#192 - February 2017

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FEBRUARY 2017 | ISSUE 192

Making strides in Iraq and beyond Faisal Al Haimus, Chairman, Trade Bank of Iraq

10 Bond markets in acceleration page 3-4 contents.indd 1

18 A new rule: digital payments and virtual currencies

28 Getting back on track

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Dubai Technology and Media Free Zone Authority

Making strides in Iraq and beyond Faisal Al Haimus, Chairman, Trade Bank of Iraq

“We believe the outlook is positive for the Iraqi economy based on better oil price forecasts and improved government spending.�

40 The state of MENA

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CONTENTS

FEBRUARY 2017 | ISSUE 192

Editor’s Letter

A

s things begin to pick up, most financial institutions have reported their 2016 financial year results. Some made slight gains, others suffered losses. Still operating in a challenging environment, banks have to continue playing defensive this year. 2017 will bear a similar macroeconomic backdrop as last year as this remains an adjustment period for Middle East markets. On a global scale, the biggest risk this year is believed to be the overreaction of bond markets. Concerns with China have dialled down and issues in the EU will most likely be domestic of nature due to the upcoming elections.

Many economies in the region are still pursuing their diversification agendas—sovereigns that are still dependent on hydrocarbons are Sharjah, Saudi Arabia, Bahrain and Oman. Industry reports have suggested that GCC countries would need $275 billion in financing for the next three years.

While some resilient governments may choose to drawdown from their reserves, others are expected to tap international markets for funding. S&P Global Ratings expect growth in the GCC to remain at two per cent this year.

Exploring new horizons, our cover story this month provides an insight into Iraq (pg. 22) through an interview with Trade Bank of Iraq, its activities as well as the country’s business and economic landscape.

Our country spotlight in this issue offers a snapshot of Saudi Arabia (pg. 28) and how the Kingdom is coping with new fiscal and economic reforms. This issue also brings you interesting features covering the new regulations issued by the central bank of UAE, the advantages of bitcoin investment as well as an exclusive interview with a representative from the International Finance Corporation.

Things are indeed starting to get interesting for 2017. Till next month.

10

22

18

6

News analysis

Equipped to weather a storm

8

News bites

THE MARKETS 10 Bond markets in acceleration 14 Managing expectations LEGAL FOCUS 18 A new rule: digital payments and virtual currencies COVER STORY 22 Making strides in Iraq and beyond

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DECEMBER 2016

FEBRUARY 2017

| ISSUE 192

JANUARY 2017 | ISSUE 191

| ISSUE 190

Making strides

clear—for 24 Qatar in the

end

10 A tripartite pact

12 The final countdown

22 Adjusting to a new environment

CPI Financial

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18 A new rule: digital payments and virtual currencies

28 Getting back on

track

40 The state of MENA

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page 3-4 contents.indd 3

of Iraq

34 Revolutionising retail banking

10 Bond markets in acceleration

Zone Authority

Making stride s in Iraq an d beyond

Faisal Al Haimus, Chairman, Trade Bank

and Media Free

42 A means to an

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Dubai Technology and Media Free Zone Authority

Zone Authority and Media Free Dubai Technology

now

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

Dubai Technology

14 The golden triangle

Bank of Iraq

of ibq

10 2017—a perspective

Preserving excellence

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

Editor

BankerMENA

r of ibq Managing Directo Omar Bouhadiba,

“We believe the outlook is positive for the Iraqi economy better oil price forecastbased on s and improved governm ent spending.”

Chairman, Trade

Managing Director

Nabilah Annuar

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Faisal Al Haimus,

Omar Bouhadiba,

Nabilah Annuar

The cautious optimist

in Iraq and beyond

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

The cautious optimist

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

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

3 19/02/2017 14:55

CONTENTS

FEBRUARY 2017 | ISSUE 192

COUNTRY SPOTLIGHT—Saudi Arabia 28 Getting back on track www.bankerme.com

BITCOIN 34 Is bitcoin the new safe haven for investors?

34

IN DEPTH 40 The state of MENA

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

TECHNOLOGY 42 Are regional banks immune to cyberattacks?

46 Retaining millennials HUMAN CAPITAL 48 Benchmarking human resources in finance

Chairman SALEH AL AKRABI

46

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 EDITORIAL editorial@cpifinancial.net

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Editor - Banker Middle East Sales Director - Banker Africa JON DESPRES NABILAH ANNUAR jon@cpifinancial.net nabilah.annuar@cpifinancial.net Tel: +971 4 433 5321 Tel: +971 4 391 3726

EVENT 52 SWIFT Business Forum UAE 2016, Abu Dhabi 54 Efma Retail Banking Summit, Middle East

52

Editors MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716

Business Development NIKHIL NIDHAN nikhil@cpifinancial.net Tel: +971 4 391 3717

WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718

DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526

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NEWS ANALYSIS

Equipped to weather a storm Banks in the GCC are expected to face weaker operating conditions this year—similar to that of 2016—but these institutions are fairly prepared for it

I

ndustry reports and comments have indicated that 2017 will be as equally a tough year as 2016. The weak economic environment will persist throughout the year, continuing to weigh on the financial profiles of banks in the region. This will hopefully taper out in 2018. The foreseeable risks for GCC banks this year are—a difficult operating environment, a higher cost of risk, and lower liquidity.

Oil prices are expected to stabilise between $50-60 per barrel in 2017 and 2018, while economic growth for GCC countries is expected to be at 2.2 per cent and 2.5 per cent in 2017 and 2018, respectively.

The end of the commodities super-cycle has resulted in a significant decline in the economic prospects of the GCC region, explained S&P Global Ratings in an industry report last month. This implies lower growth opportunities for the region’s banking systems and deteriorating liquidity. The end of this boom has also increased the pressure on GCC banks’ asset quality and profitability indicators.

While further weakening is expected in some of these indicators in 2017-2018, S&P believes that GCC banks have built sufficient buffers to make the overall impact on their financial profiles manageable.

6 page 6 News Analysis.indd 6

Lending growth for banks is expected to witness a decline this year. Based on S&P’s estimates, growth in lending to the private sector halved to five per cent on average as 30 September 2016, compared with 10 per cent in 2015. In 20172018, this situation is expected to continue as the government’s policy response to lower oil prices continues to take the form of spending cuts and the postponement of infrastructure projects. In this period, private sector lending growth would reach five to seven per cent on average for the banking systems of the six GCC countries.

GCC banks are well entrenched in their real economies. Therefore, the asset quality indicators for these institutions are on a downward trend on the back of a weaker economic environment. S&P predicts that this downward trend will last for at least two years, barring any unexpected increase in hydrocarbons prices. Additionally, nonperforming loans could increase four to five per cent over the next two years and credit losses could double over the same period. The adoption of IFRS 9 may also contribute to the increase GCC cost of risk in 2017-2018.

Although funding appears to be weakening, liquidity remains liquidity remains good by international standards. Banks in the GCC tend to keep sizable amounts of cash and money market instruments on their balance sheets (around 18 per cent of total assets at 30 September 2016), according to S&P. This ratio however has dropped from around 22 per cent at the end of 2014, yet compares favourably with global peers.

Nevertheless, the decline in profitability for GCC banks is projected to continue due to the scarcity of growth opportunities, the increase in cost of funding and the rise in credit losses.

This decline may encourage consolidation but not many are expected in the next two years.

Over the last 12 months, S&P took several negative rating actions on banks in the GCC. Most of these were concentrated in Bahrain, Oman, and Saudi Arabia—suggesting that it was also lowered in line with sovereign rating actions. According to S&P, 31 per cent of the banks it rates in the GCC have negative outlooks or are on ‘CreditWatch’ with negative implications.

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NEWS

BITES

Iraq mulls over a second $1 billion bond issue Trade Bank of Iraq (TBI) is working with Citi, Deutsche Bank and JP Morgan on a second $1 billion bond issue for Iraq. In January this year, Iraq successfully closed a $1 billion issuance guaranteed by the US. Sources told Banker Middle East that a second tranche of a further $1 billion sovereign issuance by Iraq is likely to come to market before the end of the first quarter of 2017. The five-year bond issued in January had a coupon of 2.15 per cent.

The Iraqi government is seeking to lower its international borrowing costs after the country was badly hit by the slump in oil prices. Iraq relies on oil exports for around 95 per cent of government revenues.

Consortium acquires billion dollar stake in Arab Bank Group Led by Arab Bank Chairman, Sabih al Masri, a consortium of investors bought a 20 per cent stake in Arab Bank Group for $1.12 billion from Oger Middle East Holdings. The consortium was advised by Baker McKenzie with Qatari-based investment bank, QInvest as their sole financial advisor.

The bank reported a growth of 20 per cent in net profits for the 2016 financial year. Net operating income before provisions and taxes exceeded $1.1 billion, whilst the group’s net profit after tax reached $533 million for the year 2016 as compared to $442 million for 2015.

Arab Bank, headquartered in Jordan, is one of the Arab world’s largest privately owned banks and operates in 30 countries. The bank has assets of more than $46 billion, with 600 branches on five continents. It owns 40 per cent of Saudi Arabia’s Arab National Bank.

The acquisition was led by Chairman, Sabih al Masri, a businessman with stakes in other banks and the hotel industry, and owner of ASTRA, a diversified group of companies he founded with investments in a wide range of sectors that has 6,000 employees in 11 countries. The seller, Oger Middle East Holdings, is one of the Gulf’s largest construction companies.

RATINGS REVIEW Entity

Abu Dhabi

LT IDR/LT ST IDR/ST Rtg (FC) Rtg (FC)

AA

F1+

B

B

Bahrain

BB+

Lebanon

B-

Egypt

LT IDR/LT Rtg (LC)

ST IDR/ST Rtg (LC)

AA

F1+

B

B

B

BB+

B

B-

Country Ceiling

AA+

B

BBB+

B

B-

B

Country

UAE

Bahrain Egypt

Lebanon

AA

F1+

AA

F1+

AA+

Kuwait

A

F1

A

F1

AA+

UAE

BBB-

F3

BBB-

F3

BBB

Saudi Arabia

AA-

F1+

AA-

F1+

AA+

Qatar

AA

F1+

AA

F1+

AA+

Turkey Saudi Arabia Qatar

Kuwait Ras Al Khaimah Turkey

KEY

UR

Positive Negative Evolving Stable

Under Review

8 page 8 News Bites.indd 8

OUTLOOK

WATCH

Key GCC pension fund signals investment interest in QSE A large pension fund from the GCC visited QSE at the beginning of February to discuss investment potential in Qatar’s financial market.

The CEO of QSE presented the key strengths of the Qatari market and future plans to improve liquidity in the market.

The portfolio managers from the pension fund were pleased with the plan and welcomed QSE’s initiatives to improve the quality of market and investment tools and products like margin trading and ETFs. In the past quarter QSE has actively reached out to the buy-side and the sell-side investment community locally, regionally and internationally to gather feedback and requirements for further development initiatives. QSE aims to continue its efforts to develop the financial market in Qatar that started with achieving the status of emerging markets.

NBAD-FGB merger to take effect 1 April 2017 According to WAM, the merger of the National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) will be announced on 1 April 2017, and trading of new shares following the merger will begin the day after from 2 April 2017 onwards.

The Abu Dhabi Securities Exchange conveyed to WAM that it had completed the procedures for the unification of the records of the stakeholders in both banks and is pursuing experiments to ensure there are no technical obstacles to the trading, as per the new share values. The indicative market price of the new shares will reportedly be calculated based on the last traded price of the shares of both banks in the market before the merger. The shareholders of the NBAD have also approved issuing of 1,254 new shares.

According to the latest statistics, the total assets of the two banks was estimated at AED 665.8 billion by the end of 2016, which was disclosed before the merger. Their financial statements showed combined deposits of AED 402.58 billion, while their combined loan value was AED 357.2 billion by the end of 2016.

The merger will lead to the creation of the largest banking entity in the Middle East. According to the studies carried out, the merger will contribute to reducing the operating costs of the new entity by AED 500 million a year. The study also showed that the interest cost would be realised within three years, while the estimated one-time business unification cost would be AED 600 million.

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Bond markets in acceleration Dr. Nawazish Mirza, Associate Professor of Finance and Director Industry Interface Projects at SP Jain School of Global Management provides an analysis of trends across the GCC’s debt capital market

T

Dr. Nawazish Mirza

10 page 10-12 The Markets.indd 10

he debt market enhances economic efficiency by facilitating cost effective intermediation and risk allocation. A transparent and well-functioning fixed income market provides favourable fundamentals such as funding stability, safer yields, liquidity and adequate capacity to absorb volatility shocks emanating from asset price bubbles. This contributes towards improved performance, discipline and resilience of the financial system, consequently driving economic growth.

Historically, the bond markets in GCC countries have remained conservative towards funding of private and public sector projects. However, post an unprecedented decline in oil prices over the last few years,

sovereign debt issues surged and resultantly dominated the 2016 debt market in an attempt to curtail the budgetary deficit of these petro economies. In FY16, the new issues in GCC amounted to $69.1 billion compared to $22.6 billion in FY15, registering a YoY increase of 2.1x. This increase was primarily on account of bond issues by Saudi Arabia, Qatar and UAE.

REGIONAL SOVEREIGNS OFFERED ATTRACTIVE YIELDS AT ISSUE

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THE MARKETS

The colossal debut of Saudi Arabia’s sovereign debt in 4Q16 raised $17.5 billion, which is the single largest issue (three-tranche financing) acquired by any emerging economy. The funding comprised of US dollar denominated bonds with a contractual maturity of five, 10 and 30 years, carrying a premium of 135 bps, 165 bps and 210 bps respectively over US treasuries.

The Saudi bonds outpaced issues from Qatar and Abu Dhabi that managed to raise $9 billion and $5 billion, respectively, in 1H16. This was followed by Oman, Bahrain and Dubai that acquired $4.5 billion, $2.6 billion and $0.9 billion in sovereign debt, respectively. The original issue yields remained moderate compared to historical levels. The Saudi instrument (10-year) was priced at 2.65 per cent, Abu Dhabi’s bond at 3.13 per cent and Qatar managed to trade its paper at around 3.5 per cent. These were low on a historical basis, however in the economic environment where negative rates were not atypical, these yields were deemed adequate.

When these sovereign issues were making their way to the capital markets last year, the sovereign debt of most of the European economies were offered at less than one per cent. A US 10-year paper was trailing at 1.41 per cent and countries like Hong Kong that maintain a hard peg with the USD were priced at one per cent.

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Although the yields increased in 4Q16, the global benchmark performance remained depressed. JP Morgan EMBIGD registered a return of -4.02 per cent while Citi Mena Broad Index managed a -2.2 per cent in the quarter.

It can be argued that the risk profile of GCC countries is less favourable compared to developed economies, however the risk adjusted spread still makes them attractive. The regional markets catered to diversified risk profiles with opportunities available for risk tolerant investors to earn around seven per cent from Bahrain.

Similarly, short term instruments provided interesting opportunities with the Saudi one-year bill offering more than 2.5 per cent compared to 0.78 per cent for a US treasury of same maturity. This increased investors’ interest and almost all of these issues were oversubscribed with phenomenal participation of international investors.

At the structural level, this has given a boost to the regional bond markets which were previously nascent.

The aggregate GCC deficit of

8.7%

in 2015 is likely to squeeze down to

7.5% 4.9%

in 2017, and further reduce to

in 2018 owing to support from a VAT implementation

Globally, the equity markets are usually half the size of bond markets, while in GCC, stock markets dominate their fixed income counterparts by approximately five times. Therefore, the recent pattern of bond issues, albeit sovereign, will deepen the bond markets by contributing transparency, liquidity and offering investment alternatives.

— Dr. Nawazish Mirza Globally, the equity markets are usually half the size of bond markets, while in GCC, stock markets dominate their fixed income counterparts by approximately five times. Therefore, the recent pattern of bond issues, albeit sovereign, will deepen the bond markets by contributing transparency, liquidity and offering investment alternatives.

This development is important because bond markets, in medium term at least, are likely to be instrumental in funding budgetary deficits and the created liquidity should lead to a positive investing momentum.

THE CORPORATE DEBT MARKET REMAINS NASCENT

The regional corporate bond issues in 2016 remained subdued amidst prodigious sovereign offerings.

Kuwait-based EQUATE Petrochemical funded $2.25 billion through five and 10 year bonds. Etihad Airways raised a five-year debt worth $1.5 billion with a coupon rate of 3.86 per cent and a spread of 210 bps above midswaps. Abu Dhabi National Energy Company structured two tranches, the first was a five-year $250 million paper, with a coupon rate of 3.62 per cent, while the second was a 10-year $500 billion paper, with a 4.37 per cent coupon rate. Other prominent offerings for the year included a Sukuk issuance of $200 million by Ahli United Bank and a $700 million issuance by International Petroleum Investment Company.

The banking sector in GCC contributed around $11.7 billion (15 per cent of total issues) which was primarily aimed at complying with capital requirement for Basel III. The GCC banks face substantial maturity gap emanating from very short term customers’ deposits and medium term lending. Therefore, it is expected that these liquidity concerns will be addressed by offering longer tenure bonds that will ensure continued, albeit moderate, contribution towards new issues.

MODEST PERFORMANCE IN JANUARY 2017 AMIDST INTEREST RATE VOLATILITY

The year 2017 is likely to be very dynamic for the fixed income markets.

While it was expected that the rising trend in global benchmark rates will continue, a decline in retail sales along with investors’ caution towards the new US administration resulted in a declining yield curve for US treasuries in the first two weeks. The two-year, 10-year and 30-year instruments witnessed a decline of two bps each. This is likely to stabilise once US president Trump’s disruptive exuberance is settled.

The Japanese and UK sovereigns mimicked this trend. However, on account of economic recovery in EU, bond yields gained four bps. The GCC bonds registered modest performance owing to the dual benefits of declining yields and favourable investors’ supply demand equilibrium. cont. overleaf

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page 10-12 The Markets.indd 11

11 16/02/2017 15:03

THE MARKETS

cont. from page 11

THE CONCERNS ABOUT CREDIT QUALITY ARE PREMATURE

At present, the credit strength of the region is adequate with an average MENA rating of approximately BBB+ (S&P), despite caution from rating agencies about slow economic growth, fiscal deficits and oil price volatility. Although these concerns have their own merits, some fundamentals are likely to result in economic robustness of the region.

The volatility in oil prices is not a hindrance as they are much higher compared to 2014 and some countries like UAE already have diversified revenue streams, while the rest are following suit. The aggregate GCC deficit of 8.7 per cent in 2015 is likely to squeeze down to 7.5 per cent in 2017, and further reduce to 4.9 per cent in 2018 owing to support from a VAT being instated for the first time in the region.

On a country level, the deficits will remain high for Saudi Arabia, Bahrain and Oman while for UAE, Qatar and Kuwait it is expected to be range bound between three per cent and four per cent. The overall growth of the region is likely to stabilise around two per cent through hefty contribution of non-oil activity going forward.

Therefore, for 2017 and 2018, the major GCC market funding is expected from Saudi Arabia and Bahrain while for other countries it will be a mix of moderate debt and government reserves.

Similarly, an astute participation from the banking sector will persist to bridge regulatory liquidity and capital deficits.

These developments will continue to attract more international investors who will be willing to increase their GCC exposures in search of better returns. This will continue to support the momentum in the regional bond markets, with an expected increase in benchmark rates, which will provide a unique opportunity of increasing portfolio duration along with augmented spreads.

12 page 10-12 The Markets.indd 12

The GCC banks face substantial maturity gap emanating from very short term customers’ deposits and medium term lending. Therefore, it is expected that these liquidity concerns will be addressed by offering longer tenure bonds that will ensure continued, albeit moderate, contribution towards new issues.

— Dr. Nawazish Mirza, Associate Professor of Finance and Director Industry Interface Projects at SP Jain School of Global Management Bond market progression in the GCC 80

240.00%

70

180.00%

14.4

60 50

120.00%

40 30 4.8

14.1

11.4

13.7

10

21.1

18.2

18.4

18.9

1.5

2011

2012

2013

2014

2015

7.6

0

Bond (USD Bln)

60.00%

54.6

20

Sukuk (USD Bln)

0.00% -60.00% 2016

% Change

Source: Thomson Reuters

New sovereign issues in 2016 20

17.5

15

9

10

5 5

0

4.5 2.6

KSA

Qatar

Abu Dhabi

Oman

Bahrain

0.9

0.5

Dubai

Sharjah

Source: Thomson Reuters

Key benchmark performance 4Q16

30-Sep-16

30-Dec-16

per cent Change

Citi World Govt Bond Index

966.34

883.93

-8.53 per cent

JP Morgan EMBIGD

811.22

778.6

-4.02 per cent

DJ Sukuk

163.97

161.11

-1.74 per cent

Citi Mena Broad Index

139.38

136.29

-2.22 per cent

BarCap Global Aggregate

485.68

451.35

-7.07 per cent

Source: Bloomberg as on 30 December 2016

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THE MARKETS

Managing expectations V. Ramkumar, Senior Partner at CEDAR Management Consulting provides an outlook on the UAE banking sector for 2017

T

he year 2016 has been an interesting and challenging year for banks and the overall economy. Banks that have been successful understand the pulse of change, and the mantra for success has been the ability to be adapt. Evidence of this is the increase in UAE’s banking asset book growth of 10 per cent the last year, although the return on assets has been in the range of 1.7 to two per cent.

PERFORMANCE AND IMPLICATIONS

The movement of oil prices has played in important role in the liquidity context as well as in the banking sector.

Slow economic growth and reduced public spending impacted corporate lending, which grew by a modest five per cent in 2016 against 14 per cent

14 page 14-16 The Markets.indd 14

growth the year before. However, retail banking assets managed to post 23 per cent growth.

There has been a marked increase in nonperforming loans (NPL) in 2016, reflecting stress on the portfolio, especially on retail, SME and mid-market exposure. With a fair bit of clean-up happening in 2016, the prospects for the new year 2017 may be based on how well banks respond to the opportunities that may be emerging in respective segments, and how the initiatives that may be critical to drive the cost ratios well in control. With the top five UAE banks contributing to over 55 per cent of the total assets, the approach to addressing growth opportunities could be significantly different for the large players, vis-Ă -vis mid-size and smaller banks.

OUTLOOK FOR 2017

While the new year has its own promises for banks based on positioning, profile and portfolio, it is pertinent that the approach to addressing the market should align with its opportunities.

Corporate lending is expected to show modest growth, between four to six per cent in 2017. The sectors that are likely to see a higher growth are those that are consumer driven essentially—including healthcare, retail, real estate and F&B. The midmarket segment, which includes companies with AED 100-250 million in turnover, contributes to over eight per cent of the banking portfolio, and is likely to see a higher focus both from large and mid-size banks. Primary differentiators that are likely to emerge as strong value proposition would be end-to-end transaction banking cont. on page 16

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THE MARKETS

cont. from page 14

and cash management services, with enhanced digital offerings that allow for innovative customer service.

Seen as a risky segment given their experience in 2016, most banks would look to reduce their exposure to the SME segment. Furthermore, the exposure is likely to gravitate more towards the “M” segment, especially with sectors that have a higher propensity to supply to the Government or the public sector. While there are an estimated 300,000 SMEs across 12 sectors and 57 industries, there are at least 18 industries involved in supplying to government agencies. A focused lending strategy for SMEs participating in government supply chain may well be the winning mantra for 2017.

2016 saw a fair bit of upheaval in the job market, driven by both the downsizing drive across large firms as well as the disturbances in the SME segment, which is the biggest employer. The impact of this has been reflected both in the rise of NPL in the retail segment, and the reduction in the lending growth rates—especially in the unsecured category. Retail portfolio is likely to see stiffer competition for the secured lending book, (auto, home, salary transfer loans, etc.) and the game would be beyond just the rates.

Product innovation will most likely be driven by micro-segmentation; analytics based customer preferences assessment and product differentiation. Liquidity would be a key success factor, and mobilising cost effective deposits through an effective HNWI and Wealth sector will emerge as focus area. Wealth from HNWI has grown 14 per cent last year and with a similar projected growth in 2017.

Quite naturally, this is likely to remain a hot sector to stay focused on.

There are eight Islamic banks and 11 Islamic windows operating in the UAE, with a 19 per cent share

16 page 14-16 The Markets.indd 16

V. Ramkumar, Senior Partner, CEDAR Management Consulting

of Islamic assets out of total assets.

With an estimated five per cent yearon-year growth, the competition for driving this growth is likely to be stiff.

Sukuk transactions are also likely to increase in value to AED 180 billion this year, given the initiatives to raise public debt by GCC governments across the region. An important trend likely to emerge during 2017 would be innovation in Islamic products—to be driven both by Islamic banks and Islamic windows, focused to drive higher penetration into the Islamic banking segment.

With increasing NPL trends creating a significant erosion to bank profits, the dependency on process efficiency to drive profitability is seen to become highly significant. The operational expenditure/interest income of most banks operate in the 35-40 per cent range, and banks with a higher operational expenditure are likely to drive cost effectiveness both at the branch and central operations to bring in efficiencies. Large banks are also making significant investments in digital technology and robotics to automate processes and drive efficiencies. The other consistent trend observed is in differentiating customer

experience, through innovation in customer facing processes, both at the branch and channel fulfilment.

The introduction of IFRS 9 in the UAE will affect the three main areas of asset classification, impairment and hedge accounting. The changes in asset classification driven through IFRS 9 is also likely to increase bank’s expected loss provision considerably. This would have a direct bearing on the drive for higher effectiveness of credit function, and the underwriting framework. The impairment experiences, particularly in the SME segment would also necessitate the need for a distinct credit policy framework focused on the SME portfolio, and the risk-based pricing models.

With the bottom-line growth coming under pressure, banks had to shift their focus on optimisation of staff costs in 2016, which were in the range of 65-75 per cent of total operating expenditure. Changes to the leadership and driving a leaner organisation structure, supported by a strong centralisation model may well be the theme for most of 2017.

Synergies driven through bank mergers would also augment this trend, well through 2017. The key to success would be to leverage technology to drive a leaner organisational model.

While US banks have been estimated to spend $143 per customer, the MENA equivalent is about $24. However, significant investments are made by banks to drive digital presence and provide an omni-channel experience to customers. While most banks have already invested in large core banking platforms, 2017 is expected to witness significant dollar spend to drive channel enhancement, branch automation, digital enablement and technology driving customer experience. Additionally, it is highly likely for to 2017 witness the entry of “digital only” in the UAE market.

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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

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(Photocredit: everything possible/Shutterstock.com)

LEGAL FOCUS

A new rule: digital payments and virtual currencies The Regulatory Framework for Stored Values and Electronic Payment Systems in a nutshell

T

he Central Bank of the UAE on 1 January 2017 issued the Regulatory Framework for Stored Values and Electronic Payment Systems. These regulations are aimed at facilitating the increased adoption of secure digital payments by introducing a mandatory licencing and related compliance regime for certain electronic payment service providers operating in the UAE. Digital payment service providers in the country must now comply with a range of new rules including those relating to licencing, data protection and outsourcing.

18 page 18-20 Legal Focus.indd 18

As global legal firm DLA Piper explained in a comprehensive commentary on the matter, the regulations are designed to create a safe and secure digital payment system in the UAE. Amongst other things, the guidelines establish a new licencing regime for digital payment service providers (PSPs). It regulates the protection of user data, including prohibition of storage of user data outside of the UAE. It also requires PSPs to enter into customer service agreements with every user of their service as well as create rules for the outsourcing of services by PSPs to third parties.

Organisations that are involved in digital payments are urged to study the regulations closely to determine the applicable compliance requirements and create and implement a suitable compliance programme. Based on DLA Piper’s commentary, the new regulations provide a one-year grace period for organisations that has been providing digital payment services in the UAE prior to the commencement of the new regulations to ensure they are fully compliant. Failure to do so will expose themselves to the risk of being ordered to cease provision of these services by the central bank. cont. on page 20

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LEGAL FOCUS

cont. from page 18

With the exception of commercial banks, all PSPs must apply for and obtain a licence covering one of the following PSP categories—retail PSP, micropayment PSP, government PSP, or non-issuing PSP. Commercial banks that wish to offer digital payment services need only obtain an authorisation from the Central Bank, rather than separately apply for a specific licence.

DLA Piper points out that the details of the application process for a licence has not yet been published. However, the projected timeframe for the Central Bank to respond is three months from receipt of the completed application.

In terms of data protection, PSPs must comply with strict rules regarding the storage of identification data and transaction records of users. These rules include the requirement to store and retain all user and transaction data exclusively in the UAE (excluding UAE financial free zones) for a period of five years from the date of the original transaction.

As for consumer service agreements, PSPs must enter into customer service agreements, either in paper or electronic form, with every user, and each agreement must meet a minimum set of content requirements including a privacy policy of the PSP. Similar to the data protection requirements, while PSPs may enter into outsourcing contracts with third parties, the outsourced services must only be carried out within the UAE (excluding UAE financial free zones).

Additionally, unless an exception applies, central bank approval is required three months before the implementation of any operational function outsourcing and a range of safeguards must be put in place depending on whether the outsourcing involves critical operational functions or material operational functions. Whether such approval can be obtained prior to the commencement of a procurement activity was not addressed in the regulation.

20 page 18-20 Legal Focus.indd 20

Payment Service Provider (PSP) Any institution licenced or authorised to provide digital payment services under this the Regulatory Framework for Stored Values and Electronic Payment Systems as per the following four types of PSPs. Retail PSP

Authorised commercial banks and other licenced PSPs offering retail, Government, and peer-to-peer digital payment services as well as money remittances

Micropayments PSP

PSPs offering micropayments solution facilitating digital payments targeting the unbanked and under-banked segments in the UAE

Government PSP

Federal and local Government statutory bodies offering Government digital payment services

Non-issuing PSP

Non-deposit taking and non-issuing institutions that offer retail, Government, and peer-to-peer digital payment services.

Source: The Regulatory Framework for Stored Values and Electronic Payment Systems by the Central Bank of the UAE.

One pertinent fact under the regulation is the explicit prohibition of virtual currencies. The regulation clearly states that all virtual currencies, and any virtual currency transactions, are prohibited. The legislation defined virtual currency as any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value. It does not include a digital unit that can be redeemed for goods, services and discounts as part of a user loyalty or rewards programme with the issuer and cannot be converted into a fiat or virtual currency.

In addition, the regulations also seek to establish a further category of service provider; namely, a Payment System Operator. Explaining this in a paper, leading multinational law firm, Dentons, elucidated that it is an entity that operates a fund transfer system or any other system that facilitates the circulation of digital money. This entity may apply for its payment system to become a ‘Designated Payment System’ (defined as one that is designated by the central bank as being ‘systemically important’).

While further detail on these ‘Designated Payment Systems’ seems to be pending by way of subsequent central bank instruments, according to Dentons, the key significance of it appears to rest in the payment settlement process mandated by the regulations. Under the regulations, all payment transactions shall be settled through a settlement institution—which is in turn defined as either a Designated Payment System by the Central Bank, or a commercial bank providing settlement services.

It should also be noted that the regulations set out a number of additional and quite comprehensive further obligations on PSPs that are clearly motivated by the central bank’s drive for effective consumer protection in the digital payment economy. Dentons opined that these include detailed user registration requirements, transaction and spending limits, PSP liability provisions, minimum prescribed terms for user contracts, technical security requirements, data privacy and protection controls as well as the above-mentioned requirements for effective all-around governance and compliance policies.

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

COVER INTERVIEW

Faisal Al Haimus, Chairman, Trade Bank of Iraq

22

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Making strides in Iraq and beyond In an exclusive interview with Banker Middle East, Faisal Al Haimus, Chairman at Trade Bank of Iraq provides an insight into the bank’s growth and its expansion plans for 2017

H

ow has Trade Bank of Iraq shaped the country’s financial landscape?

The Trade Bank of Iraq (TBI) was incorporated by the Iraqi Coalition Provisional Authority on 17 July 2003 as an independent Government entity to facilitate the import and export of goods to and from Iraq.

TBI was incorporated with an authorised capital of $100 million in July 2003. Paid-up capital increased to IQD 1.75 trillion ($1.5 billion) as at FYE 2015 by capitalisation of profits earned.

Since inception, the focus of the bank was on building the correspondent banks network and offer trade finance solutions to the public and private sectors. Today we are the leading bank in trade finance in Iraq and strive to give excellence in services to our clients through a 400 correspondent banking network worldwide.

How did the bank perform last year?

Overall, TBI’s performance for 2016 was good despite the economic and security challenges for Iraq. The bank’s operating income increased by six per cent in 2016 reaching $591 million compared to $559 million in 2015.

The increase in operating income was attained despite a decrease in assets of 15.7 per cent reaching $19.7 billion by end of 2016. cont. overleaf

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COVER INTERVIEW

cont. from page 23

The main factors of growth in our operating income are attributed to the increase in our fee and net interest income by 5.1 per cent and six per cent respectively.

However, our net profit has increased substantially due to better management of our lending book.

What is in the pipeline for 2017?

TBI’s product offering has spanned across retail, corporate and project finance along with Government enterprise services. Since I took office in June 2016, our focus has been the improvement of our financial performance, inducing a culture to change for the better to improve our business delivery model, to manage the spectrum of risk through adopting best in class practises, to capitalise on our strengths and consolidate our position as a market leader and increase our market shares in other segments of the business and invest in our human resources and systems.

We plan to expand our finance activities with more focus on the retail and corporate banking business by increasing our product offering and expanding our delivery channels through an expansion in our branch network domestically and overseas.

— Faisal Al Haimus, Chairman, Trade Bank of Iraq In 2017, we expect that the Government enterprise sector will remain as our main customer contribution accounting for approximately 70 per cent of the revenues, while the corporate and retail sectors are expected to contribute 20 per cent and 10 per cent respectively. We expect to launch at least five new retail products this year in addition to the introduction of priority banking. Moreover, while focusing on trade finance, our aim is to expand our market share in corporate finance in addition to serving the needs of the public sector in trade and project finance.

What kind of challenges do you currently face and do you see this persisting going into 2017?

The main challenge is finding and retaining talent. We do believe that our best asset is our human resources and due to the political and security circumstances that Iraq has undergone over the past two and a half decades, talent in the banking sector in Iraq has dwindled. Accordingly, we are revising our grading and pay scale to attract and retain human resources in addition to the establishment of TBI’s training centre to support our credit, risk and customer services culture.

TBI was incorporated with an authorised capital of

$100 million in 2003

Paid-up capital increased to

IQD 1.75 trillion ($1.5 billion) as at FYE 2015 by capitalisation of profits earned For 2016, TBI’s operating income increased by

6% $591 million $559 million reaching

compared to

recorded in 2015 An increase in operating income was attained despite a decrease of assets of

15.7% $19.7 billion to

at the end of last year

cont. on page 26

24

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COVER INTERVIEW

cont. from page 24

In 2017, we plan to keep an eye on the price of oil and its effect on the economic growth in Iraq as more than 80 per cent of the GDP is oil-based revenue. However, we believe the outlook is positive for the Iraqi economy based on better oil price forecasts and improved government spending for the reconstruction of Iraqi-liberated areas.

What are the bank’s areas of focus and what can the market expect from TBI in 2017?

2016 was the year of paving the path to transformation by adopting the best in class practices. We have revisited our vision and mission statements, and kick started an organisational culture and value system. We did an in-depth analysis of our environment and completion and prepared our strategy for the years 2017-2019. We have restructured our organisation in order to be more responsive to customer needs by introducing relationship management to serve our corporate and government clients. We also did a rebranding exercise reflecting the aspiration of the bank to induce change for the better.

In 2017, we expect that the government enterprise sector will remain as our main customer contribution accounting for approximately 70 per cent of the revenues, while the corporate and retail sectors are expected to contribute 20 per cent and 10 per cent respectively.

— Faisal Al Haimus, Chairman, Trade Bank of Iraq Many initiatives have commenced and are in different stages of completion. An example of this is the upgrade of our core banking system. The introduction of online banking, ISO 9001 certification of the letter of credit, guarantees and remittances departments, the upgrade of the Anti-Money Laundering system and the re-haul of human resources policies and grading systems.

Accordingly in 2017, we plan to expand our finance activities with more focus on the retail and corporate banking business by increasing our product offering and expanding our delivery channels through an expansion in our branch network domestically and overseas. This includes the introduction of mobile and internet banking services. Moreover, we are undertaking the exercise of the centralisation of our back-office functions to stream-line our business delivery process.

26

Faisal Al Haimus, Chairman of Trade Bank of Iraq with Ali Mohsen Ismail, Governor of the Central Bank of Iraq, at the reopening of the bank after it’s rebranding exercise.

What are the bank’s expansion plans both organically and inorganically?

We will continue to ensure our leadership position as the number one in trade finance institution in Iraq and to be the preferred partner in wholesale and retail banking. We are focusing our efforts on expanding our market share in the corporate sector and launching retail products.

Having an improved customer service as an objective, we have restructured our business delivery process by segmenting our customer base into sovereign, corporate and retail. Additionally, we have introduced relationship management to serve our corporate and government clients as well as introduced product management in retail banking.

We are growing our distribution channels through the expansion of our branch, ATM/CDM and point of sale networks. We will also introduce online and mobile banking to serve our customer segments. In addition to this, we also expect to launch a range of retail products in order to expand our retail loan portfolio.

What is your outlook on the financial sector in Iraq this year and over the short term?

The financial sector will continue to be dominated by government-owned banks and the sector will remain with high liquidity. We expect increased lending activity to the SME sector due to the initiative of the Central Bank of Iraq to guarantee/allocate approximately $5 billion to that sector. Due to the positive forecasted economic growth of the Iraqi economy, we also foresee consolidated balance sheets of the Iraqi banks to increase.

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COUNTRY SPOTLIGHT

Getting back on track Amidst many difficulties Saudi Arabia may be facing, on the back of the Kingdom’s reforms, the economy is resilient enough to weather the storm

S

audi Arabia will experience an interesting year. Following the announcement of the Government’s Vision 2030 and its National Transformation Programme, 2017 is the year to see the implementation and effectiveness of these reforms.

ECONOMIC LANDSCAPE

The IMF in its recent World Economic Outlook Update reduced its growth forecast for Saudi Arabia in 2017 from two per cent previously to 0.4 per cent.

28

The main reason for this change in outlook is the oil GDP, where, because of the OPEC Agreement, and the cut in oil output, the IMF assumed that oil GDP will somewhat contract this year.

“The non-oil sector we expect to grow. We downgraded that marginally, but we do expect a recovery in non-oil growth—a modest recovery in non-oil growth this year. That is because we’ve seen, confidence rebound a little bit in recent months after the sovereign bond issue, the government has been now paying the delayed payments, so

that has been positive for confidence.

We are also expecting a little bit less of a fiscal consolidation (phonetic) this year, than over the previous two years. That should also be supportive of the non-oil growth,” explained Tim Callen, Assistant Director and Mission Chief for Saudi Arabia at the IMF in a recent press conference on the economic developments in the Kingdom.

The Executive Board of the IMF, in its latest consultation report with Saudi Arabia, conducted in July 2016,

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noted that bank deposits in the country have declined, but growth of credit to the private sector remains strong.

Capital buffers are high, NPLs low, and banks are well provisioned against loan losses. Based on current policies, the fiscal deficit was projected to narrow to 13 per cent of GDP in 2016. Non-oil revenues were expected to increase, while spending restraint, particularly on the capital side, will result in a substantial reduction in expenditure.

The fiscal deficit is expected to be financed through a mix of deposit drawdown and domestic and international borrowing. The current account deficit is projected to narrow to 6.4 per cent of GDP in 2016 and then move close to balance by 2021 as oil prices partial recover. SAMA’s net foreign assets are expected to fall further in 2016, but the pace of decline will slow over the medium term.

On the back of various economic and fiscal reforms, Saudi Arabia could possibly be upgraded to emerging market status by MSCI. The index provider said that the Capital Market Authority’s recent reforms made a significant contribution towards bringing the Saudi equity market closer to emerging market accessibility standards. These included the move towards T+2 settlement (expected to be implemented during the second quarter of 2017); regulations and procedures surrounding adoption of a Delivery versus Payment (DVP) system including the segregation of custody and settlement; and easing of the Qualifying Foreign Investor (QFI) restrictions.

MSCI indicated that there is a possibility of the MSCI Saudi Arabia Index being part of the watch list for inclusion in the MSCI Emerging Markets Index as part of the upcoming classification cycle that will be launched in June 2017. This upgrade—if it materialises—could drive significant returns over the subsequent two years.

Forecasts predict Saudi Arabia’s GDP to expand

0.4

%

and the Kingdom to experience a budget deficit of

$85 billion in 2017

FISCAL CHALLENGES

Recent forecasts have predicted a Saudi budget deficit of $85 billion in 2017, compared to $107.5 billion in 2016, with oil prices rising to $57/barrel. The macro environment in Saudi Arabia is believed to remain weak, according to Credit Suisse in a recent market investment report. Despite being one of the worst performing markets globally, earnings downgrades have kept valuations from becoming outright cheap. Downside risks to growth remain due to continued pressure on government spending, potential for further subsidy reforms and continued weakness in consumer spending.

including continued gradual adjustment of energy prices with compensation for lower-income households, introduction of a VAT and excise taxes, containment of the government wage bill, and improved public investment management and spending efficiency.

The IMF also suggested the development of a medium-term fiscal framework and strengthening the annual budget process, with better integration of the Public Investment Fund and Aramco into the budget.

It also encouraged the authorities to take an integrated asset-liability management approach to financing the fiscal deficit. Additionally the increased role of the private sector in the economy through privatisation and public-private partnerships are expected to improve the business environment, develop local capital markets, encourage FDI, and support SMEs. Continued labour market and education reforms are also needed to encourage private sector employment of Saudi nationals and increase labour force participation of women.

Concerns about the Saudi Arabian riyal devaluation is said to be one that is misplaced. Credit Suisse in its report suggested that the risk devaluation is negligible. The political and economic costs are far too high for the Kingdom—a devalued riyal

The non-oil sector we expect to grow, we downgraded that marginally, but we do expect a recovery in non-oil growth—a modest recovery in non-oil growth this year.

— Tim Callen, Assistant Director and Mission Chief for Saudi Arabia, IMF Saudi Arabia’s fiscal and current account balances have moved into deficit and growth is starting to slow. IMF highlighted the need for a gradual but sizable and sustained fiscal consolidation as well as balancing the budget over the medium term.

Expenditure and revenue reforms,

would certainly reduce fiscal deficit, but at the cost of significantly higher imported inflation. A devaluation could also destabilise the financial framework of the country (and by extension, of the broader Gulf region) and, in a worst case scenario, it could trigger significant capital flight. cont. overleaf

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COUNTRY SPOTLIGHT

cont. from page 29

10

10

5

8

0

6

-5

4

-10

2

-15

0

-20

-2

Q1 2011

Q1 2012

Q1 2013

Q1 2014

Fiscal deficit (l.h.s.)

Q1 2015

Q1 2016

Q1 2017e

Real non-oil GDP growth (r.h.s.)

Source: Bloomberg, International Institute of Finance, Credit Suisse / IDC

Credit to the construction sector has outpaced most other industries Bank credit % GDP by sector (constant prices) 140% 120% 100%

90%

83%

80% 70% 60%

72%

68%

69%

2013

2014

40% 20% 0%

2011

2012 Construction Commerce

2015

Manufacturing Electricity, Gas, Water & Agriculture

H1 2016*

Mining & Quarrying Transport & Communication

Source: SAMA, General Authority for Statistics

*GDP as of June 2016 calculated over the last 12 months.

Excess liquidity in banking sector

Jan-16

Sep-15

May-15

Jan-15

Sep-14

May-14

Jan-14

Sep-13

May-13

Jan-13

Sep-12

May-12

Jan-12

Sep-11

Jan-11

18 16 14 12 10 8 6 4 2 0

May-11

(Per cent of bank assets)

Sep-10

Reforms that have been carried out have assisted in strengthening the financial system, and the banking sector is well positioned to weather lower oil prices and slower growth, according to the IMF. Authorities are urged to continue to closely monitor credit quality, strengthen the macroprudential framework, and finalise the framework for bank resolution and liquidity provision.

Nevertheless, this position may be compromised due to the stress in the Saudi construction sector which could lead to rising problem loans and higher provisioning costs for banks in the Kingdom. Moody’s in a commentary on the subject, explained that the decision of the Saudi government to rein in fiscal deficits in a lower oil price environment has resulted in a significant contraction in capital expenditure in the Kingdom.

% YoY 12

% of GDP 15

Jan-10

SAUDI BANKS

Real non-oil GDP vs. fiscal deficit

May-10

Callen highlighted that the pegs remain appropriate for the GCC countries. The pegs give confidence to investors, both domestic and foreign. It also gives credibility to monetary policy by being tied to the dollar. Taking a look at the structure of most Gulf economies, their exports are predominantly oil, which is priced in US dollars. Therefore the peg remains appropriate for those and a number of other reasons.

Saudi Arabia has enough tools at its disposal to avoid any devaluation in the foreseeable future, notes Credit Suisse. Foreign exchange reserves are 15 per cent lower YoY and 23 per cent lower than their mid-2014 peak, but at about $550 billion, the reserves are still close to 100 per cent of GDP and provide adequate cushion for defending the peg. This number does not include Saudi Arabia’s holdings of US treasuries totalling $96 billion as at October 2016, down from its recent peak of $124 billion in January 2016.

Source: Haver; Reuters; and IMF staff calculations

cont. on page 32

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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 KSA

Nominations will be open shortly for the Banker Middle East Product Awards 2017 in KSA. 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 STARTS ~ON~ 23 FEBRUARY 2017

For more information, contact: events@cpifinancial.net Tel: +971 (0)4 391 4682 Fax: +971 (0)4 390 9576

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COUNTRY SPOTLIGHT

cont. from page 30

This has slowed economic activity, particularly in the construction sector.

A continued deterioration of government accounts has led to a broad reassessment of the pipeline of government projects, which has resulted in a mix of project cancellations, extensions of timelines and delayed payments to contractors while demand for credit from the construction sector rose. These dynamics were said to have fuelled newspaper headlines amid signs of growing financial pressure in the industry, including large-scale redundancy plans at construction conglomerates such as Saudi Oger, and Saudi Bin Laden.

Bank lending to the sector has increased by 19.7 per cent YoY as of June 2016, well above the total credit trend of 8.9 per cent over the same period.

Banks’ exposure to the building and construction sector, as reported by SAMA, amounted to SAR 113 billion as of June 2016, or 7.9 per cent of their total loans and advances. This represented a 19.7 per cent increase YoY, well above the 8.9 per cent increase in total bank credit over the same period. This strong growth was attributed primarily to increasing levels of receivables in 2015 and in the first half of 2016, which pressured cash flows of corporates in the sector.

As a result, the construction sector’s credit-to-GDP ratio increased to around 90 per cent as of June 2016, up from 69 per cent from 2014. The trend is strongly negative, as rising levels of indebtedness heighten the sector’s vulnerability to liquidity risks and increases in financing costs.

Moody’s estimated total on and off balance sheet credit exposure to the building and construction sector to represent around 58 per cent of banks’ tangible common equity. This sizeable exposure, including some

32

Loan loss reserves at Saudi banks are strong GCC peer comparison - loan loss reserves % problem loans 180% 160% 140% 120% 100% 80% 60% 40% 20% 0%

2012

2013

Saudi Arabia

2014

UAE

2015

Bahrain

Qatar

Oman

Kuwait

Source: Rated bank’s financials, Central Banks, Moody’s Estimates

Saudi bank’s capital compares - loan loss reserves % problem loans GCC peer comparison - tangible common equity % risk weighted assets 2012

2013

2014

2015

25% 20% 15% 10% 5% 0%

Saudi Arabia

UAE

Bahrain

Qatar

Oman

Kuwait

Source: Rated bank’s financials, Central Banks, Moody’s Estimates

clusters of loans to large contractors and material related off balancesheet exposures, leaves the banks susceptible to the growing challenges in the sector. While Saudi banks are expected to face increased problem loans and higher provisioning costs over the next 12 months, Moody’s expect the magnitude of the asset quality deterioration to be within the banks’ profit margins. Capital buffers are believed to be robust and can absorb material stress from downside scenarios in the building and construction sector.

In spite these alarming findings, last September SAMA announced that it would provide Saudi banks with about SAR 20 billion ($5.3 billion) of time deposits on behalf of government agencies, and introduce seven-day and 28-day repurchase agreements. These moves follow prior deposit injections of approximately SAR 12 billion since the start of 2016 and are credit positive (according to Moody’s) for Saudi Arabia’s banks, which continue to face pronounced liquidity pressures as a result of recent deposit outflows, a consequence of depressed oil prices.

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BITCOIN

Is bitcoin the new safe haven for investors?

Looking at how bitcoin has been well-received in various markets including the UAE, Mark Leigh, Chief Operating Officer at Xtrade advocates that it is an investment that is worth contemplating

D

uring 2016, bitcoin investments realised unprecedented success earning superlative returns at well over 110 per cent, overwhelmingly surpassing all other publicly traded asset classes. The total market capitalisation was valued at more than $15 billion which now exceeds the 2013 peak and is at a record valuation in relation to the pound and euro, encouraging investors to explore this unconventional savings channel especially during these times of escalating geopolitical uncertainty.

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Mark Leigh

Bitcoin is a form of digital currency that is created and held electronically.

No one controls it and they are not printed like dollars, euros, dirhams and riyals. They are produced by people— and businesses—running computers all around the world, using software to solve mathematical problems.

Furthermore, it is the first example of a rapidly growing category of money known as cryptocurrency and can be used to make electronic purchases and can also be traded digitally via online trading platforms, just like other currencies. cont. on page 36

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BITCOIN

cont. from page 34

Investments in bitcoin is a well-positioned response to challenge the governing elites and their ‘mainstream’ financial system. As it is traded in cyberspace and mined by code-breaking computers, it is further gaining popularity among some investors as an alternative safe-haven primarily because it exists outside government regulations and is less subject to monetary policy.

— Mark Leigh, Chief Operating Officer at Xtrade What makes it unique in relation to conventional money is that it is decentralised, meaning that no single institution controls the bitcoin network.

One of the key reasons as to why investments in bitcoin surged during 2016 was nervous Chinese investors responding to arbitrary Beijing authorities, whose latest tirade is against insurers’ stock purchases and leveraged buyouts. They were also concerned about government and corporate bond selloffs, particularly at the short-end of the curve, likely reflecting Wealth Management Product redemptions as well as the tightening of capital controls of the yuan that has squeezed renminbi availability in Hong Kong, driving up the three-month yuan HIBOR rate.

In addition, Chinese investors are also concerned about the continued decline of the yuan resulting from the usual data transparency, state-inspired asset bubbles, as well as potential interest rate increases, making bitcoin an interesting investment hedge for 2017.

From a global perspective, the unsettling political, security and economic events of late 2016 such as the volatility of the Euro has motivated the replacement of centrist leaders with populist xenophobes and manifested itself in the inability of financial institutions and governments to cope with successive crises.

Furthermore, there is evidence of inflation rising from around the world.

Price pressure is intensifying in the Euro zone, with, for example, manufacturing input costs rising at a 56-month record

36 page 34-36 Bitcoin.indd 36

In 2016 bitcoin investments earned returns over

110%

surpassing all other publicly traded asset classes The total market capitalisation was valued at more than

$15 billion One of the key reasons as to why investments in bitcoin surged during 2016 was nervous Chinese investors responding to arbitrary Beijing authorities, whose latest tirade is against insurers’ stock purchases and leveraged buyouts.

— Mark Leigh in November. Similarly, the rise in UK businesses’ costs over the past two months has been the steepest in over five-and-a-half years.

Investments in bitcoin is a wellpositioned response to challenge the governing elites and their ‘mainstream’ financial system.

As it is traded in cyberspace and mined by code-breaking computers, it is further gaining popularity among some investors as an alternative safehaven primarily because it exists outside government regulations and is less subject to monetary policy.

Recently, its natural safe-haven competitor gold has staggered for reasons not central in bitcoin valuation—such as rising USD and US interest rates.

Reputable organisations are also looking to add a digital offering to their portfolio. At the end of 2016, the Royal Mint and CME Group announced a gold and blockchain ‘solution’. The two parties will collaborate on a digital gold asset called Royal Mint Gold (RMG) and will ‘transform the way traders and investors trade, execute and settle gold’.

For traders, there is still uncertainty when it comes down to the legitimacy of bitcoin. However, companies such as Tesla Motors, Virgin Galactic, Dell as well as the Pizza Guys Restaurant in Dubai, UAE, are already accepting bitcoins as a form of payment and in the future, we would most likely see more global and local companies adopt this payment method.

Will bitcoin be a safe-haven for investors? Only time will tell. However given the direction it is taking, the fast paced adoption by world renowned organisations, and the rapid shift in consumer demand to use digital forms of payments as opposed to traditional paper currency, one can certainly state that at this moment in time, it is an investment that is worth contemplating.

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THE BUSINESS OF BANKING Banker Middle East is the MENA region’s most prestigious financial title. Read by senior bankers & financiers across the Middle East, for more than a decade it has been the most informative source of news, developments and strategic thought from within the financial community.

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ADVERTORIAL

Invest Invest in in Cyprus Cyprus

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AsAs a safe, a safe, onon Money Money Laundering Laundering (FATF), (FATF), OECD, OECD, FATCA, FATCA, thethe Financial Financial transparent, transparent, modern modern business business centre, centre, thethe island island is an is an ideal ideal Stability Stability Forum Forum laws laws and and regulations regulations and and EU EU AML AML directives. directives. investment investment gateway gateway to to thethe European European Union, Union, as as well well as as a portal a portal forfor investment investment outside outside thethe EU,EU, particularly particularly into into thethe Middle Middle Human Human Talent Talent && Level Level ofof Services Services East, East, India India and and China.

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Human Human talent, talent, complemented complemented byby a broad a broad range range of of high high quality quality professional professional services, services, is one is one of of Cyprus’ Cyprus’ most most compelling compelling Tax Tax System System advantages. advantages.

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Low Low crime crime levels, levels, centuries centuries of of artart and and ofof the the European European Monetary Monetary Union Union culture, culture, and and excellent excellent gastronomy gastronomy all all contribute contribute to to a high a high AsAs a member a member of of thethe European European Union Union since since 2004 2004 and and thethe quality quality of of life. life.

Safety Safety is amongst is amongst thethe biggest biggest advantages advantages of of European European Monetary Monetary Union Union since since 2008, 2008, Cyprus Cyprus is committed is committed Cyprus, Cyprus, which which hashas been been ranked ranked thethe safest safest small small country country in in quality, quality, efficiency efficiency and and transparency transparency in transactions. in transactions.

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Cyprus combines ease of doing business with a fully transparent and stable regulatory framework.

Among the many tools used to ensure a high level of compliance and transparency are the following: • The Law Regulating Companies Providing Administrative Services and Related Matters, including a public register of licensed practitioners, a mandatory register for trusts and licensing requirements for all administrative service providers (ASPs), such as fiduciary agents • For auditors, the competent authority for all measures to prevent money-laundering and terrorist financing is the Institute of Certified Public Accountants of Cyprus (ICPAC).

For lawyers it is the Cyprus Bar Association, for banks and credit institutions it is the Central Bank of Cyprus, while for other providers it is the recently expanded Cyprus Securities and Exchange Commission (CySEC). All the authorities meet a number of times a year to share observations and best practices • Central to the new legal framework is the “risk-based approach”, with rigorous know your client (KYC) and due diligence procedures, effective record-keeping and robust channels for reporting suspicious activities. The competent authorities monitor, review and conduct onsite visits to ensure that the procedures are effective

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From January 2017 Cyprus will be one of the “early adopters” of the Common Reporting Standard (CRS)—the first group of countries to implement the standard on automatic exchange of financial information.

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page 38-39 Advertorial.indd 39

16/02/2017 10:04

(Photocredit: capitanoseye/Shutterstock.com)

IN-DEPTH

The state of MENA In an exclusive interview on the sidelines of the World Government Summit 2017, Nabilah Annuar sat down with Dimitris Tsitsiragos, Vice President for New Business at the International Finance Corporation to discuss perception and realities of this region’s economies

H

ow would you describe the business and financial landscape in MENA?

This is a region that has gone through a lot of turmoil in the last five years. Geopolitical risks and perception of risks remain high in the region. Foreign direct investment has been decreasing successively since 2011. Growth has slowed down largely due to the decline in commodity and oil prices as well as the effects of the transition from the Arab Spring.

Today in the low price environment, governments, especially in the GCC and other neighbouring oil exporting countries, are fiscally constrained.

However, we see this in many ways as an opportunity for governments to begin reforms. A number of them have done so, tackling issues such as subsidies, which is the right time to do—in a low price environment.

40 page 40-41 In Depth.indd 40

Oil importers are doing better—for example in Egypt the government has taken bold steps on the reform front.

These came at a high political cost but the implementation can lead to strong growth and equitable growth. Before 2010 Egypt had high rates of growth but it may aspects it was not seen as an inclusive growth.

We anticipate growth in MENA this year at about 3.1 per cent, higher than last year which was about 2.6 per cent. If you look at the market and the untapped potential, it’s a large market. There is a young and growing population. The interesting aspect in many parts of the region is that the government is usually seen as the employer of choice and people see the governments as an engine of growth. However, based on experience and what we’ve seen in other parts of the world, the private sector itself is the engine of growth and the government is the driver.

MENA to experience a growth of

3.1% 2.6%

compared to last year’s

Therefore, a partnership needs to be created between these two segments and it is up to the government to create the right environment for the private sector to grow and prosper.

We think that 90 per cent of the jobs around the world are created by the private sector. So what you need is a good business environment for the

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private sector to grow. In a fiscally constrained environment, the private sectors can step in and fill a number of government needs.

What economic trends in do you see developing amongst MENA countries?

Apart from the implementation of structural reforms, we also see a movement across the region for energy efficiency and renewables.

This region has some of the highest rates of energy consumption per capita in the world. Governments today are looking to deal with this challenge and if you look at what’s happening in renewables, people see this region as an oil exporter and associate it with fossil fuels. This way they miss all the positive activity and development in renewable energy. The perception and reality of this region, in many ways, is very different.

For example, Jordan has done a very good job in attracting renewable energy investments and diversifying its energy source base. The UAE—they are leaders in renewable energy in the GCC. Saudi Arabia too is looking to promote and develop its renewable energy sector, and so is Egypt. You see a lot of things actually changing in the region. If you put away perceptions of geopolitical and political risks, the economic trends can be positive for the region.

What are the common challenges here?

One of the challenges in MENA is regional integration. We support regional champions and in MENA we found that there are a number of world-class companies that are equally competitive with a global presence. We are working with them to take them not only to other parts of MENA but also to places like Africa, East Asia and Latin America. This is one of our key objectives in this region. We think that these regional

Dimitris Tsitsiragos

increasing population. Additionally, an issue linked to the need to enhance growth is education. We see a need for partnerships between governments, the private sector and education providers on developing a curriculum that feeds the needs of modern industries. With disruptive technologies things are changing very fast and the children that are now in school may work 20 years down the road in jobs that do not even exist today.

Moreover, bringing more women into the workforce will stimulate the economy. They will help create growth and increase productivity. Today in the region, you have more women going into universities than men. So if more women are invited to join the workforce, they can make a huge difference.

What are the opportunities?

People see this region as an oil exporter and associate them with fossil fuels. This way they miss all the positive activity and development in renewable energy.

— Dimitris Tsitsiragos

champions can promote regional integration, assist in linking the oil exporters and importers, help bring standards and give a different name to the region in the world.

Another main challenge is the business environment here.

Governments create an environment that generates opportunities for the private sector. In relation to this, a concern for us in the region is population growth—there is need to create jobs to meet the demand of an

This region is doing very well in the services space. I see potential in areas such as healthcare, education, tourism, FMCG, pharmaceuticals and in infrastructure such as power generation and logistics. These are areas of opportunities in the region where the private sector can step in. Financial inclusion is also a big opportunity. Only eight per cent of bank lending goes to SMEs and only 20 per cent of SMEs have access to finance—from here you can see the market potential.

Another opportunity is in the entrepreneurship and IT space across all sectors. We see a strong entrepreneurial culture here and this is something that should be leveraged. Additionally we see a lot of activity in the IT space (fintechs included) and with the high rate of mobile penetration in the region this is an area to lookout for. Companies in this market segment have unique companies and interesting models that are regional but in some ways they are global in application. It has a lot of potential for growth and needs to be nurtured.

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(Photocredit: SWEvil/Shutterstock.com)

TECH FOCUS

Are regional banks immune to cyberattacks?

Nader Henein, Regional Director, Advanced Security Solutions—Advisory Division, BlackBerry discusses potential prevention mechanisms to enhance security in financial transactions

T

Nader Henein

ake a stroll through a castle or any ancient fortification and you would probably get lost in a matter of minutes.

This architectural feature was not a result of bad design; on the contrary, it was a deliberate attempt to confuse and isolate attackers, steering them away from valuable areas. This model became so effective that it is used to this day within the government and private sector to keep potential attackers at bay. Something that is extremely important within an increasingly connected world with complex networks.

The financial services sector, especially retail banks, is a prime target for cyberattacks these days, with the migration of wealth from brick and mortar to zeros and ones. cont. on page 44

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TECH FOCUS

cont. from page 42

Cyberrisks in the financial services space are quite significant with the sector now ranking third on the list of industries most vulnerable to cyberattacks. This is not surprising considering some of the recent high profile attacks, the Bangladesh Central Bank attack last year saw attackers syphoning $81 million in just a matter of hours.

Banks in the Middle East are by no means immune to cyberrisk, geographical borders are not relevant.

In fact, given the concentration of wealth, banks in the region make very attractive targets and this has not gone unnoticed. If you speak to any of the regional banking security officers, they will tell you that they are under constant attack—from the relatively low-tech social engineering attempts, all the way to the use of zero day vulnerabilities (i.e. previously unknown weaknesses in software that are used by attackers to gain access to a secure network).

So what is the solution—do we go back to the barter system, or maybe keep money under a loose tile in the bedroom? Securing our digital wealth is of course possible but it requires more than just deploying standalone, bolt-on solutions and infrastructure in your network which seems to be the direction of choice today.

The first lesson we learn in security is that aiming to achieve 100 per cent is a fool’s errand, attackers will still get in. But once they are in your network, what attackers usually look for is fairly rudimentary. Nine times out of 10 they are trying to find something of value and the easiest place to look is in your database. These structured repositories of data look like large, interconnected excel spreadsheets, with neatly organised records of user information, details and transactions, these are quite valuable to an attacker who can easily and anonymously resell this data in a matter of hours.

44 page 42-44 Tech Focus.indd 44

A further critical catalyst to securing sensitive financial information is a bank’s ability to implement a secure file-management platform through a centralised file access system that helps them eliminate data loss whilst enabling faster and secure file sharing.

— Nader Henein, Regional Director, Advanced Security Solutions—Advisory Division, BlackBerry

Take a credit card transaction, for example. The necessary information required to do such transactions include a name, card number, CVV, expiry date and address. Imagine an Excel spreadsheet stored in the bank with customer credit card records saved in the same place.

This valuable information is a very attractive proposition for cyberattackers. But let’s now separate this information into five different spreadsheets, each with one of the five pieces of credit card information mentioned. The logic of putting them all together is in the software that fetches those records to accomplish a transaction. So, if an attacker was able to steal all of this information, he would have a list of names that he would not be able to connect to five other lists (addresses, cc numbers, CVV numbers and expiry dates) thereby rendering the information useless to the attacker and harmless to the bank, its clients and its reputation.

This practise is referred to as ‘sharding’, which breaks a record into shards and stores them in separate locations with the logic of putting them together within the bank’s software layer. This means that an attacker would have to steal and recreate a unique working banking system in their environment to benefit from the heist.

A further critical catalyst to securing sensitive financial information is a

bank’s ability to implement a secure file-management platform through a centralised file access system that helps them eliminate data loss whilst enabling faster and secure file sharing.

These are just two of the many techniques employed to safe guard a financial institution.

Aiming to be at the forefront of securing enterprises, equipping businesses, ranging from government to healthcare to finance, BlackBerry has acquired UK cybersecurity services group, Encription Ltd. Following this acquisition BlackBerry formed a new division—Cybersecurity Services Group—which helps enterprises identify, mitigate, and defend against every digital risk facing the organisation.

Considering the huge push for digitisation that is taking place in the Middle East, the region is on the cusp of a digital explosion taking place over a significantly large canvas, but the risks of the modern enterprise landscape cannot be ignored.

It is BlackBerry’s position that the region should perhaps consider forming an alliance similar to the cybersecurity alliances seen in the US and Europe by some of the leading banks. For regional financial institutions seeking a more comprehensive and calculative approach, consulting cybersecurity experts is also the best option that will deliver this result.

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TECHNOLOGY

Retaining millennials Alexander Rauser, Chief Executive Officer at Prototype discusses why banks are losing out on opportunities to keep millennial customers, and offers some best practices to help increase customer loyalty Retaining customers in the banking industry is a tricky business. Even though customers would initially prefer to stay with their current provider, 46 per cent of millennials will look for companies and services that better meet their needs—that is a large percentage of millennials that have the potential to jump ship!

Why are banks losing millennial customers?

Banks are great at selling their services and convincing new customers to sign up, but they lack in managing and nurturing existing customers. Some areas of the financial industry are worse at this than others, such as credit card and mortgage companies, however there is room for improvement in all areas of banking services.

What tactics can banks employ to retain millennials?

PERSONALISATION

You know that feeling when you bump into someone you have met several times and they still fail to acknowledge who you are, it’s the same feeling customers get each time their bank asks if they are an existing customer. Banks need to offer a much more personalised experience for their customers. If a banking customer receives a seamless experience across service lines, devices and tools, they will be stretched to find a reason to leave, and this is what banks should be striving for to keep their millennial customers.

Personalisation can be difficult for banks to deliver because they can be stuck in regulations and their own bureaucracies that block them from moving forward. However, to keep up with millennials, banks need to break through these boundaries and switch to a customer centric approach. One way banks can do this is via nurturing existing customers with content personalisation and financial advice that is relevant to where they are in their journey. This shows that the bank has a genuine interest and commitment to the consumer’s well-being. For example, using the data available, banks can offer advice to a new family trying to stay afloat, to students getting through college or the young couple who just bought their first home.

CONSISTENCY

Banks need to offer a consistent experience across all their service lines. Currently, many banks offer several services that do not appear to be from the same bank. Consistency will offer several benefits in terms of building loyalty. Firstly, if the experience feels familiar, millennial customers will gain trust for the bank and choose to return to the same bank when they need a new service. Customers will feel more confident in the process of applying for a new service because of its familiarity so that straying to a competing bank will be less likely.

Offer a fast mobile experience that doesn’t break—55 per cent of millennials rank technology failures or the inability to carry out a transaction online in their top three most frustrating banking experiences.

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HUMAN CAPITAL

(Photocredit: janews/Shutterstock.com)

Benchmarking human resources in finance Talal Bayaa, Chief Executive Officer and co-founder of Bayzat, discusses the advantages of automation in human resources for financial institutions

H

uman resources (HR) departments in financial institutions face significant challenges as their roles continue to become broader and more strategic. In today’s challenging economy, the human resource departments in banking and financial services need to be more efficient than ever to respond to the constantly changing internal and external pressures. These type pressures often challenge their ability to achieve operational excellence, improve work effectiveness, and capitalise on the growth of emerging markets. Almost every financial institution and bank is involved in various operations and requires a highly effective team and appropriate manpower to run the show. Corporate goals are translated into viable realities and profits only when staff plays an active role in achieving the desired results.

Talal Bayaa

48 page 48-50 Human Capital.indd 48

More than

50% of the human resources department’s time is spent processing employee information and answering questions

Automation is a new category of programming that is widely being adopted by financial institutions with time savings reported of up to 50 per cent in select back office processes.

For instance, let’s look at the banking industry where process automation could transform the way business is done. A study conducted by Bain and Company reported that banking cont. on page 50

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HUMAN CAPITAL

cont. from page 48

Studies show that HR automation results in significant time efficiencies and cost-reductions. The right automation tools can help reduce time spent on HR administration by 50 per cent and save up to 40 per cent in administrative cost savings.

— Talal Bayaa, Chief Executive Officer and co-founder, Bayzat customers submit only 14 per cent of loan applications through digital channels. And, on average, banks only handle seven per cent of products digitally end-to-end.

USING HR AUTOMATION TO BOOST BOTTOM LINE

Businesses today are realigning the role of HR, so they can best manage and grow their company profitably and cost effectively.

Despite the inefficiencies, many financial institutions continue to follow traditional paper-based HR processes; while some companies outsource HR functions, so that internal resources can allocate more time on strategic issues on how to grow the company. Banking executives need to be aware of how much time is spent acquiring new talent. They have to ensure that current HR service delivery model aligns with the company’s strategic goal and revenues sources; while making sure that employee benefit costs compare with other institutions in the same industry.

Managing the employment of staff, monitoring their progress, handling payroll, and employee benefits are a few responsibilities that fall under the role of a HR manager.

The routine administration involved in the day-to-day HR operations drains time and resources. According to a recent research report published by Ed Lawler and John Boudreau from the Centre of Effective Organisations, more than 50 per cent of the human

50 page 48-50 Human Capital.indd 50

resources department’s time is spent processing employee information and answering questions.

To help make their job easier, banks and financial institutions across the world are investing in human resources technology—software programmes that will allow automation to occur. While it might seem like an expensive proposition, the truth is that automating certain tasks has a number of benefits that can ultimately boost an organisation’s bottom line.

DOING MORE FOR LESS WITH HR TECHNOLOGY TOOLS

The financial services and banking industry has undergone significant change over the last decade, and today, HR automation is at the forefront of this change. It is the first step to the process of transitioning an organisation’s onerous, timeconsuming paper-based HR processes to a streamlined online system.

The financial services industry is perhaps the industry with the highest potential for process automation. With efficiency and competitiveness handin-hand and customer service as a bi-product of this, automation can significantly lower costs and increase overall resource efficiencies.

Financial institutions in the UAE are increasingly embracing automation tools and self-service to focus on their core competencies instead of spending valuable time on administrative paperwork and data management hassles. Studies show that HR

automation results in significant time efficiencies and cost-reductions. The right automation tools can help reduce time spent on HR administration by 50 per cent and save up to 40 per cent in administrative cost savings (according to a report by Sage).

Within years the UAE has turned into a regional financial hub. The financial services industry in the UAE is moving from the traditional, paper-based methods to a more secure HR management system that will provide a high return on investment.

With the technology integrated in the platform, data entry becomes effortless, allowing HR managers to drag and drop employee documents as it extracts, secures and stores all relevant employee data from hard copies such as passports and IDs. Furthermore, all data will be backed up in cloud servers, ensuring that data is securely stored. With automation, the rate of error also drops, avoiding any issues that may arise with manual human involvement.

Once the digital directory of employee records is created, any paper or spreadhseet documentation will no longer be needed. By empowering employees with the right tools and putting appropriate levels of information directly in the hands of those who need it most, companies are able to foster better relationships with their workers as well. This in itself can have a significant impact on a business bottom line and can bring new levels of success.

The next phase of HR and workplace automation in banks and financial institutions will be mainly around optimisation and digitisation.

The most effective and influential leaders will be the ones who can make existing processes more efficient while discovering ways to use technology to unlock the true value of current resources.

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EVENTS

SWIFT Business Forum UAE 2016, Abu Dhabi SWIFT held an event to discuss some the challenges facing the UAE banking and finance industry

“T

he impact of de-risking from a whole country in the way it is done at the moment will negatively affect global trade”—Osama Al Rahman, CEO of Alfardan Exchange and Chairman of FERG. SWIFT held its first Business Forum UAE in Abu Dhabi in December 2016.

The event brought together over 160 senior representatives from the UAE’s banking and finance sector to discuss the challenges facing institutions from cyber threats, de-risking and compliance.

Held under the theme of “Building for the future: regulation, innovation and the transformation of banking”, the event examined what the future of banking holds in the context of a changing regulatory environment coupled with increasingly fast technological developments.

The CEO of Alfardan Exchange and Chairman of FERG (Foreign Exchange and Remittance Group), Osama Al Rahman, gave the keynote speech.

He emphasised the need to mititage the impact of de-risking by financial institutions. More and more banks are losing access to international financial markets as banks around the world are reducing their correspondent banking relationships, mainly in perceived highrisk countries such as the UAE. “De-risking has affected many regional banks and financial institutions in the Middle East,” he said. “While regulators in mature markets encourage

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The first panel of the event focused on the culture of compliance the challenges of de-risking.

banks to look at risk management at the level of the financial institutions, correspondent banks are applying de-risking to an entire country or even region.”

“The impact of de-risking from a whole country in the way it is done at the moment will negatively affect global trade,” continued Al Rahma. “SWIFT, a non-profit banking cooperative that is developing sector standards, is supporting the financial community in dealing with the challenge of de-risking in a more realistic and responsible way. It is helping financial institutions become more transparent and giving

them the tools and systems to assist them in meeting their regulatory and compliance requirements.”

The first panel held at the event took an even closer look at the consequences behind de-risking for the region. Various factors were highlighted as leading to de-risking by Nicholas Willard, Head of Compliance Solutions EMEA for SWIFT. “Banks in the region are de-risking due to high costs as a result of increased regulation but also lack of transparency in terms of financial crime compliance.”

Meanwhile, Waheed Rathore, Chief Compliance Officer, ADCB,

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said that whilst banks have always been in the business of taking risk and de-risking, de-risking is now occurring due to nonfinancial reasons. “It is about the number of questions we need to answer about each customer. Banks constantly have to defend their on-boarding decision with visits, due diligence and monitoring, which means capital and resources need to be allocated. De-risking is now taking place due to changes in regulation and in risk appetite.”

systems are being improved such as their sanctions screening and KYC systems.”

Following on from the panel discussion was an economic overview of the UAE given by Alp Eke, Chief Economist of the NBAD. Examining oil specifically, he noted that the oil price has collapsed in the past, so the current price drop is nothing new.

“The UAE was the first to respond in 2015 to the price drop. Saudi Arabia has also responded with their 2030

The event was attended by over 160 senior epresentatives of the UAE’s banking and finance sector.

The potential impact of de-risking on UAE banks’ activities was outlined by the Group Chief Compliance Officer of Emirates NBD, Victor Matafonov, who pointed out that banks risked losing their USD/EUR clearing abilities if they are not deemed compliant. In addition, he said, banks need to take several measures to hedge against the ‘risk of de-risking’. “Banks need to start preparing for increased levels of regulation. Implementing Financial Action Task Force (FATF) standards is a good first step. Banks should also have a proactive relationship with their correspondent banks and show that

vision,” he said. “The 1984 oil price crash was followed by 15 years of low oil prices. I believe we will see a long period of $55-60 per barrel. This should stabilise the market.”

Furthermore, the UAE is particularly safe as it has made significant headway in diversifying its economy, with a particular focus on tourism and real estate, Eke said. The increasing number of Arabic investors in the region is further indication of the perception of the UAE as a safe haven, he concluded.

The event also featured a discussion as to what impact FinTech will have on the industry. Panellists Haytham El Maayergi,

Global Head of transaction Banking at Abu Dhabi Islamic Bank, Emre Karter, TTS Head for MENAPT, Citi Dubai and Ramana Kumar, Managing Director & Head of GTB Business and product Management at the National Bank of Abu Dhabi agreed that the technology is here to stay and will disrupt the industry.

Kumar argued that the customer is the driving adoption of new innovation in payments. “The customer needs money as quickly as possible. This is the most important thing. However, currently it is sometimes quicker to drive to a place than to transfer money,” he said. “The banking industry uses regulation as an excuse, but hiding behind regulation will not work. Corporates need to be able to send payments within minutes.”

In the panel focused on cybersecurity, the challenges of cybercrime were highlighted by Vigi Mohan, Head of Information & Physical Security Assurance at NBAD, who said that cybercrime can have a significant impact on business from a reputation standpoint, in addition to disruption and commercial loss.

In speaking about his bank’s new strategy to combat cybercrime, Sandro Buccianeri, Head of Information Security Division at Abu Dhabi Commercial Bank, said, “First we work out what the threats are. Then we prevent, detect and respond. How quickly we respond will save us from a breach in security.

Education is vital. We carry out training for the whole staff.”

SWIFT’s support for fighting cybercrime was highlighted by Leo Punt, Deputy Chief Executive of EMEA for SWIFT. “SWIFT has launched a dedicated programme,” he said. “The Customer Security Programme aims to improve information sharing throughout the community, enhance SWIFT-related tools for customers and provide control and assurance frameworks.

We are also sharing best practices for fraud detection and enhancing support by third party providers.”

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EVENTS

Efma Retail Banking Summit, Middle East Digital transformation, APIs, big data and omnichannel strategy found to be the main themes discussed in during the event

T

he Retail Banking Summit in the Middle East organised

by Efma concluded on the 31 January 2017 on a successful note with over 30 financial institutions participating in the event.

Gathering key banking executives and professionals from the financial sector across the region, the summit discussed the main issues and challenges facing the industry. In particular, the impact of digitisation and channel strategies, with the imperatives of ensuring a successful digital transformation, while carefully managing costs and risks.

In an exclusive interview, Vincent Bastid, CEO of Efma highlighted the emerging trends across financial institutions in the region. “I see more willingness for banks to go beyond the domestic market and have a more regional approach especially to cater to expats. The increase in oil prices is good news for banking activity in the Middle East. I’m seeing more effort to catch up on customer experience and data as well as mobile banking. There is also a lot of curiosity from the banks here about Northern Europe and how banks in these countries carry out their retail banking business,” said Bastid.

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Vincent Bastid, CEO, Efma

The panels discussed opportunities for banking in an omni-channel world, driven in particular by the rapid growth in the use of handheld devices and the digital world, and the need to implement strategies that are mindful of both the opportunities and the pitfalls. The presentations of speakers from different countries focused on the need to strategise operating models with customer segmentation, endto-end digitisation, leveraging links across borders and putting big data to work by identifying new avenues to explore, whilst enhancing the overall consumer experience.

Bastid continued to explain, “In terms of digital banking, this region is still catching up on multichannel services, and later on, to omnichannel experiences. Developed markets are already implementing this continuous e x pe ri e n c e .

It is coming, but it is less of a priority here, as the priority for banks is now strengthening their mobile banking experience with a multichannel approach.”

Expressing his views on 2017, Bastid pointed out that this year, the main subject would be to invest in the right fintechs. As the banking market in the GCC is on an uptrend due to improving conditions, he expects to see more investment into fintech. “This means a focus on ID management in particular, which is going to be a priority due to the development of the mobile wallet.

Additionally, artificial intelligence, combined with block chain will create the next generation of the wallet, where you can interact with your wallet and the bank with natural language. Basically, the trend in the region will gravitate towards services that are provided in real time, that are contextual and multichannel. This is the main priorities that I can foresee for 2017,” he said.

The one-day summit was attended by representatives from Emirates NBD, National Bank of Abu Dhabi, Mashreq Bank, Abu Dhabi Islamic Bank, Alawwal Bank Saudi Arabia, Widiba Italy, Standard Bank South Africa, Doha Bank Qatar, Kuwait Finance House Kuwait, Commercial International Bank Egypt, DenizBank Turkey and Commercial Bank Qatar.

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