of Consumer Finance, Noor Bank

22

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The UAE economy is projected to grow 2.3 per cent in 2016, compared to four per cent in 2015, according to the International Monetary Fund’s (IMF) latest Regional Economic Outlook. It is also projected to report a GDP growth of 2.5 per cent in 2017.

However, good news lies in the longterm, with the UAE GDP growth rate projected to trend around 4.30 per cent in 2020.

Credit growth has been on a slowdown trend, as risk appetite has significantly decreased especially in the SME segment, which contributes

to around 60 per cent of the country’s GDP and 86 per cent of the workforce in the UAE, according his Excellency’s Sultan bin Saeed Al Mansouri, UAE Minister of Economy.

We are currently seeing a decrease in demand on finances in general, and an increase in payments. We also believe that the wealth management sector has room to grow due to the relatively low penetration of this segment in the country. During the last couple of months, we have also witnessed a deleveraging in the SME sector, accompanied by job losses due to various restructurings. This has resulted in a slowdown in credit growth, as well as a lower demand on retail products, and we expect this trend to continue in the coming months.

Having said that, we still expect the UAE’s economy to grow and outperform other oil producing countries in the Middle East. The country has invested to diversify its focus from the oil related sectors to trade and especially the export sector, as well as hydrocarbon and alternative energy. Just recently, OPEC members agreed to lower production which caused a positive hike in oil prices.

If this trend continues, we believe it will help in a faster recovery and turnaround of the economy.

UAE BANKS—LOOKING AHEAD

Despite economic challenges, banks in the UAE are in a strong position with around a 16.5 per cent capital adequacy ratio, compared to a global standard of 12.5 per cent. In addition, history has shown us that a level of correction is required in the market, in order for the fittest to survive and to filtre any poor performers out.

Looking ahead, we believe that liquidity will be a challenge in the coming years. In the US, the Federal Reserve is raising rates, cost of funds

are getting higher, and margins are getting tighter. At the same time, we expect new regulations such as IFRS 9 (an International Financial Reporting Standard set to be introduced in January 2018 by the International Accounting Standards Board) to place new requirements on banks to ‘risk rate’ each new finance and make an immediate provision for it. This will result in an increase on the cost of finances, as well as granting them to selective clients. However, despite this, there is no doubt that it will increase transparency and stability within the banking sector in the long term.

The UAE Insurance Authority has recently issued a circular regulating life insurance and Takaful. These regulations have the potential to fundamentally change the way life products are priced and sold in the UAE. Although an implementation date has not yet been disclosed, providers are weary and on the watch as these regulations would change the operating business models associated with these products drastically.

ADAPTING TO NEW CONDITIONS

Due to these and other factors, we expect 2017 to be a very competitive year between banks in the region. It is important to understand that it is a very tough environment in the UAE especially with around 50 banks competing for a bankable population of 3.5 to four million. This does not even include fintech and other finance companies—and hence, we have witnessed some banks merging— which in our opinion is a natural and healthy step in the right direction.

Going forward, banks will need to change gears since the playing field is constantly changing and adaptability to a maturing market is key. The UAE Government, has wisely approved the Bankruptcy Law,

UAE predicted to record a growth of

2.3

%

in 2016

And a GDP growth of

2.5

%

in 2017

Over the long term, the GDP growth rate is projected to trend around

4.30

%

by 2020

Banks in the UAE are in a strong position with around a

16.5

%

capital adequacy ratio, compared to a global standard of

12.5

%

The writer is business head of consumer finance at Noor Bank.

Views expressed are his own and do not necessarily reflect the bank or publication’s policy. cont. overleaf

www.bankerme.com

page 22-24 Country Spotlight 191.indd 23

23 23/01/2017 08:51

COUNTRY SPOTLIGHT

cont. from page 23

a robust Credit Bureau is in place, and technology is forever evolving. Smart phones and online penetration in the UAE is also the highest in the region according to various reports, which affirms the UAE Government’s strategy to go ‘smart’. Hence, it is now more important than ever for banks to pay attention to this field.

In a nutshell, banks will have a challenging 2017, but we foresee an improvement in the economy as we approach 2020. Liquidity and cash will remain king for now, but technology will be a game changer and is key for survival, as well as future success. In my humble opinion, we are steadily witnessing the takeover of a new generation of ‘Bloomers’ or ‘Gen Ys’.

As a member of ‘Gen X’, I lived before the birth of the internet—which is in stark contrast from todays ‘bloomers’, whose dependencies on online and technology is perhaps much higher, as well as essential today. This new generation will be the major clients of the near future, and there is no doubt that banks will have to match their needs. In short, the bank that positions itself as the easiest solution and service provider will surely emerge as a winner.

Stable outlook on UAE’s banking system Moody’s in its most recent rating action has maintained its stable outlook on UAE’s banking system. The outlook reflects its view that resilient capital and liquidity buffers will help to protect banks’ credit profiles despite the continued economic slowdown. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in the UAE over the next 12-18 months.

The research and ratings firm expects real GDP growth of around 2.5 per cent and 1.9 per cent for 2016 and 2017, down from 3.2 per cent in 2015.

This economic slowdown will lead to modest increases in new problem loan formation, particularly in the overleveraged small and mid-sized company (SME) and retail (loans to individuals) segments.

Problem loans are expected to increase modestly to around 5.5 per cent of total loans by mid-2017 following a period of strong recovery, which drove delinquencies down from the 2011 peak of 10.6 per cent to around the current five per cent.

Profitability, will remain strong, with Moody’s expecting a broadly stable return on assets at around 1.7 per cent over the outlook horizon. Although funding costs and provisioning costs will likely increase, the rating agency expects them to be offset by rising corporate yields combined with loan growth (subdued at three to five per cent) and modest efficiency gains.

Additionally, capital buffers are likely to improve and Moody’s expects tangible common equity to increase modestly to around 15 per cent of risk weighted assets by 2017, up from 14.3 per cent as of December 2015. In addition, loan-loss reserves were a solid 94 per cent of problem loans as of June 2016, the rating agency expects this level of coverage to continue.

The reliance on market funding for UAE banks’ is expected to increase as deposit growth continues to decelerate. Nevertheless, liquidity buffers remain strong, despite a modest decline, with liquid assets expected to remain around 25 per cent of total assets.

Finally, government support for UAE banks will likely remain high, says Moody’s, reflecting the government’s continued willingness and its strong capacity to provide financial support if the need arises, despite fiscal pressure from falling oil revenues.

UAE Banks: Key Indicators (in US$ billions) Bank assets

800

Bank Deposits

Bank Loans (net)

628

600 400 300

SIB 1% 675

700 500

UAE Banks: Market Share by Assets, June 2016

414 278 265

453

283 282

289 292

489

316 300

346 331

384

375

404 398

AHB 2% NBAD 17%

CBD 3%

Mashreq 5%

100 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Source: UAE central bank

24

ENBD 17%

UNB 4%

200 -

NBF 1%

IB 1% Unrated 10%

RAKBANK 2%

530 438

UAB 1%

FGB 9%

ADIB 5%

HBME 6%

DIB 7%

ADCB 10%

Source: UAE central bank; Moody’s Investors Service

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page 22-24 Country Spotlight 191.indd 24

23/01/2017 08:52

T H E

Q U E S T

F O R

E X C E L L E N C E

BME PRODUCT AWARDS 2017

Nominations will be open shortly for the Banker Middle East Product Awards 2017 UAE. What has your institution done this year that makes you feel proud? Celebrate your achievements in financial product design, development and marketing by nominating your products in the most prestigious product recognition programme in the MENA region’s financial services sector.

VOTING OPENS

23 JANUARY

VOTING CLOSES

16 FEBRUARY

NCED

WINNERS ANNOU

19 FEBRUARY to feature in March BME

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COUNTRY SPOTLIGHT

Fujairah emerging Oil traders eye Middle East’s new frontiers as the Port of Fujairah leads UAE to become an energy hub alongside global heavyweights, says Jonty Rushforth, Head of Pricing at S&P Global Platts Photo credit: tcly/Shutterstock.com

T

he rapid evolution of the Middle East’s budding energy trading ecosystem is on track to create a new oil products hub alongside behemoths Rotterdam and Singapore within a decade. The UAE’s Port of Fujairah is leading this charge to become a global energy hub; a multifaceted and challenging goal.

Rising throughput and increasingly sophisticated infrastructure at the port—the world’s second-largest bunkering hub behind Singapore— have galvanised local government and energy stakeholders’ intentions to carve out a trading identity. The ecosystem is developing the essential building blocks of a commodity hub: transparent data, regulatory and legal clarity, robust volumes, independent oil benchmarks and a strong talent pool. The location of the hub means that it is at the pivot point of global oil trade between east and west, both physically and in terms of the trading day.

Three key developments in the last few months may demonstrate the principle of ‘build it and they will come’ as the port seeks to send a clear message to global trading communities that it is ready for the major leagues.

Fujairah’s launch of the first very large crude carrier (VLCC) jetty on the Indian Ocean coast of the Arabian peninsula late-September last year places the port in a select group of

26

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globally focused oil locations, making it ‘arbitrage ready’. Much of the major flow of oil between global regions is carried on the very largest vessels, and the $175 million jetty sits at the core of the key oil route between east and west.

Trade flows for crude and oil products have changed dramatically over the last few years, marked by a clear shift towards satisfying Asian demand.

Historically, crude was mostly shipped out of the Middle East to refineries abroad and reimported as oil products, such as gasoline, diesel, gasoil, jet fuel and fuel oil to serve Middle Eastern demand. Today, the growth of refining capacity in the Middle East and increased demand for oil products are changing historical trading patterns, with oil products now flowing both ways through the Gulf.

Also in September 2016, the port announced that it would be publishing weekly inventory data for major oil products to provide insight on the market’s supply-demand balance.

Improved transparency will whet the appetite of traders based in the Gulf, as well as at trading desks in the world’s major trading hubs of Houston, Rotterdam and Singapore.

Further transparency, especially for the local spot market, comes from S&P Global Platts’ launch of new Middle East assessments for oil products on 3 October 2016. The assessments,

reflect loadings from the region’s ports—Saudi Arabia’s Ras Tanura, Kuwait’s Mina Abdulla, Oman’s Sohar and Qatar’s Ras Laffan, for example— and are normalised to loadings at the Port of Fujairah. This offers the increasingly savvy market players in the Middle East an independent alternative to the netback prices derived from Singapore, but does not attempt to replace them.

However, challenges remain if Fujairah is to reach the status of the major energy trading hubs. An active market will require a clearer and firmer legal structure, to boost participants’ confidence to embrace what is largely an untested market. For example, will the Port of Fujairah fall under federal law that is spearheaded by Abu Dhabi, or is it best to appoint the port as a legal island?

The high cost of soft infrastructure also needs more attention, as escalating telecommunication costs for trading stakeholders in the Gulf threaten to curb momentum, especially for small and medium-sized enterprises.

The pace of Fujairah’s efforts to establish itself as a key global energy trading hub to rival Rotterdam and Singapore is impressive. If it continues to pay attention to the needs of the oil trading community, Fujairah will reap the benefits of its geographical location and grow from strength to strength.

BRANDING

What’s in a colour?

James Packer, Managing Director at Industry discusses the determining factors in positioning GCC banks for success in a digital-first world

F

or banks in the UAE, standing out from competitors has become increasingly difficult, but vital. With over 50 local and foreign lenders, competing to serve just nine million people, the country’s banking sector is vastly overcrowded.

“There are a lot of licenced banks, but the population isn’t that big. It’s unusual for so many banks to be in a country that has the population that the UAE has,” said Shayne Nelson, CEO of Emirates NBD, recently.

As the old brand mantra goes, to stand out in the market you need to own a shape and own a colour. But, can colour help these bank brands to differentiate and does it matter? Colour can be just as important as words in conveying brand values and ethos. A study carried out at the University of Winnipeg on the impact of colour in marketing revealed that it takes roughly 90 seconds for someone to form an opinion of a brand or product. In that time, between 62 per cent and 90 per cent of decisions are influenced by colour alone.

In addition to being a differentiating factor between a brand and its competitors, colour can greatly influence moods, feelings and attitudes, both positively or negatively. Evidence, therefore, suggests that making the wrong decision on colour could greatly hinder a brand’s chance to make an impactful first impression.

In banking, we see certain patterns of colour use, from which it’s possible to derive meaning. Perhaps most

28 page 28-30 Branding.indd 28

It takes

90

seconds for someone to form an opinion of a brand or product

62% -90% of decisions that are influenced by colour alone in that time

James Packer, Managing Director, Industry

conventional colour choices are the ‘trust building’ colours of blue and green.

Strongly associated with confidence, strength and loyalty, these colours are widely used both locally and internationally. Regionally, green is overwhelmingly favoured by Islamic financial institutions, followed closely by purple, because of strong religious significance.

Similarly, colours such as orange, yellow and rust have gained popularity in the local banking landscape, noted for communicating warmth, generosity and down-to-earth values.

In the GCC these tones also tend to promote familiarity and trust, alluding to the hues of the desert geography of the region.

Conventional banks tend to opt for safer colour palettes, which is why the colour blue, which communicates feelings of calmness, serenity and trustworthiness, features prominently in the brands of 28 of 42 UAE banks.

Conversely, challenger banks often choose colours that are the polar opposite of what people expect, making them easier to spot in a saturated arena. In the UK, a new breed of digital challenger banks is making digital-first and mobile-only banking a reality. Banks such as Monzo, Atom and Starling are redefining the parameters of retail banking, outfitted in disruptive, youthful and energetic shades of neon pink, vibrant red and purple.

In the context of building customerfacing digital platforms, the use of colour is especially important to promote ease cont. on page 30

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BRANDING

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In the context of building customer-facing digital platforms, the use of colour is especially important to promote ease of use, create the desired user journey as well as increase conversions.

— James Packer, Managing Director, Industry

of use, create the desired user journey as well as increase conversions.

While digital banking is still in its infancy in the GCC, industry experts foresee significant growth potential for a fintech ecosystem due to the existence of a strong potential market.

Technologically savvy and better informed ‘digital natives’ make up over half of the population in many GCC countries. Though not the wealthiest, this demographic, which is made up of everyone under the age of thirty, is less loyal to legacy banks and expects the best of both digital and traditional banking services.

GCC banks, however, need more than a unique colour story to prepare for the seismic shift in the market and the needs of this dynamic customer demographic.

When formulating a clear brand proposition, they must consider the core values that will form the foundation of their brand, and how the visual identity and overarching brand experience can be used to articulate them effectively.

For a challenger bank who wishes to communicate innovation and firstmover advantage, a bright palette of primary colours, more closely associated with brands such as Google or Ebay, may be appropriate. But, more important is how the brand experience can bring the brand values to life at

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Banks of the UAE

Union National Bank

United Bank Limited

Barclays Bank

Janata Bank

Standard Bank

Finance House

United Arab Bank

Citibank

Blom Bank

Arab Bank

First Gulf Bank

Commercial Bank International

National Bank of Oman

Doha Bank

Standard Chartered Bank

Abu Dhabi Islamic Bank

Noor Bank

ICICI Bank

Bank of Bahrain & Kuwait

Sharjah Islamic Bank

Al Ahli Bank of Kuwait

Mashreq Bank

Bank of Sharjah

Emirates NBD

Banque Du Caire

Al Masraf

Arab African International Bank

Habib Bank Limited

Crédit Agricole

Lloyds Bank TSB

Union Bancaire Privée

Habib Bank AG Zurich

National Bank of Abu Dhabi

Al Rafidain Bank

EDF man

BNP Paribas

Dubai Islamic Bank

Commercial Bank of Dubai

ABN Amro Bank

Korea Exchange Bank

Invest Bank

Al Khaliji France

Bank of Baroda

Al Hilal Bank

National Bank of Bahrain

HSBC Bank Middle East

Abu Dhabi Commercial Bank

Bank Melli Iran

National Bank of UAQ

RAKBANK

Emirates Investment Bank

National Bank of Fujairah

El Nilein Bank

Emirates Islamic Bank

Source: Industry

every touch point, from the design of a digital interface to the way customers are greeted in the branch.

A youth-oriented bank which claims to be ‘tomorrow’s bank’ for example, may employ unorthodox tones in its visual identity, but if they fail to offer dynamic customer service, state-of-

the-art digital banking services and a relaxed in-branch atmosphere, their brand promise will fall flat.

While aesthetics is often prioritised in communication, the most attractive brands will be those underpinned by carefully crafted brand strategy and positioning.

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Jersey: providing stability and certainty for

As clients in the GCC turn to financial centres outside the region for wealth preservation and succession planning, Jersey is providing services that directly meet their needs.

GCC clients According to the most recent Capgemini World Wealth Report, wealth among high-net-worth individuals (HNWIs) in the Middle East reached an impressive 2.3$ trillion in 2015. There are now more than 600,000 HNWIs in the GCC, who are looking to keep their assets secure, with the right succession planning in place to preserve their wealth through the generations. It is notable, however, that increasing numbers of those HNWIs are looking outside of the region to achieve these aims.

One reason behind this shift is that, as families have grown in size, their wealth management has evolved to reflect their increasingly complex and international interests. That said, it’s impossible to ignore the impact of the region’s relatively unstable geopolitical and economic picture. Earlier last year, for example, oil prices sank so low that ratings agency Moody’s reported the states of the GCC faced twin fiscal and current account deficits for the first time in a decade.

It’s no surprise then that the GCC’s wealthiest families would seek to hand the planning and management of their affairs to a first-class, stable international finance centre (IFC).

International investment carries risks as well as the rewards of safety and security, and the right wealth structuring service will be able to identify the most appropriate investment options within the context of fluctuating market and regulatory landscapes. Wealth structuring can also navigate tax and regulatory requirements and provide a secure and flexible service to protect and grow those assets.

This is where Jersey holds a strong hand. It’s a secure jurisdiction that offers a flexible approach to private wealth management, built on more than 50 years’ international expertise, delivering trusts as well as estate and succession planning. More recently Jersey’s innovative foundations and private trust companies have proven very popular, especially among those seeking greater control over their investment assets.

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The suitability of these products is one reason why Jersey has long been a preferred jurisdiction for private wealth management clients from the GCC. Additionally, the number of family offices in the GCC region is expected to double in the next eight years, a service which Jersey has been providing to GCC families for many years. The Island also has a longstanding relationship with many intermediaries and HNWIs in the region, offering appropriate regulation and a tight-knit network of professional firms. Furthermore, Jersey offers excellent market access into both London and the EU – it’s estimated that the Island’s finance industry facilitates around 670£ billion of foreign investment flows into those markets.

Of course the western world has its share of geopolitical uncertainty at the moment too – not least the fall-out from the UK’s vote in June last year to leave the EU. Because of its location between the UK and EU, Jersey finds itself with a front-row view of the ‘Brexit’ developments. The good news for investors is that while the UK’s referendum has generated a huge amount of uncertainty for the UK itself, Jersey’s position is unlikely to be affected. As a Crown Dependency it’s neither part of the UK nor the EU. The referendum vote doesn’t affect Jersey’s long-standing constitutional relationship with the UK, nor its rights to offer its services to EU markets, which are the result of independent bilateral negotiations.

This leaves Jersey in a prime position to provide wealth management services to HNWI clients from the GCC. The Island offers stability, independence and tax-neutrality, and robust, specialised regulation that acts as a quality filter, ensuring that funds comply with international standards and regulations. Jersey has long been commended by organisations including the World Bank and the OECD for its standards of transparency, and was commended by MONEYVAL in 2016, the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, for its anti-money

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laundering measures. MONEYVAL found Jersey to have a ‘mature and sophisticated regime for tackling money laundering and the financing of terrorism’, giving the jurisdiction the highest rating of any state it assessed.

Jersey’s expertise also extends to Islamic finance. The Island’s legal system hasn’t had to change in any way in order to accommodate Sharia-compliant products, and is flexible enough to accommodate the various nuances of different schools of Islam.

Any partnership with a wealth structuring provider has to focus on the long-term, keeping assets safe and allowing them to grow.

Provisions should be tailored to the investor’s needs and goals, and the practitioners have to keep up-to-speed with changes to regulatory and tax environments, enabling the wealth structuring services to evolve alongside them.

Jersey’s offering balances product innovation with high standards of regulation, world-class legislation and vast expertise from a range of seasoned professionals. As such, the Island is perfectly placed to support the complex estate planning and investment ambitions of GCC investors, as they seek not only to minimise the threats that lie in the rapidly changing global financial picture, but to capitalise on the opportunities that are, without doubt, there too.

For further information on Jersey’s world-leading private wealth management services, contact either Cormac Sheedy or Richard Nunn, Jersey Finance Business Development Directors for the GCC. E: cormac.sheedy@jerseyfinance.je E: richard.nunn@jerseyfinance.je

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IN-DEPTH

Photocredit: Shutterstock/PopTika

Revolutionising retail banking Charles Habak, Principal, Financial Services at Booz Allen Hamilton discusses the state of retail banking in the region

D

escribe the development of retail banking in MENA.

The two major factors driving changes in the market are the need to decrease operating costs and to increase access to deposits in light of the tightened liquidity and higher cost of funds across the region. There is also a renewed focus on the customer journey, and tailoring to customer needs in a more customised and intimate fashion.

34 page 34-36 In Depth 191.indd 34

What have banks accomplished in 2016 and what should the market expect from them this year?

The year 2016 moved the topic of digital channels under the close watch of CEOs and the board. In many cases there is a particular focus on the bank’s mobile app. Leading banks have shown significant progress in adding mobile app features and improving their underlying processes, with personalisation starting to slowly creep in.

Additional trends include— Empowering frontline staff with business tools. Banks are investing in financial planning and advice tools/CRM to enable and empower front-office staff to provide customers with personalised, relevant recommendations to free up their time for value added services and further back-office automation.

Retail banks are also looking at opportunities to automate their back offices, primarily on customer onboarding, cont. on page 36

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IN-DEPTH

cont. from page 34

loan processing and payments processing. The trend is moving from offshoring to automation. Proactive risk management and regulatory requirements are also on the agenda.

Given the pressure of implementing regulatory requirements, GCC banks have proactively started looking at early warnings systems for financial crime through investment in customer due diligence and transaction monitoring systems—data theft is a big challenge for retail banks in GCC. Banks are investing in new technologies to preempt data theft.

What are the issues surrounding the retail banking sector?

Retail banking products still tend to focus largely on affluent segments, and a lot of effort has been spent on providing competitive products, particularly when it comes to hightiered credit card offerings, same-day loans and housing loan products.

Compelling and differentiated products have been lacking, with many banks electing to limit spend on innovation and rather follow first movers.

Significant opportunities remain when it comes to personalisation, customer journeys and cross-sell, among others, particularly in mass, youth, and female segments.

What should a bank’s main focus and strategy be in gaining market share in retail banking?

The focus should shift away from market share and evolve to what we call quality share. In other words, doubling down on capturing customers that, at a portfolio level, boast strong deposits at lower risk levels, which is an area that remains largely under-developed.

Digital has still only scratched the surface. Banks have focused on adding more features and improving processes, but almost no one has created a new

36 page 34-36 In Depth 191.indd 36

Charles Habak, Principal, Financial Services at Booz Allen Hamilton

The focus should shift away from market share and evolve to what we call quality share. In other words, doubling down on capturing customers that, at a portfolio level, boast strong deposits at lower risk levels, which is an area that remains largely under-developed.

— Charles Habak, Principal, Financial Services at Booz Allen Hamilton

business model with completely restructured value propositions that can truly impact market share and brand.

Tremendous opportunities also exist in areas such as predictive analytics, machine learning, robo-advisory and support, to name a few, which have been completely disregarded to-date.

What is your outlook on this area for 2017?

The outlook will continue to be focused on cost containment and greater competition for quality customers.

Security will emerge a key priority for CEOs and Boards of Directors. New initiatives will be limited, other than regulatory requirements.

Several banks will double or triple down their efforts on digital banking, and those that will lead such endeavours come from very clear and targeted business initiatives which will reap tremendous dividends three to five years from now. Those that will focus largely on technology for technology’s sake will slightly enhance their brand but will be largely disappointed in the results.

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23/01/2017 09:02

ISLAMIC FINANCE

Catalysing Shari’ah-compliant commodity trading Continuing its reputation as a global market maker, we take a look at DMCC Tradeflow’s performance in 2016 and how its latest Shari’ahcompliant product, Salam, is playing an intrinsic role in the physical commodity market

Sanjeev Dutta, Director–Tea Tradeflow at DMCC

E

stablished over 12 years ago, DMCC Tradeflow has mimicked the fast-paced development of its parent in Dubai, DMCC, one of the world’s leading Free Zones and hubs for commodities trade by

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creating new marketplaces, products and services for the benefit of the global trading community. Launched in 2004 as a warehouse receipt system, DMCC Tradeflow has evolved to a dedicated online platform for registering possession and ownership of commodities stored in UAE-based storage facilities.

In addition to its ability to adapt, DMCC Tradeflow’s attractiveness to the market at large has been underpinned by three key areas; a willingness to offer total transparency as a platform, to provide the necessary guarantees in trading, and the introduction of collateral financing.

As a fully electronic web-based platform, Tradeflow’s transparent, yet secure interface provides wholeof-market access to a diverse range of physical commodities which can be undertaken in multi-currency formats from anywhere in the world. Each commodity available on Tradeflow is physically held within DMCC-approved warehouses, where the warehouse operator issues a document of title,

proving its existence and protecting the rights of the owner.

Another key ingredient of Tradeflow’s growth has been its financial services. In its capacity as an introducer, the platform allows the market to access collateral financing in the form of inventory financing, commodity Murabahah and transactions based on Salam contracts, and while traditional financing has remained popular, the Shari’ah-compliant products of Murabahah and Salam have shown strong performances in 2016.

Commenting on the emergence of Tradeflow’s Shari’ah-compliant products, Sanjeev Dutta, Director of DMCC Tradeflow said, “At DMCC Tradeflow we are committed to His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai’s vision to make Dubai the global centre for Islamic finance and economy. We will continue to develop and expand the range of our Islamic financial products such as cont. on page 40

Where banking is more personal

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ISLAMIC FINANCE

Global trade growth to rise to 3,6 per cent in 2017.

Photo credit: tcly/Shutterstock.com

cont. from page 38

Commodity Murabahah and Salam in line with market demand.”

DMCC Tradeflow has a strong track record in bringing new products to market. In fact, when Tradeflow developed its Commodity Murabahah platform in 2013, one of the world’s leading Islamic financial scholars issued a fatwa which subsequently enabled traders to deal in asset-backed securities in the form of warrants issued against physical assets stored in DMCC-endorsed warehouse facilities.

Based on the strong performance of its Commodity Murabahah offering, DMCC Tradeflow, in collaboration with UAE’s biggest Islamic financial institution, launched Salam in 2016, a forward-financing transaction, where the purchaser pays in advance for buying specified assets, which the seller will supply on a pre-agreed date. Historically, farmers used this type of mechanism to receive the necessary liquidity to grow their crops, which they would then deliver to the

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buyer at a specific time in the future.

Today, Salam applies to a far broader audience and is acknowledged as an instrument that enables a larger share of the market to trade.

“As our ‘Made for Trade’ slogan would suggest, one of DMCC’s fundamental roles is to provide the necessary tools and environment to facilitate trade in a safe and regulated marketplace. With Salam, the market is able to access a 100 per cent Shari’ahcompliant service that stands to benefit all parties. In agreeing a price upfront for a specific commodity, the buyer will typically get a better price than they would through a spot sale and the seller is given the necessary liquidity to fulfil their contract,” said Dutta.

By bringing both Salam and Commodity Murabahah to market, DMCC Tradeflow has created a platform which allows access to a combination of both deferred and immediate deliveries on commodities, with a further combination of immediate or

deferred payment options, making the trading process more efficient for all market participants.”

While speculators would suggest that Islamic jurisprudence is an art and therefore difficult to universally regulate, DMCC Tradeflow’s optimism for the growth of its Shari’ah-compliant business is well founded. According to a report published by the IMF in 2015, Islamic assets in the UAE accounted for 17 per cent of the market and 19 per cent of all bank deposits with the same report emphasising the importance of UAE, Qatar, Saudi Arabia, Kuwait and Yemen, as “systemically important”, given the aggregate Shari’ah-compliant assets in said countries represented more than 15 per cent of the total banking system.

With Dubai continuing to galvanise its reputation as a global financial hub, in particular for Islamic Finance, DMCC Tradeflow is very well placed to be at the centre of a market that PWC has speculated to be worth $2.6 trillion in 2017.

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TECH FOCUS

Designing a self-protecting app to secure our modern mobile kingdoms Marwan Elnakat, Mobile App & eTransaction Security Manager for Middle East & Africa at Gemalto discusses the importance of adopting a defence system that is based on a layered approach

Marwan Elnakat, Mobile App & eTransaction Security Manager for Middle East & Africa, Gemalto

S

ince the dawn of civilisation people have always thought they are more secure than they actually are. The ancient city of Babylon once felt so secure behind its massive walls that the king feasted

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while the Persian army laid siege into the city. The Persians entered within a day, wading across the river that passed beneath the city’s walls. No one anticipated this and of course the king paid for his mistake of not securing the whole city with his life.

Our modern digital kingdoms are no different. We often feel safe in our belief that one approach of security will suffice. However, as history has proven, the traditional approach of securing the perimeter may deter attacks for a while, but in the long-run the capabilities of today’s cybercriminals are so broad that these limited precautions inevitably fail.

Gemalto’s recent Building Trust in Mobile Apps report provides a snapshot into the modern global consumer and highlights the role security needs to play. According to the report, the vast majority of consumers (80 per cent) value reliability and security of their mobile applications above other attributes. This is a good sign as consumers realise that they cannot afford a mobile experience without security. Consumers are aware of cyberattacks by criminals, but having said that they need to understand the

severity of incidents that could take place. While there have been several awareness-raising campaigns about phishing and fraud attacks, there is still an education gap. Only 4.3 per cent of consumers are concerned about the possibility of malware getting onto their mobile devices if they connect to an open WiFi network. And though there are numerous attacks that can occur on unsecure networks, the public still do not appear to be overly concerned. Fear of ransomware attacks locking access to a phone was even lower at only 1.2 per cent of respondents.

Businesses and consumers today need multiple layers of security to protect themselves from prying hackers when using their mobile apps.

Recent research conducted by Google ranked UAE as number one in global smartphone penetration with 73.8 per cent of mobile consumers carrying smartphones. As smartphone penetration increases, enterprises are enabling their employees to bring their own device to work for a single mobile experience. Apart from work, we use our mobile devices in every other aspect of our lives. According to Gemalto’s report, games, banking, cont. on page 44

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shopping and payment apps are the most popular among the average modern global consumer. We use our banking and payment apps more than ever on our smartphones and these are prime targets for hackers.

The advent in mobility has brought on a paradigm shift in how security is managed and monitored. It is simply not enough to secure the mobile device with an antivirus for example. Every single layer in the mobile ecosystem should be protected based on several levels: 1) software development kits (SDKs) to protect the app’s integrity;

has discovered a vulnerability in the app, it is up to others to ensure the threat is discovered, and any damage is mitigated.

As is clear, each stakeholder bears responsibility for any serious security breach. The store must remove offending apps; smartphone makers must patch any exploits in their operating systems, app providers need to update their software, and mobile network operators need to be on-hand to push out patches over the air quickly. It really is a joint effort to build an impenetrable fort to protect

Businesses and consumers today need multiple layers of security to protect themselves from prying hackers when using their mobile apps.

— Marwan Elnakat, Mobile App & eTransaction Security Manager for Middle East & Africa, Gemalto 2) strong authentication for example biometrics, to secure access to the mobile app; 3) encryption to protect the data itself, so that if the criminal gets access to the data, it is essentially illegible and useless to them; and 4) risk management systems to secure the environment and detect unusual transactional patterns.

Now that we know we need to take a layered approach, ultimately who is best placed to safeguard a user’s security? Interestingly, Gemalto’s report states that many place the greatest onus on the app provider such as the bank, corporate enterprise, or government itself—implying that if the user’s app security is compromised, the brand that produced it would take the greatest reputation hit. While it is true that ultimately security lies with the app provider, once a party wants to create malicious software, or

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our modern mobile kingdoms.

When it comes to security, end users prefer an easy and frictionless experience. Our report states that 60 per cent of respondents said they prefer security in the form of pins, fingerprint scans or passwords. This reiterates the importance of building a frictionless security solution, which does not impact the overall user experience. Both private and public digital service providers have to provide secure authentication in a way that isn’t disruptive or perceived to be inconvenient, and it is therefore important to develop a self-protecting app.

Essentially, brands providing their customers with mobile apps need to implement end-to-end security architecture which can deal with new dynamic malware. Some solutions such as purpose-built software

development kits (SDKs) can address the problem through security mechanisms that allow apps to defend themselves through coding techniques and cryptography. These SDKs react in the presence of threats, stopping the execution and sending an alert to a risk management server. Mobile SDKs serve as the foundation for many varied and popular apps used by mobile phone and tablet users, allowing service providers such as banks, governments, etc. to design their mobile apps with strong user authentication methods.

Today, biometric technology is popular among end-users, and is an innovation that is best suited to mobile devices. People trust that their finger print and faces are unique enough to act as their authentication key.

Furthermore, mobile app providers can also consider one-time passwords; outof-band via push—a method where a push notification is sent to the user’s phone requesting approval for any app login request and secure pin pads.

SDKs also enable the design of digital signatures, which serve as another good example of strong authentication for securing critical transactions.

Regardless of the strong authentication implementation the bottom line is to keep a fluid user experience for the end user—so security and convenience go hand-in-hand.

In conclusion, I think we can learn something from the architects of warfare from the Middle Ages. It all boils down to one thing—use a layered approach of defence that attackers would fail to defeat, making it harder for them to access all our sensitive information. In most cases, the results of failures in cybersecurity are not as dire as the Great King of Babylon, but that doesn’t mean we should take our security lightly.

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TECHNOLOGY

Chris Truce, Director, Platform Development at Saxo Bank highlights emerging trends and developments that are re-shaping banking technology

F

or years, mid-tier banks have been told they’re potentially heading for extinction. The barbell effect dictates that the middle will be significantly challenged by an increasingly tough business environment, with only the large, niche institutions being able to succeed. The outlook appears to be challenging if one adds up the increased cost of regulatory compliance, the pressure on fees exerted by a low-interest rate environment and prolonged macroeconomic uncertainties, the balance sheet constraints imposed by Basel III and increasing competition from innovative, nimble FinTech firms.

But technology-led innovations are making possible new client-centric business models that will enable mid-tier banks to punch above their weight, while retaining the agility and focus to respond quickly to changes in demand. This marks a new era of open banking where higher customer expectations can be fulfilled by midtier banks providing a widening and customisable array of capabilities and services accessed via APIs (application programme interfaces). This will give

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mid-tier banks the opportunity not only to survive but to thrive.

Grasping this opportunity requires a radical change in banking models and mind-sets. We believe that the combination of socio-economic shifts and economic pressures should encourage banks to take a leap of faith. People have grown used to the responsiveness, convenience and customisation experienced via apps downloaded from their smartphones to run key aspects of their daily lives. As is already evident in many consumer-focused industries, we’re making a transition from a servicebased economy to one in which the user experience (UX) is paramount.

To ensure the necessary degree of attention to—and investment in—the user experience, banks need to re-order their priorities.

In the first instance, they must reassess their value proposition and their core competencies including customer base, core geography, product expertise, customer service levels etc.

This identity is critical to customer perceptions in a world of increasing digital disintermediation and must

Photo credit: Shutterstock/sdecoret

The rise of open banking

be leveraged as banks migrate their services to omni-channel platforms in order to reach customers via the device of their choosing.

To nurture strong, loyal customer relationships that can drive digital revenue growth in the long term, banks need to concentrate a higher proportion of their resources on highly-personalised, highly-responsive delivery to the client whilst taking an aggregator view of the necessary commoditised processes.

Historically, banks have not been known for their agility and responsiveness to customer demand.

This is partly because they are highly regulated financial institutions, charged with fiduciary responsibilities to clients and bound by rules on consumer protection and anti-money laundering.

Moreover, their services are run on complex, expensive patchworks of legacy systems that do not easily facilitate change. A further drag factor is that banks have typically preferred to exert full control and ownership over all aspects of production and distribution when bringing to market a new service, regardless of the cost and time implications. cont. on page 48

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TECHNOLOGY

cont. from page 46

Imagine a national or regional In particular, cloud-enabled bank wishes to provide access to the ‘business-as-a-service’ (BaaS) providers global securities markets to a domestic offer a low-cost, flexible and quick-toretail customer base. It could enter market route to seamless integration into an agreement with another bank, of product verticals or business lines— effectively white-labelling a service, alongside the banks’ existing core tailored to the bank’s own customer services. Different approaches will suit needs. More typically, it would opt to different needs. While API developers piece together the underpinnings of the might offer expertise in a particular service itself, such as the connectivity to product or geographic niche, BaaS major stock exchanges and their clearing providers also offer the experience of and settlement infrastructures, the risk bringing a range of API-based services management, transaction processing to market with banking partners across and client service operations, plus the multiple jurisdictions. attendant legal, tax, compliance and HR processes.

This route to market is slow, costly Open banking is and risky. Deliver the service too going mainstream. quickly, and it may be flawed from a There are many ways to functional or regulatory perspective. benefit from this new Deliver it too late and the gap in the model—but there are market has already been closed. Either few alternatives to doing way, large outlay has resulted in little added value for the customer. so—especially for midFirms that have adopted whitetier banks. labelling solutions have taken one step away from this approach, but a further change of mind-set is required for banks to embrace business models based on greater use of APIs, thus opening up access to solutions and capabilities that can be integrated into user-experience platforms more effectively than previous models for collaboration.

It is a step that many firms have already taken. The past decade has seen a revolution in the availability of capabilities and tools that underpin the evolving value propositions. Smaller, less well-funded and more techsavvy firms—notably in the FinTech sector—have also been quick to seize opportunities to tap into services as and when required from cloud-based service providers. But many larger firms have taken the plunge too, resulting in a sector that is fast maturing, with new offerings emerging as appetite increases. Chris Truce, Director, Platform Development, Saxo Bank

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Ultimately, the API-based model allows the bank to take a less capitalintensive approach to pursuing new business opportunities and new sources of revenue. Rather than investing up front in all the market connectivity and infrastructure, the bank may first test the water by delivering to clients via an API-based service in partnership with a third-party, such as Saxo. Depending on the customer response, the bank may continue down the same partnership path, or ramp up investment if it sees opportunities to broaden or deepen its core value proposition.

While embracing open APIs speaks directly to the CEO’s core priority of delivering cost-effective digital revenue growth, the shift to an experience-based banking model may also help to achieve other priorities, such as attracting and nurturing future leaders. Since the financial crisis, banks have struggled to attract high-quality graduates, many of whom have preferred the ethos and opportunities offered by the giants of ‘e-commerce’ and consumer technology. Banks that demonstrate their understanding of how digital technology innovation is reshaping peoples’ lives will have the best chance of recruiting the talent that can grow the business well into the future.

Open banking is going mainstream.

There are many ways to benefit from this new model—but there are few alternatives to doing so—especially for mid-tier banks.

You cannot predict the future, but you can prepare for it. An open, agile architecture is a pre-requisite if you want to pivot nimbly in response to changing market conditions and customer preferences. Technology has given us the tools to collaborate in new ways with third parties—as well as new ways to increase customer satisfaction and loyalty levels. To maximise the latter, banks should first exploit the former.

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11/10/16 11:49 AM 13/11/2016 16:09

PERSONALITY

Geoff Cook Chief Executive, Jersey Finance

I have been at Jersey Finance now for ten years, and the Island’s finance industry has evolved a lot during that time. It’s been a privilege to see Jersey remain so buoyant during some difficult financial times, including the crash of 2008 and most recently the repercussions of Brexit, and to be a part of the development of its international relationships, to now being very well established in key markets, including the Middle East.

My main motivation was the unique opportunity to represent an entire industry and, in some senses, a small nation. It may sound intimidating but I found the prospect very exciting. Jersey is in a special position where it is fundamentally independent as a jurisdiction and therefore can offer a lot to various markets. I also firmly believe that Jersey has the right platforms and expertise to play a really valuable role in the global economy. This is a rare blend for a jurisdiction of Jersey’s size.

One of the highlights of my career was conducting the McKinsey Jurisdictional Strategic Review in late 2012. It was a significant piece of work looking into the future opportunities and threats to the Island’s finance industry. It will without doubt influence the course of our jurisdiction and its economic growth significantly for decades to come, so to be part of that journey is very special.

No day is the same. Generally, I tend to deal with correspondence early morning at my desk.

That is followed most days by a full calendar of meetings. Of course, Jersey is an international finance centre, so there is a lot of international travel thrown into the mix too. The finance industry is a broad and rapidly evolving thing. In between pre-planned meetings, events and other activity, there is a lot of advising to be done and coming up with solutions to mitigate any issues which may arise, whether it’s responding to a media enquiry, supporting a member firm, or speaking to Jersey’s government or regulator.

At the heart of it, finance is about people, and I love meeting interesting people. I am in the privileged position of meeting board directors, C-suite executives, regulators, government officials and media from all over the world and am constantly learning about other cultures, economies and situations. It is the sort of variety that is hard to find in many other positions, and of course it is absolutely vital to have an open mind and take heed of how other people and cultures do things, after all we are all increasingly connected, socially, digitally and economically.

My current read is the Life of Edmund Burke by Jesse Norman, but I could really get lost in the Last Kingdom series by Bernard Cornwell, collectively those would be my favourites. When you lead such a busy life, it’s a treat to escape with a good book for little while.

I would say there is possibly a lack of depth in the bond and equity markets in the GCC, however, overall the infrastructure and general environment has evolved rapidly and impressively to create a sophisticated sector.

My general outlook is extremely positive. The GCC is stable and very well run relative to the wider region and the sophistication of its financial markets has created an important hub between west and east, north and south.

Current trends and indicators suggest that the main GCC financial centres will continue to gain ground relative to global progress in financial services. This, with the support of specialist centres that can provide onward investment services to attractive markets, can help position the GCC as a significant hub in facilitating high quality global financial flows.

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SHIFT TO SHIFT TO A BETTER FUTURE A BETTER FUTURE 800 124 2525 800 124 2525 Alawwal Bank hereby confirms that the change in its name from Saudi Hollandi Bank to Alawwal Bank was only confined to the trade name/logo Alawwal Bank hereby confirms that the change in its name from Saudi Hollandi Bank to Alawwal Bank was only confined to the trade name/logo