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MAY 2017 | ISSUE 195
An outstanding financial track record
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Samer A.H. Itani, Vice Chairman–General Manager of LGB BANK
18 Egypt: no pain, no gain
page 3-4 contents.indd 1
30 Riding out the storm
40 ESG in private equity: from fringe to focal
Dubai Technology and Media Free Zone Authority
An outstanding financial track record Samer A.H. Itani, Vice Chairman–General Manager of LGB BANK
“LGB BANK plans to offer new service and innovative financial solution packages, which enable it to address the challenges posed by the local market.”
62 Elevating cybersecurity management to another level 03/05/2017 15:29
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CONTENTS
MAY 2017 | ISSUE 195
Editor’s Letter
T
he first quarter of 2017 wasn’t too bad for the banking sector in the region. Granted there were financial institutions that reported losses during this period, but most banks managed to deliver profits albeit at a lower level compared to 2016. This bears testament to the alleged resilience of the financial sector in the GCC and the wider Middle East. April also witnessed several milestones in the industry—Mashreq celebrated it 50-year anniversary, Citi managed to secure a capital market licence in Saudi Arabia, the UAE launched the Emirates Digital Wallet that was two years in the making and also saw the inauguration of First Abu Dhabi Bank. In other exciting news, as I guessed last month, we could see further consolidation in other GCC markets. Saudi Arabia was graced by the announcement of the potential merger between the Kingdom’s oldest bank—Alawwal Bank and HSBC-backed Saudi British Bank (SABB). Industry reports have suggested that a union of Alawwal and SABB would place the bank as the third largest lender in the country, behind National Commercial Bank and Al Rajhi Bank. The wave of consolidation activities that can be seen across the GCC—so far we have UAE, Qatar, Oman and Saudi Arabia—is an indication that stronger and significantly capitalised banks are needed to withstand tougher operating conditions. Indeed the plunge in oil prices has awakened a complacent region, inspiring an increased level of activity in all economic sectors. This month’s issue provides an update on Saudi Arabia, Egypt and Bahrain, as well as an array of topics including transaction banking, private equity, financial technology and Islamic finance. As we hope for a better second quarter, I wish you a fruitful read.
12
22 6
30
News analysis Q2: a continuous challenge
8 News bites THE MARKETS 12 Saudi: building a better future? 16 Mashreq celebrates 50 years in banking 18 Egypt: no pain, no gain COVER STORY 22 An outstanding financial track record COUNTRY SPOTLIGHT 30 Riding out the storm TRANSACTION BANKING 36 Embracing change PRIVATE EQUITY 40 ESG in private equity: from fringe to focal FINTECH 44 The fintech revolution: friend or foe? www.bankerme.com MAY 2017 | ISSUE 195
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MARCH 2017
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APRIL 2017 | ISSUE 194
| ISSUE 193
An outstanding
52 Room for improvement
fundamentals Shailesh Dash, Founder & Board Member of Regulus Capital
14 Regional regulatory update
24 Iraq: hanging on
54 Creating a diverse bond market
Get the next issue of Banker Middle East before it is published. Full details at: www.bankerme.com
An outstandin financial trackg record
Samer A.H. Itani, 18 Egypt: no pain,
no gain
CPI Financial
30 Riding out the storm
LGB BANK
40 ESG in private equity: from fringe to focal
Get the next issue Banker MiddleofEast before it is published. Full details at: www.bankerme.com
62 Elevating cybersecurity management to another level
Full details at: www.bankerme.com Follow us on Twitter: @bankermena
www.bankerme.com
page 3-4 contents.indd 3
Vice Chairman–Gen eral Manager of
60 The blockchain conundrum
Zone Authority
Mukherjee
32 Saving Oman
Focusing on the
value
and Media Free
of India, Pranab
Market Nomu-Parallel
actual 60 Determining
Dubai Technology and Media Free Zone Authority
from the President
14 Tadawul launches
and Media Free
Samman Award
Get the next issue ofEast Banker Middle before it is published. Full details at: m www.bankerme.co
President of India,
“LGB BANK plans new service and to offer financial solutioninnovative which enable it to packages, address the challenges posed by the local market. ”
Get the next issue of Banker Middle East before it is published.
Editor
BankerMENA
Doha Bank, receiving man, Group CEO, from the Dr. R. Seethara Samman Award the Pravasi BharatiyaPranab Mukherjee
Dubai Technology
the Pravasi Bharatiya
Nabilah Annuar
continental Fostering ent developm
Zone Authority
Bank, receiving
Nabilah Annuar
BANK
Group CEO, Doha
l Manager of LGB
Vice Chairman–Genera
R. Seetharaman, development Dr.
“We try to present investors with attractive investments in this region instead.”
Dubai Technology
– Dr. R. Seetharaman
record Samer A.H. Itani,
trade is close
financial track
Focusing on the fundamentals Shailesh Dash, Founder & Board Member of Regulus Capital
Fostering continental
$100 billion trade is close to bilateral “GCC-India bilateral which the Qatar-India in 2015-16 out of$10 billion.” to
3 03/05/2017 15:30
CONTENTS
MAY 2017 | ISSUE 195
ISLAMIC FINANCE 48 GCC Islamic banks set to be more profitable in 2017 www.bankerme.com
HUMAN CAPITAL 52 Building the right workforce IN DEPTH 58 Breathing life into customer experience 62 Elevating cybersecurity management to
48
Chief Executive Officer ROBIN AMLÔT robin@cpifinancial.net Tel: +971 4 391 4681
another level
58
PERSONALITY 78 Alejandro J. Garcia-Monterde
Managing Editor GEORGINA ENZER georgina@cpifinancial.net Tel: +971 4 391 3728
Sales Director OMER HUSSAIN omer@cpifinancial.net Tel: +971 4 391 5419
COMPANY SPOTLIGHT 68 Mc Lagan TECHNOLOGY 70 Out with the silo, in with the ecosystem 74 The personal touch with customisable cards
Chairman SALEH AL AKRABI
Head of Business Banking Credit Risk & Risk Department, Risk Management, Emirates Islamic
78
EDITORIAL editorial@cpifinancial.net
ADVERTISING sales@cpifinancial.net
Editor - Banker Middle East NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726
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MOHAMED MAKSOUD mohamed@cpifinancial.net Tel: +971 4 433 5320
London Bureau ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476 Chief Designer BUENAVENTURA R. JALUAG, JR. jun@cpifinancial.net Tel: +971 4 391 3719
52 Log on to www.cpifinancial.net for news, polls, events, analysis, blogs, features, commentary and more.
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ou
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www.bankerme.com
01/05/2017 17:20
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
Q2: a continuous challenge Financial institutions in the region are expected to face similar conditions going into the second quarter of 2017
T
he banking and finance sector in the Middle East saw varied financial result reports for the first quarter of 2017. Most made single digit profits, others made marginal losses. Islamic financial institutions portrayed better resilience as they maintained a sustained growth rate since 2016. In spite of the continued volatile external financing conditions and challenging credit conditions, financial institutions in the region fared well. Banks across the board are still going through a period of low returns and weak prospects for revenue growth. S&P Global’s EMEA Financial Institutions Monitor for the second quarter of 2017 highlighted that this continues to raise doubts about the long-term viability of some of their business models, that is, their ability to shape operations to meet the demands of stakeholders, notably shareholders and regulators. Management teams are therefore under sustained pressure to restructure and improve efficiency—this has been an obvious trend since 2016. The slightly improved economic outlook in the region could improve revenue prospects in time. However, efforts to reduce excess capacity and operate more efficiently remain key, as investments in digitalisation and cybersecurity as well as the need to comply with demanding regulatory will continue taking their toll on expenses.
6
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According to S&P, external financing conditions in EMEA emerging markets remain highly volatile, as foreign investors repeatedly reassess the attractiveness of the region in light of ever-changing expectations about the path for the interest rates in the US and other developed markets. This frequent re-evaluation has resulted in large movements of global capital in and out of emerging markets, spurring volatility in their currency and bond markets. The banking sectors of Turkey and Qatar are believed to be particularly vulnerable to the changing sentiment of international investors, given their high dependence on foreign financing. Banks in the GCC are expected to show resilience in the face of weaker operating environment in 2017-2018. Under S&P’s base case scenario, lower growth opportunities, scarcer liquidity, and pressure on profitability and asset quality indicators are anticipated. However, GCC banks should be able to manage the impact on their financial profiles due to their large capital buffers and strong capitalisation by international standards. The drop in government and government-related entity deposits have prompted some GCC banks to go after external liquidity. Qatari banks, in particular, have been active in
attracting external liquidity over the past couple of years, although exposing them to the tail risk of a sudden dryup of this liquidity or an increase in US interest rates that are larger than expected. Nevertheless, the existing peg between the Qatari riyal and the US dollar, expectations for government support in case of need, as well as the country’s new regulation limiting foreign currency open positions may provide some cushion for Qatar. The weak operating environment in Turkey is expected to test banks’ quality and funding profiles. S&P pointed out that Turkish banks still remain vulnerable to potential shifts in global debt and capital market, which could affect the financing of rollovers and the cost of their external debt, which still funds a higher share of assets than in most peer countries. On the other hand, the pace of loan growth is now closer to that of deposits, and rollover rates and debt pricing were relatively stable in the past 12 months. S&P suggests that the depreciation of the lira against the US dollar is increasing indirect credit risks for Turkish banks because of their large amount of loans denominated in foreign currencies. An offsetting factor is that many of the loans were made to large corporates that have revenues in foreign currencies.
(Photocredit: AshDesign/Shutterstock.com)
NEWS ANALYSIS
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NEWS
BITES
Alawwal and SABB explores potential merger
A
lawwal Bank has announced that it is in preliminary talks to merge with Saudi British Bank (SABB). Similarly, SABB’s Board of Directors has also announced that it resolved to enter into preliminary discussions with Alawwal Bank to study the possibility of merging the two banks. According to statements by both banks, the entry into these discussions does not mean that the merger will happen. If a merger is agreed, it will be subject to various conditions including and without limitation, the approvals from each bank and regulators. The Saudi Arabian Monetary Authority was approached in relation to the merger requirements prior to the commencement of the discussions. However, the proposed merger will still be subject to formal regulatory approvals prior to the completion. Neither bank expects that the proposed merger will, if completed, result in any involuntary layoff of employees.
Alawwal Bank underwent a rebranding exercise late last year.
RATINGS REVIEW Entity
Abu Dhabi
Bahrain Egypt
LT IDR/LT ST IDR/ST Rtg (FC) Rtg (FC)
AA
F1+
B
B
BB+
B
LT IDR/LT Rtg (LC)
ST IDR/ST Rtg (LC)
AA
F1+
B
B
BB+
Country Ceiling
B
AA+
BBB+ B
Country
UAE
Bahrain Egypt Iraq
Iraq
B-
Kuwait Ras Al Khaimah Turkey
AA
F1+
AA
F1+
AA+
Kuwait
A
F1
A
F1
AA+
UAE
BB+
B
BBB-
F3
BBB-
Saudi Arabia
A+
F1+
A+
F1+
AA
Qatar
AA
F1+
AA
F1+
AA+
Turkey Saudi Arabia Qatar
Lebanon
UR
B-
B B
Under Review
8 page 8-10 News Bites.indd 8
B-
KEY Positive Negative Evolving Stable
B
OUTLOOK
B-
B-
Lebanon
WATCH
Emirates Digital Wallet launched
E
mirates Digital Wallet, a unique platform established by 16 of the UAE’s leading banks, has been formally launched at the Seamless Middle East conference. Emirates Digital Wallet paves the way for cashless spending, transfer and storage of money for everyone living and working in the UAE. It brings together best practise from a wide variety of payment systems around the world, and provides a unique solution tuned in to the needs and characteristics of the UAE’s local environment. “This is an exciting and ground breaking project for the UAE. While there are many payments solutions using new technology out there, none have the buy-in of leading national banks, none have been constructed from the ground up in co-ordination with government, and none allow instant transfer of cash to vendors. What we are creating is new cash for the 21st century, cash that does not need a visit to an ATM, or cash that does not fill your pocket or wallet. This is a new movement both to reduce and ultimately eliminate cash from the system, and to allow even those without bank accounts to enjoy the convenience, security and peace of mind of having cash without the physical frustration and risks it often entails,”said Maki Vekinis, General Manager of the Emirates Digital Wallet. The new system, to be rolled out as an app from the last quarter of this year, provides a free to use, highly convenient, safe and efficient way of making payments without the use of physical cash. It responds to the UAE’s smart government initiative by providing a simple to use and interconnected payments platform using smartphones and other handheld digital devices. Emirates Digital Wallet has been developed over the past two years under the umbrella of the UAE Banks Federation, which created a special committee for its member banks to contribute ideas and suggestions to and formulate the ideal solution for the UAE. The UAE Central Bank has also played a crucial role in providing advice and guidance on how the platform should be constructed and operate to meet the highest regulatory standards. The trading brand for Emirates Digital Wallet will be announced in the near future.
This is a new movement both to reduce and ultimately eliminate cash from the system, and to allow even those without bank accounts to enjoy the convenience, security and peace of mind of having cash without the physical frustration and risks it often entails. — Maki Vekinis, General Manager of the Emirates Digital Wallet
www.bankerme.com
03/05/2017 15:34
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NEWS
BITES
NBAD shareholders approve name change to First Abu Dhabi Bank, launches new brand identity
F
ollowing National Bank of Abu Dhabi’s (NBAD) shareholder approval of the combined entity’s name change to First Abu Dhabi Bank on 24 April 2017, the financial institution has launched its new brand entity. The new brand embodies FAB’s long-term strategic goals to empower its customers, shareholders, employees and communities to ‘Grow Stronger’, through initiating a powerful social movement which goes beyond banking. The ‘Grow Stronger’ movement represents FAB’s aspirations to motivate, educate and inspire its stakeholders, providing ideas, tools and expertise to help them become stronger, today and in the future. The First Abu Dhabi Bank (FAB) name reflects the two banks’ deep roots and experience in the region, combining the strong ‘Abu Dhabi’ and ‘First’ identities from NBAD and FGB. The bank has adopted the acronym F.A.B in its logo, which also features the well-recognised Awwal brand mark, enlarged to represent growth and leadership. The blue, red, black and white colour palette epresents a bold, crisp aesthetic, which provides a modern, progressive look and feel for the new brand. The brand colours reinforce FAB’s position as a strong and visible financial institution which is confident in its future. The brand identity is dual language, supporting the bank’s strategic plans at home and abroad. FAB is the UAE’s largest bank by total assets at AED 682 billion and one of the region’s dominant banking players by a market cap of AED 120 billion. Led by growth in revenues, NBAD and FGB has recorded a pro-forma Group Net Profit of AED 2.93 billion for the first quarter of 2017.
FAB’s new logo.
NBAD shareholders approve name change to 'First Abu Dhabi Bank'.
10
www.bankerme.com
Citi receives CMA licence in Saudi Arabia
T
he Saudi Arabian Capital Market Authority (CMA) has announced that a licence has been granted to Citi. The business will be branded Citigroup Saudi Arabia and will provide a full range of investment banking, debt and equity capital markets, markets, and securities research capabilities to its local and international institutional clients. “Saudi Arabia is a regional economic leader and a strategically important market for Citi. We are very proud of our long association with Saudi Arabia and are delighted at the opportunity to establish a presence in the Kingdom. Saudi Arabia has embarked on a profound economic transformation journey and we are excited and committed to contributing to this endeavour. We will strive to make a positive financial and social impact by providing Citi’s best in class resources and capabilities to our clients and stakeholders,” said Jim Cowles, Citi’s CEO for Europe Middle East and Africa.
DIFC companies now allowed dual licences to operate across Dubai
D
ubai International Financial Centre (DIFC) has signed a memorandum of understanding (MoU) with Dubai Economy to allow companies operating within DIFC to obtain licences to operate in mainland Dubai. Under the MoU, a central data repository will be established, allowing data exchange between the parties, improving visibility and transparency of commercial activity within the DIFC. In addition, joint inspections will also ensure better compliance, prevent fraud and increase consumer protection.The agreement aims to increases levels of governance, compliance and transparency for businesses working within the DIFC infrastructure. Commenting on the agreement, HE Essa Kazim, Governor of DIFC said, “This landmark MoU is further evidence of DIFC’s efforts to encourage robust best practise and our commitment to our 2024 strategy that will see us triple in size. The new licence agreement and increased level of governance, transparency and compliance from this MoU will directly benefit businesses in DIFC and contribute to the economic growth of Dubai, the UAE and wider region.” “Enabling companies and investors worldwide to benefit from the competitive advantages of Dubai as a business hub is part of the strategic objectives of Dubai Economy. The MoU will enrich the economic diversity and services available in Dubai, and also complement our efforts to improve transparency and compliance in the business sector,” added HE Sami Al Qamzi, Director General of Dubai Economy.
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Research
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Photo credit: Philip xtock/shutterstock.com
THE MARKETS
Saudi: building a better future? The country is pushing its economy towards non-oil growth, but is this enough to prevent decline on the back of further oil-price fluctuations
H
eading towards 2017, the outlook by regional experts on the Saudi Arabian economy is largely positive, with Moody’s revising its outlook on Saudi Arabia’s banking system to stable from negative, and KPMG predicting a growth in the country’s economy into 2017. This improved sentiment is largely due to an expected increase in government spending and easing funding pressures. The improvement in the oil price to a projected $60 per barrel later in the year, as well as the leadership’s determination to implement the National Transformation Program which includes the restructuring of
12 page 12-14 The Markets.indd 12
many economic sectors only adds to marketplace confidence. “Despite low oil prices, which we expect to fluctuate between $40 and $60 a barrel over the next 18 months, and cuts in oil production, the Saudi economy will gradually recover, supported by government spending. As a result Saudi banks’ liquidity and funding conditions will improve. Although profitability and loan performance will continue to soften, Saudi banks will maintain robust capital and loss absorption buffers compared to regional and international peers over the outlook horizon,” says Olivier Panis, a Vice President at Moody’s.
According to Moody’s, the operating environment for Saudi banks will recover. Whilst the rating agency expects real GDP growth to contract by -0.2 per cent in 2017, increased government spending and projects to diversify economic output will support a gradual recovery of the non-oil economy, which will grow by two per cent in 2017 versus 0.2 per cent in 2016. Consequently, Moody’s expects credit growth to remain low at three per cent in 2017, but to gradually pick up from 2018. This outlook is also supported by Saudi-based business support services company, Proven, which helps small businesses and start-ups set up. cont. on page 14
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01/05/2017 10:38
STAY AHEAD is not just a statement. STAY AHEAD It’s our way of exceeding expectations.
is not just a statement.
It’s our way of exceeding expectations.
At Dubai First we continuously strive to ‘Stay Ahead’ by offering innovative financial solutions combined with world-class customer service. Industry recognition for our service, products and campaigns is testament to this commitment strive and our as one the leading consumer finance companies. At Dubai First we continuously to position ‘Stay Ahead’ by of offering innovative financial solutions combined with world-class customer service. Industry recognition for our service, products and campaigns is testament to this commitment and our position as one of the leading consumer finance companies.
2016 Best Consumer Finance Company
2016 Best Consumer Finance Company
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THE MARKETS
cont. from page 12
“Government spending will increase [in 2017] after the budget deficit was greatly reduced in 2016. State spending on infrastructure will increase with the aim to support economic growth and a new system of cash payments to poorer citizens will offset the impact on them as the government gradually raises domestic energy prices to reduce its subsidy burden,” said Zaid Al Mashari, CEO and Founder of Proven. Al Mashari added that actions taken to expand the private sector and get Saudi’s into work (National Transformation programme) will also give a boost to the economy as spending increases. The Saudi Arabian Government’s Vision 2030 strategy is also a key driver of economic confidence across the Middle East, and a positive business indicator at a time of record low oil prices. “The growth strategy is pinned on diversifying the nation’s oil-based economy. It plans on attracting direct, foreign and domestic investments, moving towards a broader, servicebased economy,” said Edward Gallagher of De Boer Middle East. Regional experts predict that the most growth will be seen in the mining, real estate, IT and logistics sectors, with huge investments already being seen in REITs in the country. According to reports, the size of real estate investment funds in Saudi Arabia is estimated at $10 billion. The Saudi Arabian construction industry is also forecast to rise at a CAGR of 7.05 per cent reaching $148 billion by 2020, according to independent figures released by the Timetrics Construction Intelligence Centre (CIC). This presents both opportunities and challenges. The result is an increasing number of major infrastructure and mega construction projects throughout the Kingdom.
14 page 12-14 The Markets.indd 14
The growth strategy is pinned on diversifying the nation’s oil-based economy. It plans on attracting direct, foreign and domestic investments, moving towards a broader, service-based economy. — Edward Gallagher, Business Development Director, De Boer Middle East Growth in the construction sector will be underpinned by increasing religious tourist numbers in Saudi Arabia, expected to rise from 17.5 million visitors recorded last year to between 25 and 30 million in 2025. The contribution of religious tourism to the non-oil sector of the country’s GDP will rise from 5.4 per cent to 5.7 per cent by the year 2020, according to a local publication by Al-Jazira Capital. A recent report by property experts JLL also points to a hotel property construction boom in Makkah adding fuel to the fire that is the Saudi real estate investment sector. The Saudi 2030 Vision recognises the crucial role religious tourism can play in diversifying the economy away from dependence upon the oil and gas sector, with pilgrims currently contributing two to three per cent of Saudi’s total GDP. Bearing this in mind, there are plans to roughly double the capacity of the hotel sector in Makkah to accommodate both Umrah and Hajj visitors to around 15 million and five million respectively by 2020. “Increasing religious tourism in line with ‘Saudi Vision 2030’ will create huge opportunities in the retail, hotel and broader accommodation sectors in Makkah. The long term prospects for the hotel sector are extremely positive given the reliance on accommodation providers to support the global unlimited demand of religious pilgrims to Makkah. More than ever, the key to capitalising on growth of the real estate market is the strong cooperation between
public and private sectors to invest in new and existing accommodation. An added benefit is the maxim of ‘build it and they will come’ which applies more aptly to the Makkah market than any other city in the region. In addition to increasing accommodation, the success of the Saudi Government’s plans to expand the number of religious visitors also relies heavily on the ability to address transportation capacity. While there have been significant investments to improve the networks serving Makkah, many of the projects have been affected by the stringent 2016 budget,” said Jamil Ghaznawi, National Director and Country Head of JLL Saudi Arabia. While much of the Saudi economy appears buoyant, there are still some reservations. Much of the GCC’s largest economy is still based upon oil, and further downward fluctuations in the oil price and OPEC restrictions could continue to hit the country hard, especially since it has not had time to fully diversify away from its main money source. However, the Saudi Arabian Government’s Vision 2030 strategy is a key driver of economic confidence across the Middle East, and a positive business indicator at a time of record low oil prices. The growth strategy is pinned on diversifying the nation’s oil-based economy. It plans on attracting direct, foreign and domestic investments, moving towards a broader, service-based economy. If this succeeds, Saudi Arabia may be a force to be reckoned with once again.
www.bankerme.com
03/05/2017 15:35
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C
C
C
M
M
M
Y
Y
Y
M CM
CM
CM
Y MY
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Y CY
CY
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CMY
K
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THE MARKETS
Mashreq celebrates 50 years in banking Bank executives plant 50 UAE National Trees to symbolise 50 years in the business
M
ashreq Bank, the oldest privately-owned bank in the UAE, is celebrating its 50 year anniversary alongside the local community. In association with Goumbook, a leading social enterprise promoting sustainability in the UAE, senior executives from the bank planted 50 national trees to mark its 50 years of being in the banking industry.
Mashreq Bank CEO, Abdul Aziz Al Ghurair
16 page 16-17 The Markets.indd 16
Capable of growing in even the harshest desert climate, the Ghaf tree is the UAE’s national tree and is a symbol of tolerance, sturdiness and stability. It doesn’t require much water and is able to capture 35 kilogrammes of carbon dioxide a year. “To celebrate our 50th anniversary and to support the UAE’s ‘Year of Giving’ graciously launched by our President His Highness Sheikh Khalifa
bin Zayed Al Nahyan, we are launching our Tree Planting programme today. This initiative is comprised of three sub-initiatives: today, we will plant 50 trees in this venue behind our office [Mashreq’s offices in Dubai Outsource Zone]; on 26 April, we will plant another 50 trees in the Desert; and on 1 May, we will do the same at Nursery with young children, so that we teach them well about the spirit of giving,”
Al Ghurair, planting a Ghaf tree.
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01/05/2017 10:43
said HE Abdul Aziz Al Ghurair, Chief Executive Officer of Mashreq Bank in his speech during the first phase of the tree-planting on 25 April 2017. “Being one of the most committed companies in the UAE community over the past 50 years, we fully understand the importance of giving back, and today is another example of our love for the UAE—and we will plant 50 Ghaf trees to mark the occasion. The Ghaf tree is reflective of our Mashreq Spirit, capabilities, and potential to grow. Even in the toughest of times and economic uncertainty, just like the Ghaf tree, we have stood strong, supported our customers through thick and thin, and continued to grow with them. So we really could not have found a better symbol to mark our 50 year anniversary,” added Al Ghurair. Established in 1967, Mashreq is the oldest bank in the UAE and one of the country’s leading financial institutions
The Ghaf Tree is reflective of our Mashreq Spirit, capabilities, and potential to grow. Even in the toughest of times and economic uncertainty, just like the Ghaf tree, we have stood strong, supported our customers through thick and thin, and continued to grow with them. So we really could not have found a better symbol to mark our 50 year anniversary. — HE Abdul Aziz Al Ghurair, Chief Executive Officer of Mashreq Bank with a growing business presence in the region including Egypt, Qatar, Kuwait and Bahrain. Its branch network extends across the UAE, with one in every two households banking with Mashreq Bank. It also has 12 overseas offices in nine countries, including Europe, the US, Asia and Africa. The bank prides itself on providing customers with access to a wide range of innovative products and services and is invariably among the highest performing banks in the region.
Mashreq launched its new vision and mission in 2016, outlining its commitment clients, colleagues and towards its the community. In line with its new vision to be the region’s most progressive bank, Mashreq leverages its leadership position enable in the banking industry to innovative possibilities and solutions for its customers across corporate, retail, and Islamic international, treasury also continues banking. Mashreq invest in recruiting, training and to developing future generations of UAE national bankers.
Mashreq Bank Team
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page 16-17 The Markets.indd 17
17 03/05/2017 15:36
THE MARKETS
Egypt: no pain, no gain
S
ince 2011 the political situation in Egypt has caused significant problems for the country’s economy. The political transition, in combination with underlying challenges facing the Egyptian economy, has led to macroeconomic imbalances including a significantly overvalued currency, weakening revenues and a growing public sector bill. Measures to address these issues began in 2014/15 with the Central Bank of Egypt (CBE) devaluing the Egyptian pound by five per cent and increasing interest rates to constrain inflationary pressure. As part of Egypt’s reform programme, the CBE decided to move the EGP to a completely floating currency in November, which is now
18 page 18-20 The Markets.indd 18
trading at its genuine exchange rate, noted the IMF. However, in the process the pound lost about half of its value, with prices increasing at the fastest rate in 12 years in December 2016. However, reforms such as these have increased the frustration and struggle for the Egyptian people. Fitch Ratings has that noted key challenges for the economy lie in combating social unrest—which the government is trying to address with increases in social spending and other measures, including improvements in electricity provisions. Furthermore, the agency added that even if the reform process continues smoothly, gross general government debt will take several years to reduce to more sustainable levels.
INTERNATIONAL SUPPORT
The reform process has been welcomed by international institutions, however. The Executive Board of the International Monetary Fund (IMF) approved a three-year extended arrangement under the Extended Fund Facility (EFF) for Egypt with a value of approximately $12 billion to support the authorities’ in their economic reform programme. The Executive Board’s approval allowed for an immediate purchase of $2.75 billion, with the remaining amount to be phased out over the duration of the programme, subject to five reviews. The first review of the IMF programme is set to complete before end-June, which would release an additional $1.25 billion. Fitch believes that the outcome for this is likely, as the authorities appear to have broadly met monetary, policy and budgetary targets. On the subject of the EFF, Christine Lagarde, Managing Director and Chair of the IMF, said, “The Egyptian authorities have developed a home-grown economic programme, which will be supported under the IMF’s Extended Fund Facility, to address longstanding challenges in the Egyptian economy. These include: a balance of payments problem manifested in an overvalued exchange rate, and foreign exchange shortages; large budget deficits that led to rising public debt; and low growth with high unemployment. The authorities recognise that resolute implementation of the policy package under the economic programme is essential to restore investor confidence, reduce inflation to single digits, rebuild international reserves, strengthen public finances, and encourage private sectorled growth.”
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Egypt has remained a challenging environment for the past few years, but in the face of the authorities’ willingness to implement reforms increasing optimism can be found
cont. on page 20
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Where banking is more personal
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THE MARKETS
cont. from page 18
POSITIVITY IN FX
Foreign exchange (FX) reserves have continued to rise for the Egyptian economy, reaching $26 billion as of end-January 2017, up by more than $10 billion from the low seen in July 2016. Fitch noted in March that it has seen anecdotal evidence of progress being made in clearing the backlog of FX demand in the economy. The agency continued that these positive developments for the economy are largely a reflection the inflows from multilateral and bilateral institutions—particularly the IMF and World Bank, the resumption of foreign portfolio inflows and remittances after the authorities floated the pound, and improving export activity in conjunction with import compression. Fiscal consolidation, in combination with Egypt’s continued progress in external rebalancing noted in rising foreign exchange reserves, a return of private capital inflows and currency appreciation, suggest that there is groundwork for an improvement in sovereign credit metrics in 2018, added Fitch. For 2017 and 2018 the government is targeting growth rates of 5.2 and 4.6 per cent respectively.
INFLATIONARY INTENSIFICATION
Inflation reached a multi-decade high in February reaching 30.2 per cent. This marked an increase over the
28.1 per cent inflation level seen in January and is notably the highest inflation level the country has experienced since November 1986. Inflationary pressures have been amplified by the flotation of the pound, the scrapping of subsidies on goods such as fuel, and the introduction of a new value added tax. The exceptionally weakened EGP has eroded Egyptians’ purchasing
create more jobs. We recognise the sacrifices made and the difficulties faced by many Egyptian citizens, especially due to high inflation,” said Lagarde in a statement. “The IMF is working to help the government and the Central Bank bring inflation under control and supports the steps the Egyptian authorities are taking to protect its poorest and most vulnerable citizens.”
Egypt is implementing a strong economic reform programme to help the economy return to its full potential, achieve more growth and create more jobs. We recognise the sacrifices made and the difficulties faced by many Egyptian citizens, especially due to high inflation. — Christine Lagarde, Managing Director, IMF power, said FocusEconomics, whilst also increasing the prices of imported goods. Furthermore, subsidy removal has prompted increased social unrest, supply shortages and discontent, whilst conversely improving investor confidence in Egypt, with international reserves rising. In early April, Lagarde lent further support to Egypt’s reform programme following a meeting with Egypt’s President Abdel Fattah El Sisi in Washington. “Egypt is implementing a strong economic reform programme to help the economy return to its full potential, achieve more growth and
Overall, Egyptians are likely to continue to feel the pain of economic reform for some time. The outlook for the country’s economy remains positive in the long-term however. Strong support for the IMF’s reform programme from Egypt’s authorities, noted in the achievements of the country in meeting objectives set out by the IMF, provides further positivity. We can look for an improving macroeconomic situation to continue throughout 2017, with further improvements likely in 2018 barring any significant social unrest in protest of increasing reforms.
Macroeconomic indicators 2013/14 (e)
2014/15 (p)
2015/16 (p)
2016/17 (p)
Real GDP growth
2.2
4.2
4.3
4.5
Real GDP per capita growth
0.0
2.0
2.2
2.4
10.8
11.2
8.8
10.2
Budget balance % GDP
-12.2
-11.5
-9.6
-8.7
Current account % GDP
-0.9
-3.7
-1.1
-1.4
CPI inflation
Source: Data from domestic authorities; estimates (e) and projections (p) based on author’s calculations; Africa Economic Outlook.
20 page 18-20 The Markets.indd 20
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NBF C&IB press MAY3RD AW.pdf
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COVER STORY
An outstanding financial track record Samer A.H. Itani, Vice Chairman—General Manager of LGB BANK sheds light on the bank’s history and stellar performance
22 page 22-28 Cover Interview.indd 22
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02/05/2017 11:34
W
ith over 50 years of banking tradition, trust and excellence in customer service, LGB BANK stands today as one of the Lebanese banking sector’s leading players with a strong position and a rich heritage. Established in 1963 under the name of Banque de Credit Agricole, LGB BANK adopted its current name and shareholders’ form in 1980, when a group of businessmen led by the current chairman acquired the shares majority. The Bank currently operates from its head office located in Beirut Central District, backed by a powerful network of 18 branches spread across the country and a branch in Cyprus that has been operational since 1986, as well as a representative office in Dubai—UAE. Today, being one of the most dynamic and vibrant institutions in Lebanon, the Bank is committed to a systematic expansion strategy which dictated a successful capital increase in 2014, followed by an enhancement of the Bank’s operational and information technology infrastructure, a substantial growth in profits and deposits, and most importantly a concentrated modernisation and development process of its human capital. LGB BANK expansion strategy runs in parallel in Lebanon and the Middle East, as the Bank taps into new potential markets. By early 2015, the Bank had embarked on a contemporary branding effort that promises to propel it to new heights, in line with its robust business strategy. With its dedication and clear vision, LGB BANK continues to build strong relationships with its customers through a personalised approach coupled with sophisticated services and “out of the box products” that meet customers’ evolving financial needs.
INNOVATIVE PRODUCTS AND E-SERVICES
LGB BANK’s dynamic strategy offers top quality services and a wide variety of financial products catering to its customers’ aspirations, objectives and financial needs. The bank’s unique offerings benefits customers from unprecedented banking services such as Banking By Night and LGB Loyalty programme with the competitive LGB Miles programme that enables the Bank’s customers to travel to more than 55 countries, in addition to other convenience products such as foreign currency cards in UAE Dirham, Turkish Lira, Saudi Riyal and Sterling Pound, and elite cards: the Black Card, the VISA Infinite Card and the VISA Signature Card. In order to provide better travel solutions for its customers, LGB BANK offers exclusive currency credit cards in UAE Dirham, Saudi Riyal, Turkish Lira and Sterling Pound,
LGB BANK recorded an asset growth of
14.9% equivalent to
LBP 6,193 billion in 2016
enabling travellers to pay for their purchases without any additional currency fees. These credit cards are flexibly designed to deliver the ultimate travel experience with valueadded benefits including payments in local currencies without the worrying about managing conversion fees; free access to more than 500 international airports and VIP lounges in Lebanon, UAE, Kuwait, KSA, Turkey, UK, and US; fraud insurance, travel insurance, and personal incidents insurance for the cardholders and their families; international concierge services; and LGB BANK’s Loyalty programme. LGB BANK also offers elite cards including VISA Infinite Card and VISA Signature Card, where cardholders can enjoy the luxury lifestyle and benefit from LGB Loyalty and Miles programmes, and earn 1.5 miles or one point for every dollar spent, in addition to free access to more than 500 airport lounges in more than 300 cities around the world with no previous registration needed. Cardholders will also benefit from special travel offers to visit more than 55 touristic destinations on most of the international airlines. VISA Infinite and Visa Signature Cards encompass special offers and protection services including travel and medical insurance, as well as fraud protection services. Additionally, with the aim to provide innovative and renewable banking products and services, LGB BANK also introduced its Euro Card which enables cardholders to live a unique European experience. The Euro Card fulfils European traveller needs and allow them to withdraw cash or pay in euro without any additional charges. Platinum Euro Card holders can also benefit from the Loyalty and Miles programme rewards, in addition to accessing airport VIP lounges using the Priority Pass card, enabling travellers to enter over 900 lounges, and free access to some airport VIP lounges in the United Arab Emirates, Egypt, Saudi Arabia, Jordan, and Kuwait. cont. overleaf
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COVER STORY
cont. from page 23
The Bank constantly introduces new services and cards to provide customers with the financial support needed, the best banking services, as well to enjoy a unique travelling experience of Lebanese people anytime, and anywhere. LGB BANK also provide cardholders with high-level security services to curb piracy when using cards for online and POS purchases. The two introduced security services include the Pin On Chip service for POS purchases, where cardholders are asked to enter a PIN when purchasing at the point of sale; the 3D Secure service for online purchase, where cardholders will have to enter an OTP (one time pin), which is sent via SMS, for each online purchase; and the change of PIN code service which enable cardholders to change their PIN codes via ATM. These services falls under the Bank’s efforts to introduce security services, to ensure maximum safety for its customers so that online purchases are done safely.
EXTERNAL RELATIONS
LGB BANK features a network of strong historic relations with individuals and corporations in neighbouring and GCC counties. This network is a vital platform for the business locally and abroad. The platform is correlated with the Bank’s structure and products offered, and supports in positioning us as a trusted banking and financial partner. The Bank puts all its effort and attention for its customers, and provide them with the best investment returns, wealth management, bond subscriptions, preferred stock, and competitive products. Catering to the customers’ needs across all categories, whether they are savings, investments, placements, or even financial falls, is the heart of the Bank’s business strategy in adding value across all processes done at LGB BANK.
LGB BANK’s head office in downtown Beirut.
cont. from page 26
24 page 22-28 Cover Interview.indd 24
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COVER STORY
cont. from page 24
LGB BANK wins Best Financial Transformation, Best Credit Card and Best Co-Branded Credit Card.
LGB BANK also plans to offer new service and innovative financial solution packages, which enable it to address the challenges posed by the local market, through the leadership in offering distinctive products and services. Accordingly, the Bank’s team is working on ways to enhance its communication and relationship with the customers, through a series of high-standard initiatives and activities that aims to better understand the needs and requirements of its customers.
AWARDS AND ACCOLADES
In recognition of the efforts exerted by LGB BANK to establish a distinct position among the biggest Lebanese banks, the World Union of Arab Bankers granted the Bank the Banking Executive Award 2016 for Excellence in E-banking and Mobile Banking. The Bank also received Best Financial Transformation at the Banker Middle East—CPI Financial Industry Awards 2016 and Best Credit Card and Best Co-Branded Credit Card for the publication’s Product Awards 2016.
26 page 22-28 Cover Interview.indd 26
Sound corporate governance is an integral part of its business culture and practises, as it constantly monitors all newly proposed regulations, and support in modifying the policies and practises. — Samer A.H. Itani, Vice Chairman—General Manager, LGB BANK This proves that LGB BANK seeks to acquire various awards that showcase its success through its innovative and advanced banking products and services offered in its 18 various branches across Lebanon, in addition to a branch in Cyprus and a representative office in Dubai. These awards are yet another testimony of the Bank’s insistence on innovation and singularity, and providing the best for its customers. LGB BANK also believe that the awards will serve yet as an additional incentive to push them to achieve more accomplishments and better services. cont. from page 28
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COVER STORY
cont. from page 26
OUTSTANDING FINANCIAL TRACK RECORD
According to the 2016 unaudited financial results, the report which evaluates and identifies the rankings of the Lebanese Alpha Banks, for the year 2016, LGB BANK achieved great strides in terms of performance and growth indicators. LGB BANK ranked third in asset growth rate of 14.9 per cent, with a value of LBP 6,193 billion while maintaining a high liquidity ratio, and ranked second in customer deposits growth of 14.6 per cent, with a value of LBP 5,367 billion. As for the equity growth, the bank ranked seventh reaching LBP 528 billion which accounts for 9.4 per cent growth rate, thus contributing in strengthening the Bank’s solvency and increasing its capacity to face risks. The Bank also amounted a rate of 15.6 per cent, ranking in sixth position in terms of net profit growth rate with a value of LBP 53 billion. LGB BANK continues to prove that it is adapting the right strategy for developing its banking business, through offering new and innovative services and products that caters to the customers, and expanding into new markets that will further enhance the Bank’s leadership position. The Bank believes that the ongoing successes are the result of the team and Board of Directors’ unprecedented efforts, along with the innovative and unique banking experience offered to all customers.
INTEGRATED CORPORATE GOVERNANCE AND MANAGEMENT
LGB BANK’s Board of Directors and management are committed to complying with the best corporate governance practises, designing and approving all corporate governance policies and practises, including the Code of Corporate Governance and Board Charter, in order to ensure the Bank is meeting its responsibilities towards stakeholders, and creating long term shareholders’ value. The designed and approved policies offer a robust foundation for management in making responsible and ethical decisions. Complying with the policy also safeguards integrity in financial reporting, offers timely and balanced disclosures, as well as risk identification and management. LGB BANK believes that sound corporate governance is an integral part of its business culture and practises, as it constantly monitors all newly proposed regulations, and support in modifying the policies and practises. The Bank’s Corporate Governance Framework is tailored to serve as a guiding tool for the Board to follow in order to achieve the Bank’s objectives based on the highest ethical standards and interests of its stakeholders.
28 page 22-28 Cover Interview.indd 28
LGB BANK plans to offer new service and innovative financial solution packages, which enable it to address the challenges posed by the local market, through the leadership in offering distinctive products and services. — Samer A.H. Itani, Vice Chairman—General Manager, LGB BANK Developing and implementing sound corporate governance has always been a fundamental focus for LGB BANK, in addition to enhancing its succession plan which focuses on key managerial and functional positions for talent and leadership development. Additionally, LGB BANK also enhanced its disclosure policy to ensure that all required regulatory disclosures are done effectively and efficiently, taking into account due disclosure of conflict of interests.
COMPLIANCE AND TRANSPARENCY POLICIES
LGB BANK’s Board of Directors manages the Bank’s compliance to the set rules and regulations, to ensure the safeguarding of the Bank and its reputation, which also contributes to enhancing of the ethical standards and transparency. The Board of Directors and management team also monitors all financial transactions on a daily basis and ensures that they are in compliance with the instructions of the Central Bank of Lebanon and the recommendations of the Financial Action Task Force (FATF). Accordingly, LGB BANK has put in place an Antimoney Laundering scenario to combat money laundering along with a powerful data integrity module that filters suspicious names from major international checklists throughout all its network’s divisions and branches. Furthermore, LGB BANK complies with one of the strongest global standards of transparency in financial reporting, namely the International Financial Reporting Standards (IFRS) as certified by the International Accounting Standards Board, to further strengthen its corporate governance standards and enhance transparency and disclosure in its financial reports. The Board directs the disclosure and communications process, which includes the Bank’s profile, vision and mission statements, strategy and objectives, as well as its financial statements, with all stakeholders in a fair, transparent, comprehensive and timely manner. Financial and practical information are disclosed through the Bank’s main shareholders, annual report, website, brochures, newsletter and regular media announcements.
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COUNTRY FOCUS
Riding out the storm Bahrain is still in a sticky situation with continuing deficits, depleting reserves and higher currency risk, but a strong financial sector and GCC support is expected to mitigate the situation
B
ahrain is one of the GCC countries that was hit hard by the drop in oil prices. With its government budget still highly dependent on oil revenues, the Kingdom urgently needs a sizable fiscal adjustment to restore financial sustainability, reduce vulnerabilities, and boost investor and consumer confidence. Bahrain made positive strides in economic diversification by increasing the role of financial services and food processing. According to Moody’s, the proportion of oil exports fell from close to 80 per cent in 2011 to 62 per cent in 2014 and is projected at 44 per cent in 2017, though lower oil imports also contributed to the $5.6 per barrel drop in the external
30
breakeven oil price since 2014. Nonetheless, Bahrain still has the highest external breakeven oil price after Oman, at $69.9 per barrel, due to large import bills and lower overall export competitiveness.
FISCAL AND ECONOMIC CONDITION
“During 2016, economic activity was solid and inflation remained subdued. Overall GDP growth is estimated at three per cent, with strong nonoil growth of 3.7 per cent aided by the implementation of GCC-funded projects. Despite significant fiscal measures that were implemented, lower oil prices led to the overall
fiscal deficit and public debt in 2016 near 18 per cent and 82 per cent of GDP, respectively. The external current account deficit is estimated at 4.7 per cent of GDP,” said Padamja Khandelwal, IMF Mission Chief to Bahrain. Based on current levels of reserves and assuming stable and low oil prices at $50 per barrel, stable oil production, no further economic and fiscal reforms, Bahrain would only be able to sustain the projected 2017 current account deficit for around four years. According to the IMF, Bahrain’s overall growth has been projected at 2.3 per cent in 2017, continuing to be driven by strong infrastructure spending from GCC funds. Inflation levels in the
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01/05/2017 14:09
Photo credit: Dr Ajay Kumar Singh/shutterstock.com
Kingdom is expected to stay moderate. Owing to the higher expected oil prices and continued implementation of measures to reduce spending and raise non-oil revenues, the fiscal deficit is expected to fall to 12.6 per cent of GDP in 2017 and remain close to that level over the medium term. Furthermore a substantial increase in debt is also projected. Fitch Ratings expects Bahrain’s GDP growth of 2.4 per cent in 2017-2018 to be driven by constant hydrocarbon volumes (after a fall in 2016) and a moderation of non-hydrocarbon growth to three per cent from an estimated 3.4 per cent in 2016. Spending on projects financed by the $7.5 billion GCC
development fund provides crucial support to growth amid government retrenchment. $3.9 billion of projects had been awarded to contractors as at end-2016 up from $1.1 billion at end2015. Growth is also supported by stateowned enterprise projects (in oil, gas, and aluminium). Designed to minimise the adverse impact on vulnerable groups, a substantial fiscal adjustment is pertinent. In this context, fiscal measures in the near term could include the VAT, which is already agreed at the GCC level, and further rationalising spending on subsidies, which disproportionately benefit the wealthy, and social transfers. The wage bill, which is nearly 12 per cent of GDP and among the highest in the GCC, can be reduced in the near term by streamlining allowances and freezing nominal wages, suggested the IMF. Fitch expects the fiscal deficit to fall only moderately to 12.3 per cent of GDP in 2017 (assuming Brent averages $45/bbl), from an estimated 13.6 per cent of GDP in 2016 and 15.4 per cent of GDP in 2015. The estimated fiscal breakeven Brent oil price of $84/bbl for 2017 is well above expected oil prices in the medium term. Continued deficits will push debt to 84 per cent of GDP in 2018 from 75 per cent of GDP in 2016 (well in excess of the BB median of 51 per cent of GDP). Fitch’s deficit numbers include estimated extrabudgetary spending of 2.6 per cent of GDP, and the 2016 fiscal outturns are still preliminary. Subsidy reform, spending restraint and growing non-oil revenue underpin the adjustment effort. Gradual increases in domestic gas and fuel prices partly offset the negative effect of oil price weakness on hydrocarbon revenue, which Fitch expects to rise 13.4 per cent in 2017 after a fall of only 10 per cent in 2016. Over the medium term, sizable further consolidation can be achieved
GDP growth is estimated at
3 % 3.7 %
with strong non-oil growth of
External current account deficit is estimated at
4.7
%
of GDP Continued deficits will push debt to
84 % 75 %
of GDP in 2018 from
of GDP in 2016
in the context of a civil service review and will help support the goal of boosting private sector employment of Bahraini nationals. The IMF mission in its concluding statement further added that other measures are also needed to raise non-oil revenue to help finance the provision of government services. This includes reforms to strengthen the fiscal framework that would support the process of fiscal consolidation. cont. overleaf
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page 30-34 Country spotlight.indd 31
31 01/05/2017 14:09
cover its short-term external debt and amo rtization payments, resulting in a ojected pr EVI exceeding 1,500% in 017 2 s( ee Exhibit
prevent credit booms. Forer ofinst in of015 2r the EQ passed regulations governing consumer l Unlike O and l 5). A figu el ssatnce, han 100% VIatar denotes sufficientnew resources to cover upcoming external repayments.oans man,ending Bahrain is ar no t knregu ownlations to have reserves oUAE.of Second, the central th bank d entities, of llowing simil in he t utside ey. have sterilized of reign-currency inflows by to sovereign-wealth rat than po increasing As financing a resu lt, infl ation ess ll ththananBahrain's 4% onw( e average in » Oman fu isnds in amo reher af vourable sition. Althoughspending. its gross external requ irementswas are arger project 2017 current acco to reach o $f8.8new billion), these are are argely lnly co f ntribute assets, which totaled $38.6 spik billion ard, the ifting l of the subsidies and/o r untintrdeficit oduction taxes o ikely l vered toby oreign co to mo derate es asin COUNTRY FOCUS of September 2016 – abo ut equally shared between the central bank reserves andhet State General Reserve und F S( GRF; though
they have dropped from $41.5 billion at the end fo 2015). At this rate of depletion a( ssuming continued external debt issuance, similar to 2016), Oman ound nine year s oo ff reserves eft, l do prollar vidingrelit with a toco mfortable cushion. Oman'sn payment s mies are negat ively affect ed by he t hasstrarengthening the US ative other cu rrencies. I extthernal e past three position is al so supported by he t relatively ol w el vel of external indebtedness. Nonetheless, Oman would be part icularly vulnerable ve exchange rate toin aaudi SrenewedArabia t UAE appreciated by 0.3% 2 and 0.1%, 2 respectively s( ee Exhibit 8). While weakness and in ilohe prices.
cont. from page 31 ce fo non-dollar impo rted goods, it also reduces the demand orf and co mpetitiveness of GCC services, part icularly Exhibit 5 t. The opportunity cost of maint ainingto pressures a topeg isigher h onofthe r peg Bahrain and he t the UAE which have more diversified Heatmap denoting vulnerability pressures currency peg to US, dollar Heatmap denoting vulnerability on the currency to the US dollar eipts. Nonetheless, high trade openness and exible fl abour l markets allow of r some adjustment in co mpetitiveness.
g int erest rates will be mirr ored in GC C countries, ely or with a ag. l 3 Nevertheless, GCC whether immediat ble to issue debt in 015 2 and 016 2 at ow l rates to cover their fiscal and ernal borrowing needs. Mo reover, ext 5% of revenu e in mo debt affordability ratios, with interest payment s absorbing ess l than st countries. However, osed to an increase in erest int rates, with a debtaffordability ratio at 15% and gr oss borrowing requirements of ed in 017 2 s( ee Exhibit 9). EVI External Indicator: (Short-Term External + Currently Maturing Long-Term External DebtForeign /Official Foreign Exchange Reserves. EVI refers er fers totoththe e External VuVulnerability lnerability nI dicator: S( hort-Term External Debt Debt + 9Cu rrently Maturing Long-Term External Debt)/Official Exchange Reserves. Exhibit For SWF Assets, CA deficits’ andareKuwait are blank we surpluses forecast CA surpluses in 2017. For ‘FX FX ' Reserves Reserves ++ SWF Assets, Yrs Years of CAof deficits', ifgures, figures of r Qatafor r, thQatar, e UAE the andUAE Kuwait blank because webecause forecast CA in 2017. Source: Moody's Investors Service
ge rates have appreciated in GCC countries Source: Moody’s Investors Service
Settlements
01-2017
09-2016
05-2016
01-2016
09-2015
05-2015
01-2015
09-2014
05-2014
Interest payments to revenue, % Bahrain is expected to finance Debt affordability is strong, but Bahrain is most exposed to an interest rate hike United Arab Emirates its deficits through a mixture of Kuwait Oman Saudi Arabia foreign and local debt. Fitch forecasts Interest payments to revenue, % United Arab Emirates Qatar Bahrain government foreign borrowings to reach about $3.2 billion in 2017 and 4 14 March 2017 Sovereigns – Gulf Cooperation Council: Currency Risks Still Low on Average, But Rising in Oman and Bahrain $2.2 billion in 2018, after $2.9 billion in 2016. Fitch assumes domestic borrowing to be less than a third of these amounts, in line with 2016. A debt management strategy is still in the early stages of development, but the government wishes to limit domestic borrowing. The government would have recourse to other means of financing should a stressful situation arise. Its deposits in domestic banks (around Source: Moody’s Investors Service 14.2 per cent of GDP in 2016) Source: Moody's Investors Service mostly reflect the assets of the Social Insurance Organisation, which could increase its holdings of government INCREASING CURRENCY RISK initiated under the GCC Fund more debt. Government-owned Mumtalakat than doubled in 2016 to $3.1 billion, Currency risks across the GCC are Holding Company has an illiquid while the value of projects that went relatively low. However this is not the portfolio of mostly domestic assets to tender rose 20.5 per cent to $4.3 case for Bahrain. Moody’s in a recent with a balance sheet value of around billion. Consequently, the aggregate commentary pointed out that pressures 30 per cent of GDP. value of active projects should continue are building in Bahrain because of low Additionally, the GCC development to expand significantly in the course of foreign exchange (FX) reserves. fund reflects the broader support 2017 as work on these ventures begins. The country’s foreign-exchange that Bahrain enjoys from some GCC The aggregate buffer to protect the reserves halved to $1.5 billion (a countries, particularly Saudi Arabia peg is substantial, but reserves are very little over one month’s worth of and Kuwait. Further material support low in Bahrain. According to Moody’s, imports) between December 2015 and from the GCC is highly likely in case the Kingdom’s external debt levels are September 2016, before bouncing back of extreme political, financial, or fiscal extremely high at around 147 per cent to $2.7 billion in October. This is despite instability, given Bahrain’s smallSovereigns size and – Gulf GDP At the same time, in itsOman financial support funding made available to the Cooperation Council: Currency Risks Still of Low on. Average, But Rising and Bahrain strategic importance. buffers are insufficient to cover its Kingdom. The total value of projects 01-2014
09-2013
05-2013
01-2013
09-2012
bia
Debt affordability is strong, but Bahrain is most exposed to an interest rate hike
cont. on page 34
32
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Best SME Credit Fund 2015
Best Private Equity Firm in the Middle East, 2011, 2012, 2013, 2014 and 2015 Best Alternative Investment Firm, 2016
16/03/2017 17:32
at end-2016, compared to an est imated 2017 current account deficit of $552 million supported Bahrain between 1997 and mid-2 004 by al locating all revenue from the s
Exhibit 6
STRENGTH IN BANKING AND FINANCE
Oman's forex r these have dec
increasing external vulnerability Forex Reserves 7.0
EVI (RHS)
Forex Reserves
1800
EVI (RHS)
30.0
1600
6.0
25.0
1400
5.0
20.0
1200
4.0
1000
3.0
800
%
short-term external debt and amortisation payments, resulting in a projected External Vulnerability Indicator (EVI) exceeding 1,500 per cent in 2017. A figure of less than 100 per cent for the EVI denotes sufficient resources to cover upcoming external repayments. Unlike other GCC countries, Bahrain is not known to have reserves outside of the central bank.
Exhibit 7
Bahrain's foreign-exchange reserves have dropped, increasing external vulnerability reserves have dropped, Bahrain’s foreign-exchange
US$ BIl
cont. from page 32
600
2.0
400 1.0
US$ Bil
COUNTRY FOCUS
By contrast, Oman is arger l and ess l strategic to other GCC countries, meaning su ppo stance in recentregional conflicts, and he t sultanate is he t only GCC country that do coalition in emen. Y Along with the UAE, Oman pulled itself from the proposed GCC deposits from Saudi Arabia inanuary, J Oman has not received bal ance-of-payment
15.0 10.0
5.0
200
34
2011 - Jan 2011 - Apr 2011 - Jul 2011 - Oct
2016 - Jul
2016 - Oct
2016 - Apr
2016 - Jan
2015 - Jul
2015 - Oct
2015 - Apr
2015 - Jan
2014 - Jul
2014 - Oct
2014 - Apr
2014 - Jan
2013 - Jul
2013 - Oct
2013 - Apr
2013 - Jan
2012 - Jul
2012 - Oct
2012 - Apr
2012 - Jan
2011 - Jul
2011 - Oct
2011 - Apr
2011 - Jan
0.0 0 0.0 Banks are well placed to extend more credit to the economy and the government, enjoying profitability, as well as levels of capitalisation and EVI to the Vulnerability Indicator: n (Short-Term Debt +External CurrentlyD Maturing Long-Term EVIrefers er fers to External the External Vulnerability I dicator: S(External hort-Term ebt + Cu rrently EVI er fers to the Ext liquidity, and low nonperforming loan External Debt + Total non-resident deposits over on year)/Official Foreign Exchange Reserves. Maturing Long-Term External Debt + otal T non-resident deposits over one year)/Official Maturing Long-Term levels. Higher policy rates and yields on Foreign Exchange Financial Reserves. Foreign Exchange R Source: International Statistics, Moody’s Investors Service government bonds have not yet translated Source: International Financial Statistics, Moody's Investors Service Source: Central Bank into significantly higher private sector borrowing costs. Fitch expects credit to allows investors to establish limited senior unsecured local currency shortthe private sector to expand by four to partnerships nationwide, as opposed to term bonds have been affirmed at ‘B’. five per cent per year in 2017-18, from only in identified free zones. The law According to Fitch, Bahrain’s an estimated 3.5 per cent in 2016. offers new financing structures that ratings are supported by high GDP “Bahraini banks’ strong capitalisation complement the existing opportunities per capita and human development and liquidity will help them weather a available in the Kingdom. It is expected indicators (relative to the BB median), slowing in the pace of economic growth. to provide a strong boost to the financial a developed financial sector and the The Central Bank of Bahrain continues sector, supporting growth in real estate boost to external financing flexibility to strengthen its regulation and funds, private equity funds, venture from strong GCC support. The supervision of the financial sector, which capital and technology funds, start-ups, strengths are balanced by double-digit will support the continued development and Shari’ah-compliant funds, as well fiscal deficits, high and rising debt, and stability of the financial system. insurance. a highly oil-dependent government The exchange rate peg to the US dollar 5 as captive 14 March 2017 Sovereigns – Gulf Cooperation Cou budget and domestic political tensions continues to serve Bahrain well, and will that hamper fiscal adjustment. be supported by fiscal consolidation. CREDIT RATING The main factors that could lead Measures to reduce the costs of doing Fitch Ratings in February affirmed to positive rating action include business are key to boosting growth Bahrain’s Long-Term Foreign and Local a reduction in the budget deficit prospects and achieving economic Currency Issuer Default Ratings (IDRs) consistent with a decline of the diversification in Bahrain. They can help at ‘BB+’ with a stable outlook. The government debt-to-GDP ratio in the raise productivity and catalyse private country ceiling has been affirmed at medium term, and a broadly accepted investment, thereby contributing to ‘BBB+’ and the Short-Term Foreign and political solution to domestic political create better paying private sector jobs Local Currency IDRs at ‘B’. The issue tensions. On the other hand reasons for nationals and diversify the economy,” ratings on Bahrain’s senior unsecured that could warrant a negative rating Khandelwal added. foreign and local currency long-term action would be the failure to reduce Additionally, to support the country’s bonds have been affirmed at ‘BB+’. The the fiscal deficit leading to a sharper growing financial sector, Bahrain ratings on the Sukuk trust certificates than expected rise in the debt-to-GDP became the first country in the GCC issued by CBB International Sukuk ratio, as well as a severe deterioration to introduce an Investment Limited Company 5 have also been affirmed at of the domestic security situation. Partnership (ILP) law. The new move ‘BB+’. The issue ratings on Bahrain’s
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page 30-34 Country spotlight.indd 34
03/05/2017 15:37
GFH has researched and identified unique opportunities which have ensured the growth and diversity of the group’s asset base. The employment of deep market insights, innovative thinking, and investment intelligence, has ensured our portfolio develops in accordance with our strategy, and is capable of delivering remarkable performance. gfh.com | Invested with insight
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TRANSACTION BANKING
Embracing change Commercial Bank of Dubai sheds light on the three key trends emerging in the transaction banking space
I
t is evident that the global transaction banking industry is witnessing a paradigm shift by the way technology is being leveraged, radical demographic shifts across the region, and an ever evolving regulatory environment, which are shaping the banking industry today. The global ecosystem is constantly changing and a major contributor to this is the new kid on the block— fintech and payment banks, who are forcing conventional banks, regulators, and even corporates to change the way they think.
36
Over the past 12 to 18 months, the transaction banking industry has seen ups and downs, both in terms of catching up with new ideas and technologies available—few banks that have adopted change are working towards improving their services. The rest are trying to survive and sustain existing business, the so-called “defensive strategy”. There has been a great amount of success in migrating transactions from cash to cashless. There are three key trends seen changing the transaction banking space—supply chain, partner banks and fintechs.
SUPPLY CHAIN
Supply chain has been talked about by every global, regional and local bank. However, it was hardly part of strategic initiatives run by any bank or invested in until 2015. With recent technology advancements and big data, banks have realised the key to success. Supply chain enables banks to lock in the entire supply chain in the trade, which include SMEs to corporate profile clients. It allows banks to take informed decisions about the client’s credibility, helping banks to take an opportunity to finance or discount cont. on page 38
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page 36-38 Transaction Banking Commercial Bank of Dubai.indd 36
01/05/2017 16:58
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TRANSACTION BANKING
cont. from page 36
their invoices. Very few banks have developed sophisticated data analytics that blend with their clients’ treasury management systems to provide timely information and operational efficiency. With more banks jumping onto the bandwagon, this space is going to become very competitive, very soon.
Transaction banking is growing in importance Global corporate & investment banking revenues ($ billion)
Cash management
Transaction banking
Trade finance
PARTNER BANKS
Correspondent banking is a thing of the past, as it carries sentiments of a very conventional mindset. Banks, predominantly single-country banks have realised the need to have a relationship beyond traditional correspondent banking, ‘Partner Banks or Bank Alliances’ allow them to leverage on the technology of their partner banks, and offer faster processing of payments and bespoke service models to their clients.
Securities services Lending IBD Equities FICC 2010
2011
2012
— Commercial Bank of Dubai
FINTECH
The most revolutionary idea generators are fintechs. We are surrounded by apps which allow us to perform all kinds of transactions with ease. More importantly, these applications control a major part of lives today and this is just the beginning.
38
2014
2015
2016
Source: Coalition
Over the past 12 to 18 months, the transaction banking industry has seen ups and down, both in terms of catching up with the new ideas and technology available—few banks that have adopted the change are working towards improving their services. Partner banks gain success based on the reciprocal treasury and trade business as well as referral programmes. However, at the end of the day, a better client experience will decide if the relationship will be long term. The end result for a bank will always remain the loyalty of the client and its business.
2013
We are in the middle of a digital revolution. Today transaction banking is buzzing with terms such as biometric, bitcoin, API, artificial intelligence and digital wallet, these are technologies which are most talked about across the region. Banks who adopt them sooner will be in the game, the rest will perish, as they will not have clients who are tech-savvy and willing to perform transactions using their thumbprint. It is a competitive world out there and fintech are definitely helping banks to get more competitive to win more businesses and achieve better efficiency.
Analysts around the world have always predicted that the transaction banking business would be concentrated with a few global banks. However, post the 2008 recession which affected practically every bank, and with recent technology advancements, banks have been reviewing their businesses and have realised their potential. According to the recent data on the industry monitor provided by Coalition, the transaction banking business made almost three times the income for banks as compared to other peer products. Cash management accounted for 85 per cent of transaction banking revenues in 2016. There is no doubt that innovations in the transaction banking space will continue and with growth of over 20 per cent in digital payments, banks will continue to invest as they see increasing benefits to the clients and themselves.
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Bank Notes_v2.pdf
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Photo credit: Nattapol Sritongcom/shutterstock.com
PRIVATE EQUITY
ESG in private equity: from fringe to focal As institutional investors increasingly turn to alternative investments, including private equity to seek additional return and diversification, the pressure is now on private equity managers to step up and offer sustainable investment solutions, says Mirja Lehmler-Brown, Senior Investment Manager at Aberdeen Private Equity
J
ust as with listed equity, institutional investors in private equity are increasingly widening the scope of their analysis to include wider environmental, social and governance (ESG) issues, in addition to traditional risk/return analysis. ESG covers a broad range of factors, some of which have the ability to materially impact the financial prospects of an investment. They include environmental factors such as air, land and water pollution, social factors like employee diversity and governance factors such as the existence of anti-bribery and corruption policies.
40 page 40-42 Private Equity.indd 40
Many factors are driving the trend towards greater ESG integration. Technology is continually re-shaping the behaviour of businesses and consumers through game-changing developments in areas like artificial intelligence and robotics, autonomous vehicles and biotechnology. The UN’s 17 Sustainable Development Goals to be met by 2030 provide a framework that defines global development priorities and aspirations. National governments around the world are implementing new regulations relating to environmental pollution and waste disposal, workplace standards and corporate governance.
Meanwhile, investors are increasingly prioritising responsible investment in their evaluation of investment managers. At a fundamental level, private equity is about the transformative power of investment. It serves a key role in financing new businesses and upgrading and futureproofing old businesses. Importantly, the private equity governance model puts it in prime position to effectively incorporate ESG issues into value creation. Private equity managers can do this in two broad ways. Prior to investment, they can undertake research and due diligence to evaluate how sectors, value chains cont. on page 42
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PRIVATE EQUITY
cont. from page 40
and business models are being shaped by ESG factors. This can be extended to individual companies to identify those businesses that can take advantage of ESG trends. Secondly, once invested, an ESG framework can be used to reveal new strategic and growth opportunities. Performance can be reviewed and progress formally reported as a standard part of advisory boards meetings, and an annual public ESG review can be integrated into annual accounts. The global trend towards ESG integration in private equity means such processes will soon become necessary, rather than optional. This is where the Nordic countries and the Netherlands are streets ahead in pioneering ESG integration in private equity. Many large asset owners there take ESG considerations into account when selecting, appointing and monitoring investment managers for new mandates. In contrast, ESG considerations have not been a priority for asset owners in the US largely due to questions over whether this breaches their fiduciary duty to clients. Times are changing, however, and sustainability is fast gaining traction among the US investment community. ESG integration also has some way to go in Asia, although progress is being made in some countries, notably Japan.
ESG is most powerful when truly integrated into an organisation—where it goes far beyond the initial phase of just focusing on risk mitigation through strong compliance and a ‘do-no-harm’ approach. — Mirja Lehmler-Brown, Senior Investment Manager at Aberdeen Private Equity
ESG considerations for private equity firms ESG considerations for private equity firms What dodo wewe mean by ESG What mean byissuers? ESG issues? Environmental,social socail and governance (ESG) issues abroad agenda. Therefore, wethe break the issues Environmental, and governance (ESG) issues coverover a broad agenda. Therefore, we break issues down into five categories: Workplace, Community, Marketplace and Governance. and The governance. ‘ESG wheel’ below shows down into fiveEnvironment, categories: environment, workshop, community, marketplace The ‘ESG examples of issues within each category. Thewithin relevance of category. the issues will on of thethe specific situation, for example, wheel’ below shows examples of issues each Thedepend relevane issues will depend on the related a portfoliofor company’s sector or geography. specifictosituation, example, related to a portfolio company’s sector or geography. •
Waste management
• Waste management Hazardous materials/pollution • Hazardous materials/pollution •• Water Water use use •• Energy Energy use use •• Global Global warming/ warming/ emissions to emissions toair air use •• Resource Resource use •• Biodiversity Biodiversity • Land contamination
• Talent attraction • Talent attraction and retention and retention • Employee development • Employee development • Employee welfare • Employee welfare • Equality andand diversity • Equality diversity • Occupational health • Occupational health and safety and safety
•
•
Land contamination
Governance Governance
• Governance of sustainability • Governance of sustainability issues issues ••Board level responsibility Board level responsibility • Anti-bribery and corruption • Anti-bribery and corruption • Business ethics/conduct Business ethics/conduct ••Grievance procedures • Grievance procedures
marketing •• Responsible Responsible marketing • Responsible products Responsible products • Sustainability within Sustainability within the the supply supply chainchain
• •
• Community impact • Community impact • Local economic • Local economic development development • Human rights • Human rights • Community investment • Community investment
We recommend that a wide range of activities—from strategy and policy development to tools creation and use, and training are needed to appropriately manage ESG risk and opportunities. Source: PWC
We recommend that a wide range of activities – from strategy and policy development to tools creation and use, and training are needed to appropriately manage ESG risks and opportunities.
migration have become an everyday The global trend towards ESG integration in reality. Meanwhile, ageing demographics, private equity means such processes will soon become climate change and technological Strategyis where Policy the Procedures Tools Training Reporting Assurance necessary, rather than optional. This disruption all represent serious longerNordic countries and the Netherlands are streets ahead term challenges. Businesses and investors in pioneering ESG integration in private equity. aiming to prosper amid this disruption
— Mirja Lehmler-Brown ESG is most powerful when truly integrated into an organisation— where it goes far beyond the initial phase of just focusing on risk mitigation through strong compliance and a ‘do-no-harm’ approach. Companies that embed ESG into the core of their
42 page 40-42 Private Equity.indd 42
2 | ESG considerations for private equity firms | PwC
performance culture are better able to build a resilient organisation with a sustainable strategic agenda. This is all the more important given the many uncertainties that businesses and investors face today. Political unrest, weak economic growth and unprecedented
will need to adapt quickly. In this fast-changing world, many leading companies are appreciating and capitalising on the positive impact of integrating ESG factors into corporate strategy. Those that fail to prioritise ESG considerations are, in contrast, increasingly being held accountable for poor performance.
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01/05/2017 17:00
KIB Awards (Combined) 21x27 EN 24-3-2017.pdf
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CM
MY
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FINTECH
The fintech revolution: friend or foe? Majed Al-Ghanemi, Chief Operating Officer of Alawwal Bank sheds light on the development of financial technology in the Kingdom of Saudi Arabia
‘F
intech’ is a term that has been used in the banking sector for years. There are predictions that financial technology will see the demise of traditional banking practises, leading the way for digital-only competitors. With the onset of new financial technologies, the banking sector has been investing heavily in digital infrastructure and is delivering more services through digital channels, but what does this mean for the sector more broadly?
FINTECH INFRASTRUCTURE IN THE GCC
Although the majority of fintech investment has taken place in the US and Europe, a consensus is emerging across GCC countries that governments and financial intuitions
44 page 44-46 Fintech.indd 44
must invest in the development of fintech ecosystems. These ecosystems are critical to nurturing technological innovation that will improve overall efficiency in financial services. The strong support of financial technology in the GCC from investors, regulators, and banks has resulted in the industry being placed on the verge of uber growth. In Saudi Arabia financial technology is being encouraged at a government level as a result of a combination of factors. These include measures to reduce dependence on oil, a growing millennial population (50 per cent of the country is under the age of 30) and Vision 2030’s strategy which places a huge amount of importance on the role of technology and its contribution to the growth of the Kingdom.
Majed Al-Ghanemi
Regulatory changes have also had a huge impact in creating a positive ecosystem for digital adoption and with the stage set, it is clear the digital revolution is coming, but what impact will this have on the current status quo? cont. on page 46
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FINTECH
cont. from page 46
DISRUPTER OR INNOVATOR?
According to FICO, a data analytics company which focuses on credit ratings and consumer behaviour in the US, only 25 per cent of millennials display brand loyalty towards financial services. This is the reason fintech companies have been so successful in transforming the existing business model of banks. Fintechs have deconstructed banking into several verticals including robotic money managers, ewallets, and virtual currency. The reality is that fintech is both a disrupter and innovator; it has created pioneering customer experiences around mobile technology. Traditional banking experiences have become outdated. Consumers now expect their financial experiences to be mobile, personalised, customisable, and easily accessible. While the role of banks has not changed since the inception of money management, customer expectations revolved around these services have. Fintech solutions that have emerged have resulted in a range of developments from lower turn-around times for mortgages, to peer-to-peer lending/currency exchange, and crowd funding. This has greatly improved the customer experience, satiated customer demand, and has given scalable access to financial solutions in a manner which previously did not exist.
AN INTEGRATED BANKING MODEL
The solution? A digital ecosystem in which banks collaborate with fintech companies to provide seamless customer experience solutions. Banks are evolving in many ways to meet customer needs from investment to advisory boards. A collaboration will more effectively integrate supply-side specialisation, from origination to bionic authentication, with the core expertise of banks, such as regulatory frameworks, to meet customer needs. If we identify fintech competencies, integrate, and offer a
46 page 44-46 Fintech.indd 46
While banks need to react and embrace digital as a core value, the digital evolution needs to be integrated seamlessly into a bank’s business model to provide an enriched customer experience. — Majed Al-Ghanemi, Chief Operating Officer of Alawwal Bank distinguished user experience, the result would be greater than its parts. The banking industry is all about meeting customer needs and I cannot stress this enough. To be relevant today and in the future, digital innovation linked to customer lifestyle is extremely important; for example, today’s customers demand interaction with banks via their mobile phone and banks that fail to follow will be left behind. History is filled with examples of once great companies that failed to recognise and react to the digital revolution. Alawwal bank recognises this need to innovate. It has a history of doing so and will continue to do so. To demonstrate, Alawwal was the first bank in the Kingdom to offer transactional capability on the Apple watch. We have also launched an app which encompasses a fully functional independent banking channel allowing customers to start banking from their mobile devices. Today all transactions are available via Alawwal Mobile and we have material plans to further increase our presence in this domain. More recently, we launched an innovative banking model based on
technology and the retail experience. Ibda is a digital branch which offers customers an integrated experience and redefines the traditional banking model into a state-of-the-art café facility. The new branch allows customers to apply and instantly open an account or receive a credit card in under seven minutes while enjoying a selection of beverages and snacks from its partner; Costa Coffee. We expect Ibda to set new benchmarks in how banks engage with their customers across the MENA region. As for the demise of traditional banks to digital models, it is difficult for one to exist without the other. While banks need to react and embrace digital as a core value, the digital evolution needs to be integrated seamlessly into a bank’s business model to provide an enriched customer experience. Traditional banks have strong reputations, invoke trust, and provide security. While technology solutions offer many advantages, traditional bankers are best placed to integrate the technology into existing, established ecosystems to offer the most value to customers.
THE REALITY IS... The current customer experience is outdated — consumers now expect their financial experiences to be:
Mobile
Personalised
Customisable
Accessible OPEN 24 hr
Source: Alawwal Bank
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ISLAMIC FINANCE
Net profitability will not rise at old rates, but will continue to rise.
GCC Islamic banks set to be more profitable in 2017 According to Nitish Bhojnagarwala, Assistant Vice President—Analyst at Moody’s, Islamic banks will continue the trend they started in 2016 in outpacing net profits of conventional banks
T
here are many arguments why Islamic banks are superior to their conventional counterparts, but from 2010 to 2015 in the GCC, profitability was not one of them. In fact, in that time frame, GCC Islamic banks were less profitable, which, according to Moody’s, was due to their higher operating costs and the cost of risk, which outweighed their strength in margins, which were in fact more favorable than those of conventional banks. But the tide began to change. The profitability gap slowly shrink starting in
48 page 48-50 Islamic Finance.indd 48
2014 before disappearing completely. In 2016, Islamic banks actually surpassed the conventional heavyweights in the markets in terms of profitability, ‘helped by continued stronger margins and an improved cost of risk performance’, according to Moody’s. And the good news for Islamic banks doesn’t end there. Moody’s expects this positive performance to continue in 2017, with Islamic banks set to once again report higher net profitability in comparison to conventional banks. “This reflects our view that the Islamic banks’ lower funding costs will support
their margins against a backdrop of rising interest rates, while their cost of risk eases due to improvements in their risk management and asset quality,” said Nitish Bhojnagarwala, Assistant Vice President—Analyst at Moody’s. The Islamic banks’ stronger performance has been reflected in some recent rating actions in the GCC region. In terms of their stronger margin, it is mainly driven by low funding costs, which is due to their reliance on current and savings account balances, as well as their higher asset yield tendency. This tendency is due to their focus on retail
www.bankerme.com
03/05/2017 15:39
lending to the real estate sector, according to Bhojnagarwala. “We expect Islamic banks to retain a margin advantage of about 40 basis points over conventional banks in 2017. Islamic banks’ net profit margins are analogous to conventional banks’ net interest margins.” While net profitability will surpass conventional, Islamic banks will remain less cost-efficient in 2017. This higher cost base, according to Bhojnagarwala, is due to the fact that they are “younger and because they are more focused on retail customers, entailing higher levels of investment in branch network and technology. Conventional banks in the GCC, in contrast, have already established their branch networks.” Another reason for the higher profitability is due to convergences in the cost of risk. “Higher impairment charges on loans and investments have historically dampened Islamic banks’ profitability,” said Bhojnagarwala. “However, we expect their diversification away from real estate lending towards other sectors, and their improving risk management practices, to reduce the pressure on their cost of risk over next 12-18 months.” The improvement in the GCC Islamic banks’ profitability and broader risk profile has been reflected in recent rating actions. In the last 24 months, Moody’s has changed the rating outlook of two Islamic banks (Dubai Islamic Bank and Boubyan Bank) to positive from stable, upgraded the ratings of Qatar International Islamic Bank and Masraf Al Rayan; and affirmed the ratings of the largest Islamic bank in the world, Saudi Arabia-based Al Rajhi Bank, at a time when most bank ratings in the country were downgraded because economic headwinds were pressuring their standalone risk profiles. It is due to their favourable funding structure that Moody’s expects Islamic banks’ to maintain stronger margins than conventional lenders.
Islamic banks had weaker profitability in 2010-1015 Islamic Banks
Net Income/Tangible Assets 2.0% 1.8% 1.6% 1.4% 1.2%
1.0% 2010 2011 2012 2013 2014 2015 Q3 2016 Source: Banks’ financial statements, Moody’s Investors Service
Islamic banks have higher CASA balances CASA balances as a % of Customer Deposits
Islamic Banks
Conventional Banks
70% 60%
58%
55%
50% 40%
37%
54% 41%
42%
45%
57%
56%
55%
54%
47%
45%
48%
30% 20% 10% 0%
2010 2011 2012 2013 2014 2015 Q3 2016
Source: Banks’ financial statements, Moody’s Investors Service
Islamic banks’ have stronger margins Cost to Income Ratio
Islamic Banks
Conventional Banks
4.0% 3.5% 3.0% 2.5% 2.0% 2010 2011 2012 2013 2014 2015 Q3 2016 Source: Banks’ financial statements, Moody’s Investors Service
“The Islamic lenders’ are funded largely by current and savings accounts (CASA), a relatively stable and low cost form of funding. In GCC countries, retail customers attach high importance to Islamic banks’ ethical investment principles, providing
the lenders with a large and stable base of low-cost CASA balances. This leads to weaker efficiency metrics, as the focus on retail customers requires extensive branch networks, but it supports the Islamic banks’ liquidity and profitability,” said Bhojnagarwala. cont. overleaf
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Conventional Banks
49 01/05/2017 17:05
ISLAMIC FINANCE
cont. from page 49
This low-cost funding structure will be particularly beneficial in the current environment of rising interest rates, as upward pressure on borrowing costs will widen the Islamic banks’ cost of funding advantage, according to Bhojnagarwala. “This is because conventional banks hold higher balances of rate-sensitive term deposits, which will reprice at higher levels, driving up their funding costs.” These factors, coupled with Islamic banks’ stronger retail and real estate lending franchise, 10 which tends to return higher yields, have consistently given them stronger margins than their conventional peers, according to Bhojnagarwala. However, their margin advantage narrowed between 2010 and 2015 as they diversified away from relatively high yielding real estate loans. High provisioning charges on loans and investments have dampened the profitability of Islamic banks in the past, but these charges have fallen in line with those of conventional peers in recent quarters, and Moody’s expects this trend to continue. “Previously, a high proportion of these charges was driven by Islamic banks’ greater appetite for investing in the volatile real-estate sector, seen as closer to Shari’ah principles due to the tangibility of property assets. This, combined with a lack of appropriate risk management practices, led to a deterioration in asset quality and an increase in impairment charges,” said Bhojnagarwala. Lower oil prices will continue to weigh on GCC economies, making the operating environment for banks more challenging. However, Moody’s expects that sustained improvement in Islamic banks’ risk management, combined with more diversified lending, will continue to reduce the pressure on the cost of risks for Islamic banks.
50 page 48-50 Islamic Finance.indd 50
We expect Islamic banks to retain a margin advantage of about 40 basis points over conventional banks in 2017. — Nitish Bhojnagarwala, Assistant Vice President – Analyst at Moody’s
Islamic banks are less cost-efficient than their conventional peers Cost to Income Ratio
Islamic Banks
Conventional Banks
45% 40% 35% 30% 2010 2011 2012 2013 2014 2015 Q3 2016 Source: Banks’ financial statements, Moody’s Investors Service
Cost of risk has improved for Islamic banks Islamic Banks
Loan Loss Provision to Pre-Provision Income
Conventional Banks
35% 30% 25% 20% 15% Q3 2016 2010 2011 2012 2013 2014 2015 Source: Banks’ financial statements, Moody’s Investors Service
List of rated fully-fledged islamic banks in the GCC* BASELINE CREDIT ASSESSMENT
ISSUER / DEPOSIT RATING
OUTLOOK
United Arab Emirates
ba2
A2
Negative
K uwa it
baa3
A2
Stable
ba2
A1
Negative
Al Rajhi Bank
United Arab Emirates Saudi Arabia
a3
A1
Stable
B a hra in I s la m ic B a nk
B a hra in
b3
Ba3
Stable
6
B a nk A l-J a z ira
S a ud i A ra b ia
baa3
Baa1
7
Bank AlBilad
Saudi Arabia
baa2
A3
Stable Stable
8
B a rwa B a nk Q . S . C .
Q a ta r
baa3
A2
Stable
9
B o ub y a n B a nk K . S . C . P .
K uwa it
ba1
Baa1
Positive
10
D ub a i I s la m ic B a nk P J S C
United Arab Emirates
ba3
Baa1
Positive
11
Khaleeji Commercial Bank B.S.C
Bahrain
b1
Ba3
12
Kuwait Finance House K.S.C.P.
ba1
A1
13
Ma s ra f A l R a y a n ( Q . S . C . )
Kuwait Q a ta r
Negative Negative
baa2
A1
Stable
14
Qatar International Islamic Bank (Q.S.C.)
Qatar
baa3
A2
Stable
15
S ha rja h I s la m ic B a nk P J S C
baa3
A3
Stable
16
W a rb a B a nk K . S . C . P .
United Arab Emirates K uwa it
ba3
Baa2
Stable
NO
NAME
DOMICILE
1
A b u D ha b i I s la m ic B a nk
2
A hli U nite d B a nk K . S . C . P .
3
A l H ila l B a nk P J S C
4 5
* Moody’s also include two unrated Islamic banks in their analysis. Source: Banks’ financial statements, Moody’s Investors Service
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03/05/2017 15:40
AUB-Banker-Middle East-Magazine-21X27 cm.pdf
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30/04/2017 16:54
Photo credit: Jirsak/shutterstock.com
HUMAN CAPITAL
Building the right workforce Speaking to Banker Middle East, Matthew Cowan, Regional Director of the Chartered Institute for Securities & Investment Middle East discusses the importance of the development of qualified talent in the financial sector
D
escribe the current development of the financial sector in the region?
The Middle East is one of the fastest growing economies in the world, and has built a strong position as a financial centre over the past few decades, as well as establishing itself as a trading hub, connecting east and west through maritime routes. The availability and value of oil in the region created a large amount of wealth throughout the oil boom, but as it can be a turbulent industry, this can cause markets and the economy to fluctuate. As the region now diversifies its economy away from oil dependence, and focuses on the growth of other sectors, the demand for wealth
52
management in the Middle East is growing at a rapid pace. It is paramount that wealth and asset management in the region stays one step ahead of market trends and are prepared for any changes in the economic landscape, squeezing margins in some areas and opening up opportunities in others. This emphasises the need for integrity and professionalism in the industry.
(CISI) qualified professionals are committed to maintaining and enhancing their skills annually through continuing professional development (CPD) to keep their skills relevant and up to date in the fast moving world of financial services. Underpinning qualifications and CPD all CISI professionals uphold the highest standards of integrity by agreeing to abide by our code of conduct.
How important is a qualified talent pool as the engine of growth for the industry?
How would you define qualified professionals?
A qualified talent pool is a measure of competence for employers and reassurance for clients. Chartered Institute for Securities & Investment
We define professionalism as the effective combination of knowledge, skills and behaviour. Knowledge is acquired via professional qualifications and skills are maintained through cont. on page 54
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HUMAN CAPITAL
cont. from page 52
annual CPD. The behaviour aspect of professionalism relates to integrity and its importance cannot be underestimated in maintaining confidence in financial services markets. So as knowledge, skills and behaviour are key to professionalism for employees, it is equally important for employers to show a commitment to their staff by providing them with opportunities to constantly develop their skills in this dynamic industry. Ensuring the workforce is up to date with regular training and development programmes allows firms throughout the regions to improve accountability and raise standards across the profession.
What do you think is lacking in banking and finance professionals across the region?
The GCC countries and the UAE, in particular have made great strides in establishing a knowledge-based economy and society. As part of its Vision 2021 the UAE aims to develop an intensive and diversified knowledge economy. The overall objective of this
Matthew Cowan, Regional Director, Chartered Institute for Securities & Investment Middle East
A qualified talent pool is a measure of competence for employers and reassurance for clients.” Matthew Cowan, Regional Director of the Chartered Institute for Securities & Investment Middle East — Matthew Cowan plan is to enrich the wealth of natural and financial resources, invest in technology and infrastructure and demonstrate visionary leadership. Continuing professional development for staff should be an integral part of a financial services business’s plans. This is particularly important if advisers are to continue to meet the future challenges and demands of the investment market and lend support towards achieving Vision 2021.
54
CISI’s qualifications, e-learning modules, CPD courses for practitioners and workshops on integrity and ethics assist to promote professionalism and trust in financial services. These programmes are aimed at raising standards in the sector and best practise across the region to ensure the market is fully equipped for economic demands. We have seen an increase in interest in CPD in the Middle East as more countries acknowledge
the benefit of a well-educated and professionally qualified financial services team. Since CISI first began working in the Middle East in 2007 a growing number of individuals have joined this global professional body as members showing their commitment to raising standards in the region. We have seen growth in partnerships with regulatory authorities in UAE, Kuwait, Oman, Qatar, Bahrain, Palestine and Lebanon.
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ADVERTORIAL
Geoff Geoff Geoff Cook Cook Cook Geoff Cook
Chief Chief Chief Executive, Chief Executive, Executive, Executive, Jersey Jersey Jersey Jersey Finance Finance Finance Finance Limited Limited Limited Limited
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UNITED UNITED ARAB UNITED UNITED ARAB ARAB ARAB UNITED ARAB EMIRATES EMIRATES EMIRATES EMIRATES EMIRATES OMAN OMAN OMAN OMAN
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As AsAs such such such Asthe the such the the The The The suitability suitability The suitability suitability of ofthese of these these of products these products products products isisone is one one is reason reason one reason reason why why why Jersey Jersey why Jersey Jersey has has has has Island Island Island Island isisperfectly is perfectly perfectly is perfectly placed placed placed placed to tosupport to support support to support the the the complex complex the complex complex estate estate estate estate planning planning planning planning long long long been been long been aa been preferred preferred a preferred a preferred jurisdiction jurisdiction jurisdiction jurisdiction for forfor private private private for private clients clients clients clients from from from the the from the the and and and investment investment and investment investment ambitions ambitions ambitions ambitions of ofGCC of GCC GCC ofinvestors. investors. GCC investors. investors. GCC, GCC, GCC, in GCC, inaddition in addition addition in addition to tothe to the the to growth growth the growth growth in inthe in the the number in number the number number of offamily of family family of family offices offices offices offices For For For further further For further further information information information information on onon Jersey’s Jersey’s Jersey’s on Jersey’s world-leading world-leading world-leading world-leading private private private private in inthe in the the region, in region, the region, region, aaservice service a service a service which which which which Jersey Jersey Jersey Jersey has has has been been has been providing providing been providing providing to toGCC to GCC GCC to GCC wealth wealth wealth management management management management services, services, services, services, contact contact contact contact either either either either Cormac Cormac Cormac Cormac Sheedy Sheedy Sheedy Sheedy or oror or families families families families for forfor many many many for years. many years. years. years. The The The Island Island The Island Island also also also has has also has aalongstanding has longstanding a longstanding a longstanding wealth Richard Richard Richard Richard Nunn, Nunn, Nunn, Nunn, our our our GCC GCC our GCC business business GCC business business development development development development representatives: representatives: representatives: representatives: relationship relationship relationship relationship with with with many many with many intermediaries many intermediaries intermediaries intermediaries and and and HNWIs HNWIs and HNWIs HNWIs in inthe in the the region, in region, the region, region, This This This isisThis an is anan exciting exciting isexciting an exciting time time time for for time for Jersey Jersey Jersey for Jersey and and and its its and its relationship relationship relationship its relationship with with withwith the the the GCC. GCC. the GCC. For GCC. For For more more For more than more than than ten ten than ten years, years, ten years, years, Jersey Jersey Jersey Jersey Finance, Finance, Finance, Finance, Jersey’s Jersey’s Jersey’s Jersey’s government government government government and and and the the and the Island’s Island’s the Island’s Island’s regulator regulator regulator regulator have have have been been have been regular regular been regular regular visitors visitors visitors visitors to tothe to the the to region. region. the region. region. 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offering offering offering offering appropriate appropriate appropriate appropriate regulation regulation regulation regulation and and and aatight-knit and tight-knit a tight-knit a tight-knit network network network network of ofof of email: email: email: email: richard.nunn@jerseyfinance.je richard.nunn@jerseyfinance.je richard.nunn@jerseyfinance.je richard.nunn@jerseyfinance.je professional professional professional professional firms, firms, firms, firms, most most most of most ofwhich of which which of which are are are experienced experienced are experienced experienced in inmanaging in managing managing in managing email: email: email: email: cormac.sheedy@jerseyfinance.je cormac.sheedy@jerseyfinance.je cormac.sheedy@jerseyfinance.je cormac.sheedy@jerseyfinance.je Sharia-compliant Sharia-compliant Sharia-compliant Sharia-compliant products products products products and and and services. services. and services. services. Furthermore, Furthermore, Furthermore, Furthermore, Jersey Jersey Jersey Jersey Tel: Tel: +971 +971 Tel: +971 (0) +971 (0)(0) 44319 4 319 (0) 319 9923 49923 319 9923 9923 offers offers offers offers excellent excellent excellent excellent market market market market access access access access into into into both both into both London London both London London and and and the the and the EU. EU. the EU. EU. Tel: linkedin.com/company linkedin.com/company linkedin.com/company linkedin.com/company youtube.com/jerseyfinance youtube.com/jerseyfinance youtube.com/jerseyfinance vimeo.com/user17505711 vimeo.com/user17505711 vimeo.com/user17505711 vimeo.com/user17505711 jerseyfinance.je jerseyfinance.je jerseyfinance.je youtube.com/jerseyfinance @jerseyfinance @jerseyfinance @jerseyfinance @jerseyfinance jerseyfinance.je /jersey-finance /jersey-finance /jersey-finance /jersey-finance
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IN-DEPTH
Breathing life into customer experience Nabilah Annuar sat down with Rasool Hujair, CEO of Najm and winner of Best Credit Card for the Banker Middle East UAE Product Awards, to gauge his views on a creating meaningful financial products for consumers
H
ow important is customer experience for a retail financial product?
We are at a time when the product or the service offered by a company is no longer the differentiator for customers. What truly helps brands stand out is the customer experience they offer, and how they make their customer feel. This is because consumers are changing. The challenge for our industry is to consistently provide a seamless customer experience, specifically to younger generations who will become more dominant and more demanding in the coming years. For example, when getting a taxi, my generation would have either queued up for one, reserved one through a telephone operator or flagged one by the side of the road. These days, all you need to do is download an app and after a few minutes, a taxi will already be on the way to your exact location. This app will also track where the car is, notify you when it is approaching, allow the customer to rate his/her ride and provide an option to pay via credit card, enabling a seamless transaction and overall experience for the customer. This type of experience that we need to mirror, as it is what we are being compared to.
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At Najm, it is our priority to focus more on the digital front, better understand our customers, and explore how we can best tailor our product and services to fit their needs and to make it effortless and enriching. That is what will make us stand out from other financial solutions providers in the market.
In this day and age, technology plays an important role in enabling financial transactions. How has this shaped the UAE market and how does Najm cater to this demand?
Rasool Hujair, CEO of Najm Photo credit: Florante Magsakay/CPI Financial
The financial services sector is going through a technological transformation, which is quickly making what used to seem impossible, possible and within reach. In the UAE, we are lucky in many ways as we are at the centre of entrepreneurial activities and technological advancements in the region, with the Government being the pioneer in implementing smarter services. The private sector is in the position of having to catch up with the Government’s efforts when it comes to providing the ideal user experience. I believe we need to take advantage of this progress, this drive to transform into all things digital. It is both a challenge and an opportunity. It’s a challenge in the sense that if we do not act quickly, we fall behind quickly. And it’s an opportunity because if we take action fast enough, we would be able to capture a bigger market share and stand out from the crowd. At Najm, we continuously invest in our infrastructure to meet those evolving conditions. We have partnered with some of the top technology providers to ensure that what we adopt flexible and scalable solutions that allow us to focus on providing effortless and enriching customer experiences. We started with mobile applications: 60 per cent of our customers have downloaded our Najm app, with more than a quarter of usual enquiries now done via the app. We also have an enterprise product that goes beyond a payment method: cont. overleaf
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IN-DEPTH
cont. from page 59
our Corporate credit card programme. This is not only a card but an entire expense management system for companies that focuses on the start-to-end process of corporate travel, entertainment planning and cost management. In addition to this, we also have invested in Beam Wallet, a tech startup that allows payments to be done entirely with one’s mobile phone. The more a customer uses it, the more we are able to learn about them, enabling us to push specific information to them at the appropriate time. This helps to create added value for the customer.
In your opinion, what is most lacking in the retail financial market?
I would not say there is a lack, but rather a lag. As technology advances, key bodies such as regulators have the responsibility to ensure that all processes are accurate, transparent and readily available for use for financial institutions. An example of this is Know Your Customer (KYC) processes. Some companies have already begun using electronic KYC processes in terms of gathering data about customers, whereas the regulations in place are still based on the more traditional KYC methods used years ago. That is why I would say that the ability to keep up and ensure the regulations are up to date will be key to filling this gap.
With the different age groups in the market, how do you cater to this demographic and ensure that the customer experience is suitable for that particular customer?
I do not really see segmentation of customers anymore. On the contrary, there seems to be a blurry line between demographics, and each person becomes their own ‘type’ of customer. What technology does for us at Najm is it gives us the opportunity to personalise each customer’s experience to their liking, rather than resort to grouping them into generic demographics.
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This ensures that we are able to communicate with them on a more personal level. With the use of data that we have gathered about our customers’ habits, we are able to make the experience truly tailored to them. With the advent of artificial intelligence, this process will only become more refined, more precise and much faster. Mobile penetration is at 99 per cent in the UAE, so our opportunities are massive.
What are the challenges that come with personalisation?
The main challenge in creating tailored experiences is communicating to customers that we are using their data to improve their customer experience, and not to infringe on their privacy. Once that is made clear, we instantly create a line of trust between them and us. This also raises the question of cybersecurity: ensuring customers that their details are safe and protected is how we create value and trust. We are an institution that is using this data for to sole purpose of bettering our customers’ experience.
technologies that are made available to us. For example, this will extend to having the ability to know what the customer is looking for, and providing them with appropriate suggestions the minute they walk into a store. Essentially, it’s being able to offer the highest degree of trust and value to the customer through technology.
You recently won Best Credit Card for the Najm series of Voyager cards. What does this mean to you and what can the market expect from Najm this year?
We are very pleased to receive the Award from Banker Middle East. Voyager is a product that we are proud of. We designed Voyager not to be a credit card, but a comprehensive travel programme, with a credit card as one of the offerings that the Voyager platform has. Again, we’ve kept the customer’s experience at heart, and Voyager suggests the ideal travel itinerary for the user at hand, depending on preferences and previous habits. One of the key things for us is improving the onboarding experience for customers. In effect, within a few weeks, we will have
Moving forward, the challenge is to be able to show each customer that they are valuable and that we are still a humane company, without entirely relying on manpower, and leveraging the technologies that are made available to us. — Rasool Hujair, CEO, Najm In terms of technological advancements, how do you see this developing over the next five years?
Digital will be mainstream, if it isn’t already. Cloud-based computing will be the norm. Artificial intelligence will be in everything, as well as the use of robotic automation. We will see mundane repetitive tasks being taken over by machines. Moving forward, the challenge is to be able to show each customer that they are valuable and that we are still a humane company, without entirely relying on manpower, and leveraging the
an infrastructure in place to issue our Najm credit cards instantly, to better cater to the fast, dynamic lifestyle of our customers. Our products today cater to the different needs of society—for example shopping and travel—but there are also segments that we believe we still need to address. At the moment, we are researching and testing out a few concepts for customers. The next phase would be to have focus groups evaluate them, and share their inputs—creating products that answer our customers’ needs is the main aim of our product development process.
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AWARDS
BME PRODUCT AWARDS 2017 — UAE WINNERS Most Innovative Product Launch and Campaign RAKBANK
Best SME Internet Banking Service National Bank of Fujairah
Best SME Loan/Finance RAKBANK
Best SME Trade Finance Offering National Bank of Fujairah
Best New SME Product Union National Bank
Best Retail Customer Service Emirates NBD
Best Call Centre Union National Bank
Best Online Banking Service Emirates NBD
Best Customer Deposit Scheme Union National Bank Best Current Account Product Union National Bank Best Co-branded Credit Card Dubai First
Best Home Finance Abu Dhabi Islamic Bank Best Premium Islamic Card Emirates Islamic Best Savings Account Emirates Islamic
Best Credit Card Majid Al Futtaim Finance
Best Corporate Account Noor Bank
Best Customer Service National Bank of Fujairah
Best Structured Product Noor Bank
Best Corporate Advisory Service NBF Capital
Best Home Finance Product Noor Bank
Best Treasury Management National Bank of Fujairah
Best Cash Management Commercial Bank of Dubai
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IN-DEPTH
Elevating cybersecurity management to another level In an exclusive interview with Banker Middle East, Wayne Loveless, Principal, Cybersecurity and Lutfi Zakhour, Senior Vice President, Financial Services, both at Booz Allen Hamilton MENA extensively discuss major issues surrounding blockchain technology and cybersecurity
W
hat are the major cybersecurity issues and concerns in this region?
Wayne Loveless: Cybersecurity is a growing concern across organisations around the world. In fact, this was discussed at the World Economic Forum’s annual summit in Davos this year where cybersecurity was highlighted in the list of business risks across different sectors. Average annual losses to companies worldwide from cyberattacks now exceed $7.7 million per organisation, according to the Ponemon Institute. For example, one of the most notable cases to hit GCC shores was the Shamoon virus attack, which shut down more than 30,000 workstations at Saudi Aramco in 2012. Despite the exceptional efforts to remediate and protect systems after the 2012 attack, the Shamoon virus resurfaced in January this year, impacting several government agencies and private sector companies. Given these growing cyberrisks and threats, more organisations in the
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region are waking up to the potential hazards that a weak cybersecurity readiness presents. Currently, one of the major concerns around cybersecurity in the region is preparedness. As technology and digitisation becomes more prevalent across industries, the risk of attackers successfully penetrating and compromising systems, and the vital data they store and process, is only increasing. In addition to the government, other sectors that have been identified as being particularly vulnerable to cyberdisruption include finance, energy, manufacturing, utilities and transportation.
More than 50 per cent of recorded incidents in the Middle East region were conducted against oil and gas corporations, according to the Repository of Industrial Security Incidents (RISI) data. This is but a precursor to the potential disruption of the energy and oil and gas sectors’ industrial systems. A more targeted and concerted effort from governments and private companies in the region is warranted. Therefore, investing in a robust resilience strategy that could prevent or reduce the impact of potential threats and protect national interest is key.
Lutfi Zakhour
50%
of cybersecurity incidents were conducted against oil and gas corporations
How is financial regulation developing in these markets and in what ways will it help combat cybersecurity breaches?
Lutfi Zakhour: Recent brazen attacks have brought regulatory requirements and standards in the financial services sector to the limelight. For instance, last year a Bangladesh hack leveraged the SWIFT payment system, allowing attackers to successfully steal $81 million of their targeted $951 million from Bangladesh Bank before a spelling error compromised the attack. With regional financial institutions also not being immune to such attacks GCC governments have been eyeing changes to the regulatory role within their respective countries. While SWIFT is taking actions to improve security requirements and preclude a repeat of the Bangladesh Bank heist, GCC governments are also increasingly viewing financial services as a critical national infrastructure. A prime example can be found in the UAE where the federal government is seeking across the board improvements to the cybersecurity of critical infrastructure. In fact, the National Electronic Security Agency (NESA) is rolling out its latest cybersecurity framework with an initial focus on the financial services industry. Further actions taken in other GCC countries include new updates to e-transactions laws and cybercrime laws to place further emphasis and controls on ensuring the protection of both banks and consumers. cont. overleaf
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IN-DEPTH
cont. from page 63
With the MENA region waking up to the importance of digital technologies, today’s financial landscape has seen key players re-evaluate their strategies and regulations to guarantee maximum efficiency and security. What is your view on this?
LZ: The financial services sector in the UAE, specifically, has picked up on blockchain technology, with one leading bank pursuing proof of concept of a blockchain network for international remittances and open account trade finance and another launching a pilot of blockchain, using the technology through Ripple. Additionally, Dubai has announced plans to use blockchain for all government documents by 2020 and several departments have announced that they would explore the technology in areas including healthcare, wills and diamond transactions. Other initiatives include The Global Blockchain Council, established by the Dubai Museum of the Future Foundation, which has spearheaded several blockchain-related initiatives and launched pilot projects across several sectors such as healthcare, diamond trade, title transfer and business registration in order to test the cost-saving and time reducing effects of the technology. Blockchain has now been recognised as a potentially gamechanging approach to cybersecurity. Described as a generational disruptive force in the financial services industry, these distributed ledgers maintain tamper-proof lists of ever-growing data records and enable secure value exchanges—money, stocks, or data access rights—between different parties. Blockchain also creates a more secure, efficient, and collaborative ecosystem for sharing and accumulating critical data and information. It is particularly beneficial in the financial services sector, where it could enable safe
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and secure applications across payments services, trade finance and KYC registries benefitting both firms and consumers. We foresee a lot of growth potential for blockchain in the GCC, across different industries, with several entities wanting to continuously advance the technology in order to complete their digital transformation and truly realise the potential of a smart city.
What are your suggestions to improve the cybersecurity standards in the region?
WL: Cybersecurity standards represent a baseline for tackling cybersecurity threats and improving overall readiness in prevention and mitigation of cyberincidents. While progress towards minimum standards for security is underway across the GCC and many institutions continue to follow industry standards and best practises, further efforts will be needed to improve security.
more fully how organisations can improve beyond the basics. This means foregoing basic compliance in favour of a maturity-based approach to cybersecurity. Building cybermature organisations requires maturation across all three perspectives of cybersecurity. It does not mean having the latest and greatest technology. While technology certainly plays a role in automating much of the security domain, it is actually other dimensions—namely, people and process— where greatest levels of improvement are needed across the region. Organisations are only ever as secure as their people. Each employee, no matter where they stand within an organisation, is often both the first and last line of defence. Better trained people, more cyber-focused skillsets, and a defined organisation-wide cybersecurity focus on improvement are three key means of improving organisational prevention, protection, and response.
The challenges would lie in that with the creation of these new services, comes the need to support their development, marketing, provisioning and continuous enhancement, among other requirements, to support the creation of jobs across the current and future financial services value chain. — Lutfi Zakhour, Senior Vice President, Financial Services, Booz Allen Hamilton As demonstrated in the SWIFT attacks on the Bangladesh Bank, attackers can take any number of routes when compromising the security of systems and data, both stored and in transit, to meet their motives. With cybercriminals, nation states, and hacktivists all seeking to meet their objectives across the region, a more robust, and beyond baseline perspective on security is certainly warranted. One of the biggest impediments to improving cybersecurity is not necessarily improving compliance to the minimum standards but understanding
Additionally, another area of focus should be improving the overall processes around cybersecurity. Many of the cybersecurity standards actually centre on the process aspect of the cybersecurity dynamic. Stronger governance, adherence to sound practises and procedures, and implementation of security first processes can ensure that systems and data remain secure while continued growth in digitisation and adoption of technologies like blockchain rapidly progress. cont. on page 66
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03/05/2017 16:14
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IN-DEPTH
cont. from page 64
How will big data and blockchain technology impact the financial sector? What are the pros and cons of these technologies?
LZ: There is no doubt that big data, predictive analytics and blockchain technology in the financial sector (and beyond) have the potential to create a myriad of new services and a new frontier of business intelligence. Deploying big data can fuel job creation especially for personnel with specialised skills such as data scientist, digital app developers, digital payment experts, and cybersecurity specialists. It can also fuel lateral job movements and a re-positioning of current jobs in the financial sector, whereby traditional counter clerk positions will transition to financial services analyst positions.
Furthermore, data analytics capabilities will eventually allow for Data-Analysis-as-a-Service (DAaaS) offerings to different establishments—a merging of today’s credit rating companies and financial institutions, for example. This will allow SMEs to benefit from the data-analytics revolution and become more relevant and prosperous in their services industry. The challenges would lie in that with the creation of these new services, comes the need to support their development, marketing, provisioning and continuous enhancement, among other requirements, to support the creation of jobs across the current and future financial services value chain. If this is overlooked, the potential of these services will not be realised.
While technology certainly plays a role in automating much of the security domain, it is actually other dimensions—namely, people and process—where greatest levels of improvement are needed across the region. — Wayne Loveless, Principal, Cybersecurity, Booz Allen Hamilton With the power of advanced data analytics, today’s counter clerk will be able to proactively and predictively offer a customer the most personalised services required when that customer enters a financial centre, or over the phone or internet—based on data insights from that customer’s financial behaviour. This customer data will then allow institutions to benefit from data insights related to spending patterns, financial capabilities and income thresholds of customers. The more access to data, the better the ability to harness power to make customers more satisfied and employees more productive. These socio-economic benefits can lead to an increased customer base, a higher performing work force, and consequently to overall market growth.
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As for blockchain technology, it can offer support on a wide range of use cases for financial institutions, including trade finance, remittances, syndicated loans, loyalty programmes and KYC registries, to name a few. Blockchain improves cost efficiency, durability and reliability, ensures transparency and speeds up transactions, while enhancing security and privacy. Due to its decentralised network, blockchain does not have a central point of failure and is better able to withstand malicious attacks. Changes to public blockchains are also publicly viewable by all parties, which ensures that all transactions are unchangeable. The blockchain payment system will, however, come with challenges. An example of this is the persistent
doubt on whether the blockchain can handle the speed, scale, and security required to process high volume payments. To cater to a significantly larger volume of transactions, highend servers would need to be put in place, which could impact the potential cost savings of moving to a distributed ledger. There is no silver bullet on selecting the right path to develop blockchain technology for financial services in the GCC region. What is clear though is that central banks and financial services players need to engage with the technology to understand, harness, and develop it appropriately to bring about the potential benefits it promises to both businesses and consumers.
The benefits which blockchain technology can offer both financial institutions as well as users include: Cost efficiency: Financial institutions can benefit from reduced costs and fees due to the lack of required intermediary and associated overhead costs. Durability and reliability: Due to decentralised networks, blockchain does not have a central point of failure and is better able to withstand malicious attacks. Enhanced security and privacy: Parties are able to make an Exchange without the oversight or intermediation of a third party, strongly reducing counterparty risk. Ensured transparency: Changes to public blockchains are publicly viewable by all parties, which ensure that all transactions are immutable. Faster transactions: blockchain transactions can be processed in near real-time around the clock. Source: Booz Allen Hamilton MENA
www.bankerme.com
03/05/2017 15:44
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COMPANY SPOTLIGHT
Mc Lagan Ray Everett, President of McLagan provides discusses the evolution of the financial services industry in the region
T
en years ago, McLagan set up home in Dubai and now work with nearly 200 leading financial firms across the Middle East. As the leading talent, rewards and performance consulting and benchmarking firm for the financial services industry, we wanted to understand what’s changed over the past decade, how the market has evolved and what challenges and trends firms are likely to see in the future. We caught up with Ray Everett, President of McLagan, to find out.
What kind of issues were financial firms facing back in the early days of your business? When we opened the Dubai office in 2007, there was a lot of demand in the market for credible compensation data. Our clients were growing and wanted to make sure they could offer fair but attractive pay packages. At the same time there was tremendous interest in introducing stock option plans in order to motivate and retain staff. Our clients had big growth plans, and stock was seen as a great way to align senior management and shareholder interests (still is). After the global financial crisis we worked with many of our clients to make sure they had in place compensation policies and governance in line with global best practises and regulatory requirements, especially in Saudi Arabia. As the GCC economies improved after 2010, clients asked us to help them better understand their own efficiency and performance relative to their peers.
McLagan has been in the market for 10 years—what’s changed? We’ve seen many changes throughout the GCC but they tend to have common drivers: • Our client base is much more sophisticated now and demand more innovation and creativity in how compensation is managed. • The world has gotten smaller and global trends hit us quicker and we also see a need to follow global norms on regulatory and compliance issues which puts more pressure on HR and the business. • Firms are now taking a long term point of view on how to pay. Long term incentives and deferrals are the norm. Pensions are increasingly important as companies see the employee life cycle extending beyond the transient expat life, which was uncommon a decade ago. • Employees have more choice now—especially millennials who demand that their deal focuses on all aspects of their working life, not just cash.
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What challenges do you see for the next few years? Many of our markets continue to grow, however nationalisation and job creation needs to focus on developing a sustainable local talent supply. There are efficiencies gained in from scale which allow companies to manage technology and regulation which make it increasingly difficult for smaller players to keep up. This may lead to more M&A activity. This is always a challenge. Traditional banking models are under threat from Fintech providers—regional banks need to evolve or they will see their customer base diminish.
Is McLagan going to be here in 10 years’ time? We are committed to the region and our clients. We truly believe that our specialist knowledge of the financial services industry and our commitment to fact based advice will ensure we always have a client base to work with.
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02/05/2017 10:41
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TECHNOLOGY
Out with the silo, in with the ecosystem Gerhard Oosthuizen, Chief Information Officer at Entersekt highlights importance of a synergetic approach in enhancing a financial institution’s digital capabilities
A
s consumers, we have become so used to being able to engage with our service providers via digital devices that many of us do not give a second thought to the complexity behind these interactions. Online and mobile have become part of our daily lives, and we expect our favourite brands to be available on these channels. This demand has in fact become so strong that 89 per cent of executives believe digital will disrupt their business in the next 12 months. As new services hit the market at an exhausting pace, companies known for their traditional business models are
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turning their attention to how they can compete with the smaller, more agile offerings that pose a serious threat to their revenue streams. Financial services companies are particularly vulnerable to being left behind by so-called digital disruptors. Tapping into digital ecosystems is a way for banks to prevent their own disintermediation. An ecosystem is simply a partnership between a bank and one or more service providers, aimed at creating additional value for customers. In such partnerships, the bank often provides the banking licence, technical infrastructure, and some or all client data, while the
89% of executives believe digital will disrupt their business in the next 12 months
provider partners bring all manner of previously unavailable user tools to the table. This may include data aggregation, messaging, payments, personal finance management and much more. cont. on page 72
www.bankerme.com
01/05/2017 10:56
We See What Others Don’t
CONTACT US:
Asas Capital Ltd. is a Dubai Financial Services Authority (”DFSA”) regulated investment institution, incorporated in the Dubai International Financial Centre (”DIFC”)
702 South Tower PO Box: 506806 Emirates Financial Towers, DIFC Dubai, UAE Tel: +971 4346 4700 Fax: +971 4386 7557 Email: inquiry@asascapital.com
TECHNOLOGY
cont. from page 70
According to Gartner, top-performing organisations will be doubling their ecosystems in the next two years because “a digital ecosystem amplifies the reach of a company. It enables scalable connections between known partners and customers, but also provides a medium for unknown parties to connect with one another”.
EASIER SAID THAN DONE
Fintech providers are clearly making significant inroads with customers, most banks admit they are not adequately prepared to manage outside threats, such as fintech startups. According to the 2016 World Retail Banking Report, released earlier this year by Capgemini and Efma, nearly two-thirds of customers (63 per cent) are now using fintech products or services, and
requirement for banks to expose their customer data to third-party service providers through open APIs. Banks that fail to enter into collaborative ecosystems with partners, fintech or otherwise, will miss out not only on access to a broader set of customers, but also on a myriad of potential revenue opportunities. According to Accenture, “banks that […] deliver new sources of value through customer value ecosystems can provide consumers with an estimated $1,600 in value per US household (compared to less than $100, on average, provided by the bank today)”. Accenture lists three things that banks must do in order to capitalise on ecosystems: be fast, be seamless, and be secure. And the latter is exactly where banks should be focusing.
An ecosystem is simply a partnership between a bank and one or more service providers, aimed at creating additional value for customers. — Gerhard Oosthuizen, Chief Information Officer at Entersekt are much more likely to refer friends and family to their fintech provider (55 per cent) than to their bank (38 per cent). While the vast majority (96 per cent) of banking executives agree that the industry is evolving toward a digital ecosystem in which fintech providers play a much bigger role, only 13 per cent say they have the infrastructure in place to support such an ecosystem. Banks are wary of opening their systems to outsiders, and with good reason. Aside from the atmosphere of fear created by the constant feed of security breaches in the news, the regulations surrounding data protection are also becoming ever stricter. Europe’s revised Payment Services Directive (PSD2) legislation, which was passed by the Council of the European Parliament last year, promises to upend the traditional financial system with its
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KEEP IT SECRET, KEEP IT SAFE
New technologies for reaching customers are blurring our existing ideas about customer engagement. The bank’s “perimeter” will soon be closer to the customer than ever before, which is why it needs to be secured better than ever before. For example, digital certificates should be a non-negotiable requirement for secure ecosystems. When using these in its authentication processes, a financial institution can be certain it is communicating with a legitimate device; that the communication originated from a trusted source; and that no third party can access or alter the communication. Banking-grade authentication and verification measures need to be employed throughout the ecosystem, since protecting customer details is paramount. Only a multi-factor, outof-band channel will counter phishing
attacks, keystroke logging, number porting, and other attempts to defraud online and mobile users. Furthermore, if they are going to embrace the benefits of ecosystems, banks will need to make sure that their partner companies comply with the same strict security standards as they do. Any enterprise that wants to set up as a provider of identity (or otherwise benefit from a platform such as a bank) should put a security protocol in place that is consistent with the relevant standards for their region. After all, banks will be more likely to team up with service providers that are already compliant. Applying the highest levels of security throughout the ecosystem will give banks and other financial institutions the peace of mind they need to leverage collaborative opportunities.
Case study: Siirto (Finland) Siirto—a collaborative ecosystem incorporating IT software provider Tieto and ATM operator Automatia, which is owned by Finnish banks OP Bank Group, Nordea Bank and Danske Bank—is scheduled to go live in March 2017. This platform will be a pioneer in two aspects: the first real-time mobile payments service in Finland that works without a credit or debit card, and the first such service in Europe to follow the new PSD2 rules. Sami Uski, Tieto’s Head of Business Development: Banking and Digital Channels, explains that each component of the ecosystem had something specific to contribute: Tieto’s experience and knowledge, Automatia’s infrastructure, and the banks as end-user service providers. “Now, we are looking to lead collaboration further,” says Uski, “not only with banks and payment service providers, but also retailers and other service providers like public transportation.” Source: Entersekt
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01/05/2017 17:09
May issue Business Banking W21cm X H27cm.pdf
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Photo credit: Pushish Images/shutterstock.com
TECHNOLOGY
The personal touch with customisable cards By Eric Claudel, President Banking & Payments for the CISMEA region at Gemalto
H
istorically, banks have had a one-size-fits-all product offering for their clients. Today, the banking sector is exposed to innovative new technologies, ushering in an era in which mass customisation is feasible, safe and profitable. Banks of all sizes around the world have been refocusing their strategies to grow top-line revenues through innovation and customer experience. Today’s customers demand specialised products, high-quality service and a degree of personalisation, a true differentiator between banks. Banks have increasingly been focusing, in recent years, on a personal approach to retain customers
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and have a competitive edge. In the Middle East region, with nearly 52 million people, it can be easy to get lost in the crowd—so it is crucial for banks to find a way to stand out for customers to take notice. One costeffective and relatively simple way to do this is through personalisation of payment cards. In the Middle East & Africa region alone, more and more countries and financial institutions are migrating to EMV smart banking cards standards, bringing enhance security to payment transaction at point of sales, thanks to PIN codes. We expect more than 902 million EMV banking cards will be in circulation by 2021, up from 303 million in 2015. While smart banking
cards are gaining popularity in a region where cash has predominantly been king, there is still scope for banks to provide a more personalised approach and this is where customised cards come into play. We have identified five key reasons why these cards can bring measureable advantage to banks that keep them front of mind for card providers.
THE CHANCE TO BE UNIQUE
As we’ve mentioned already, most customers are keen to find any way to distinguish themselves today. They want to be different and seen as an individual when dealing with their bank and day to day payments. A customisable card gives you the chance cont. on page 76
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TECHNOLOGY
cont. from page 74
to experience this—it’s an easy way to keep a customer happy and to not feel like one of the masses. The whole point is to drive usage. While there is so much competition out there, it is fairly easy for banks to implement customised cards and get their cards prime position in customers’ wallets. Through this personalisation, customers can add a creative twist to their cards, to make monetary transactions more personal and fun too. One example, especially welcome and popular in this part of the world, where banks are liaising with VIP customers, with high expectations, is the use of metal cards. These customised cards are being labelled as the ‘ultimate status symbol’ and are exclusive to High Net Worth Individuals or anyone who has the means to get their hands on one. These cards give ultra-wealthy cardholders the differentiation they seek with these desirable pieces of luxury.
INNOVATIVE CARD BODIES
Customisable cards give customers and banks the chance to go green, thanks to improved production methods. Responsible, green and sustainable banking is crucial now, especially if new customers are to be acquired and existing ones retained. Fortunately, there are sustainable options available for customisable cards, which offer a “carbon offset” solution to compensate greenhouse gas emissions generated by card production.
More than
902 million EMV banking cards is expected to be in circulation by 2021
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Eric Claudel, President Banking & Payments, CISMEA, Gemalto
Today, there are a myriad of customised cards available with varying bodies and finishing options including transparent cards, 3D cards and bio-sourced cards. Of particular relevance in our region are bio-sourced cards made out of renewable materials such as poly lactic acid that provide a green offering to customers. These cards are also temperature-resistant which is especially important in this region given the high temperatures in the summer months.
CARD DIFFERENTIATION
Sometimes, it’s easy to confuse different payment cards you may have in your wallet. This situation can be especially confusing for people who have three to four cards. Some people want to, understandably, have separate cards for separate things, such as personal spending versus family or business spending. Customisable cards give these people an easy way to distinguish between what they should and shouldn’t be using for different purposes.
OPPORTUNITIES FOR ISSUERS, BANKS AND THIRD PARTIES
Customisable cards also provide an excellent opportunity for issuers and banks to involve third parties in transaction processes and implement loyalty programmes. This can be very beneficial for retailers such as supermarkets that can partner with banks. As an example, each time a consumer uses their custom card issued by their bank, co-branded by a partnering supermarket, they would receive a 10 per cent discount or loyalty points.
HAVE SOME FUN!
Customised cards have not only revolutionised the way consumers and businesses can make payments, but have also provided the much needed ‘personal touch’ and allowing consumers to have some fun. Through customised cards, card holders can personalise their payment cards using their own photos—a beloved pet, a memorable trip or even pictures of family and friends.
www.bankerme.com
01/05/2017 17:10
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PERSONALITY
Alejandro J. Garcia-Monterde Head of Business Banking Credit Risk & Risk Department, Risk Management, Emirates Islamic
I’ve gained over 26 years of experience in risk management and compliance within investment, corporate, SME and private wealth banking spanning four major economic regions, North/Latin America, Eastern Europe, former Soviet states Russia, Ukraine and Kazakhstan and now within the Middle East. While an economics undergrad, a Canadian savings bank, Central Guaranty Bank (now Toronto Dominion Bank) was offering late banking hours including Saturday mornings and they required branch staff on a part time basis. That was my first introduction to regulatory risk management as their compliance officer. My biggest achievement was weathering the 2008 financial crisis, my second economic downturn, the first being the dot.com crisis of 2000 while in investment banking. Until 2011 I was working for Raiffeisen Bank and later for other banks as an independent management consultant for BearingPoint, zeb.rolfes and Deloitte through the Bank of International Settlements initiatives. It was a unique opportunity to witness how radically different 10 major banks addressed their risk bearing capacity strategies post crisis. I take modest pride in being part of these major regulatory risk projects that resulted in vastly improving liquidity coverage. I am responsible for the underwriting/portfolio quality of Emirates Islamic’s SME and commercial segments. It is an operational role where individual decisions are made in creating new credit lines and restructuring distressed credit but the portfolio management affords an opportunity to implement greater proactive creativity in underwriting and restructuring standards to drive profitable growth. I can say without fear of contradiction that the best part of the job is being led, in the post SME default crisis, by EI’s and ENBD’s management board members. Their ‘cooler heads prevails’ approach through prudent provisioning strategies while sustainably growing the portfolio via selective policy tightening has ensured cost optimisation without sacrificing customer service quality. My favourite fiction and non-fiction books: The Spy Who Came in From the Cold by John Le Carre and Capital by Thomas Piketty respectively. Now I am reading Planet Ponzi by Mitch Feierstein. The biggest weakness in GCC’s financial sector is slow loan growth due to low borrowing demand from previously highly leveraged GCC SME’s coupled with persistent NPL concerns that are exacerbated by increasing cost of funding/interest rate and implementation of regulatory requirements such as the IFRS9 that will put further pressure on revenue flows. This could be mitigated with growing deposits to shore up liquidity and lower dependency from costly alternative funding. The outlook locally and globally will be fraught by greater uncertainty that can be navigated by ‘tried and true’ fundamentals first before pursuing ‘quick-fix’ innovations. Managements must become reacquainted with the client/credit lifecycle—from acquisition and monitoring satisfaction to understanding risk and providing a valueadded option to exiting clients regardless of the client segment. This, albeit a simplistic view, is nonetheless complicated by world-wide costly regulatory re-tooling and the ‘digitise or die’ impetus which UAE banks in particular have made a commitment to despite their inherent challenges. At the expense of sounding immodest, I’d like to leave a legacy by imparting my international experience to other developing markets starting with the GCC region’s new generation of risk managers.
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www.bankerme.com
01/05/2017 10:57
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