NOVEMBER 2017 | ISSUE 200
SARY I VER SS NI
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Global wealth creator
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Mohammed Alardhi
Executive Chairman, Investcorp
Dubai Technology and Media Free Zone Authority
"Everything that we are doing is driven by our investors’ needs. Our ambition is large, and we have the right team and resources to make it happen."
INSIDE:
10 GCC ECONOMY:
RECOVERY EXPECTED
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34 TACKLING THE
LIQUIDITY GAP
52 MANAGING
TRANSFORMATION
60 TECHNOLOGY:
AN UNSTOPPABLE FORCE
19/11/2017 14:54
THE JOURNEY TO SIMPLICITY 50 years ago, we started with a single thread of hope. Even though there were knots and tangles along the way, we persisted until we overcame the complexities to offer simpler banking solutions today. ABK... moving forward over 50 years.
Simpler Banking
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CONTENTS
NOVEMBER 2017 | ISSUE 200
3
E D I TO R ’ S L E T T E R
W
elcome to the 200th issue of Banker Middle East! We are proud to have always been at the forefront of banking and finance in this region. Celebrating our 200th issue, this edition features a special commentary from our very own Robin Amlôt on the exceptional feats the industry has achieved over the past decade. Similar sentiments are echoed in this momentous issue as we bring you a thorough outlook— which is positive—on the GCC markets for 2018. The cover story this month features Mohammed Alardhi, Executive Chairman of Bahrain-based Investcorp,
20
as he discusses his ambitious plans for global expansion and almost tripling his assets under management by 2022. Our November issue also covers various aspects of the industry as we bring you analyses on liquidity management, compliance risk and remittances. The country focus this month explores Kuwait, a country that has been fairly stable but is in need of reforms to ensure sustainability. In line with this theme, our In Depth section features an interview with the Group CEO of Al Ahli Bank Kuwait as he provides his thoughts on technology advancement and the future of the banking industry in Kuwait.
6
This issue also features exclusive interviews with the heads of the Middle East Investor Relations Association, Diebold Nixdorf, and Entersekt as they provide an insight into their concerns for the industry going forward. Touching on various pertinent areas in this vibrant market, as usual we wish you a fruitful and productive read.
Nabilah Annuar Nabilah Annuar Editor
BankerMENA CPI Financial
16
6 A decade of transformation 8 News bites THE MARKETS
10 GCC economy: recovery expected LEGAL PERSPECTIVE
16 The effectiveness and exhaustiveness of
34
COVER INTERVIEW
20 Global wealth creator
COUNTRY SPOTLIGHT
28 Confidence in Kuwait
LIQUIDITY MANAGEMENT
34 Tackling the liquidity gap
the new bankruptcy law
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| ISSUE 200
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, Investcorp
INSIDE:
10 GCC ECONOMY:
RECOVERY EXPECTED
34 TACKLING THE
LIQUIDITY GAP
Zone Authority
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30 RISING ABOVE 60 ANTICIPATING BUDDING 70 DATA ANALYTICS TO ENHANCE CUSTOMER
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and Media Free
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INSIDE:
INDUSTRY PROGRESS
H
Dubai Technology
What the customer wants
Dr. Bernd van Linder, CEO, Commercial Bank of Dubai
14 FACILITATING
YEARS IN T
"Everything that we are doing is driven by our investors’ needs. Our ambition is large, and we have the right team and resources to make it happen."
Dubai Technology and Media Free Zone Authority
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“The most visible aspect of new technology is on the front end but the biggest impact is on the back-end.”
ST R Y
CELEBR ATI
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52 MANAGING
TRANSFORMATION
60 TECHNOLOGY
: AN UNSTOPPABL
E FORCE
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CONTENTS
NOVEMBER 2017 | ISSUE 200
38
COMPLIANCE RISK
38 Bank compliance risk management REMITTANCES
44 Getting to tango with start-ups ISLAMIC FINANCE
48 How loyal are Islamic banking customers?
52
IN DEPTH
52 Managing transformation 56 Maintaining healthy relationships 60 Technology: an unstoppable force TECHNOLOGY
64 Mobile biometric optimisation PERSONALITY
60
70 Suzzanna Ali
Head of Compliance & MLRO, Ahli United Bank
www.bankerme.com Chairman SALEH AL AKRABI Chief Executive Officer TONY LONG tony.long@cpifinancial.net Tel: +971 4 391 4681 Editor - Banker Middle East NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726
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Editors MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716
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DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526 MOHAMED MAKSOUD mohamed@cpifinancial.net Tel: +971 4 433 5320
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Celebrating Banker Middle East’s 200th issue
TH YE A RS IN
A decade of transformation Robin Amlôt looks back at the highs and lows of the last 100 issues
I
n October 2008, Banker Middle East published its 100th edition. The financial storm clouds were already looming over the region as the impact of the financial crisis that had begun in the USA were reaching round the world. The time bomb of collateralised debt obligations (CDOs) had exploded, taking with it Lehman Brothers, which, in September 2008, had the dubious distinction of being the largest bankruptcy filing in US history. What began in the US and flashed round the world in 2008 and into 2009 resulted in a decade of low interest rates and loose monetary policy as Central Banks came to grips with the financial system’s greatest threat since the Depression of the 1930s. Indeed, we are still living with the consequences of what is now described for the history books as the Global Financial Crisis. These consequences include the adoption of new practices and standards promulgated by local and global regulators, including the likes of Basel II and Basel III and new International Financial Reporting Standards (IFRS) on revenue recognition and financial instruments. BLACK GOLD TARNISHED However, the trials facing the Middle East’s bankers were not only the
direct impact of the financial crisis but other ramifications resulting from depressed global economic activity as well, including the gyrations of real estate in Dubai and elsewhere, together with a slump in the oil price. The latter, still the key determining factor in the economic health of the region, had reached record highs mid-2008 with the benchmark Brent Crude price touching $147/barrel in July 2008. By January of 2016, it was trading below $30. A recovery in the ensuing couple of years has brought the price back over $60 at time of writing, still leaving a number of oil producers below break-even. Yet we should underline this key fact: no major financial institution in the Middle East failed during this time of trial. Yes, there were a number of smaller banks that faced difficulties, notably in the region’s investment banking sector, but prompt action on the part of regulators assisted in containing the problems that arose. PUNCTUATED BY MERGERS In the year prior to the publication of the magazine’s 100th edition, a mega-merger in Dubai between Emirates Bank International and the National Bank of Dubai had created Emirates NBD. Fast forward to our 200th edition and we find that in the
Robin Amlôt, CPI Financial
preceding year, another mega-merger has taken place, between National Bank of Abu Dhabi and First Gulf Bank, to form First Abu Dhabi Bank. In 2014, Saudi Arabia’s National Commercial Bank came to the Tadawul in an initial public offering (IPO) that generated some $6 billion. It was the second-largest IPO around the world that year. Over the nine years since our 100th edition, the Dubai International Financial Centre (DIFC), together with its regulatory authority, the Dubai Financial Services Authority, has become the leading financial centre in the region and a significant global centre. That said, the DIFC is not without competition. In 2016, Abu Dhabi Global Market (ADGM), Abu Dhabi’s own financial free zone, began accepting registration requests, focusing initially on private banking and wealth and asset management firms. Geopolitical issues, including the Arab Spring, the rise and fall of Daesh, and the diplomatic row between Qatar and other Gulf Cooperation Council cont. on page 18
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7
(GCC) states, to mention but a few, have seen the region’s financiers face a multiplicity of challenges in recent years. Challenges that in some instances turned into real opportunities, notably for those GCCbased banks which invested in the banking sector in Egypt. Among GCC achievements impacting business and finance were the establishment of a customs union in January 2015 and the Unified Value Added Tax (VAT) Agreement that will see the introduction of this indirect tax in all six GCC countries in 2018. However, we should also note what did not happen, notably the introduction of a GCC common currency. The six nations of the GCC had discussed the creation of a common currency for more than 10 years but talks stalled in 2010 following the withdrawal from negotiations of Oman and the UAE. Also in the categories of what did and did not happen, we may place in the former the introduction of better credit risk management with the establishment of credit bureaux such as Al Etihad Credit Bureau in the UAE and Simah in Saudi Arabia. What did not happen, however, despite a new bankruptcy law in the UAE, was the decriminalisation of bouncing cheques in the country.
ISLAMIC INFLUENCE The footprint of Islamic finance has continued to grow, with global Islamic banking assets passing the $2 trillion mark. While that remains a small proportion of total banking assets, it is very clear that growth in Islamic finance continues to outperform growth in conventional banking, reaching out not just to the unbanked and underbanked Muslim community but also making inroads with nonMuslims who seek an ‘ethical’ alternative to conventional banking. It is worth noting the 2017 Islamic Banking Index published by Emirates Islamic, which showed that more than half of UAE consumers (52 per cent) have an Islamic banking product, a five-percentage point increase since 2015. Note also a seven-point increase in the adoption of Islamic products by non-Muslim customers. BRANCHING OUT At a day-to-day operational level, in 2008 it was common for Banker Middle East to receive regular notification of new bank branch openings around the region. By 2017, such announcements have slowed to barely a trickle. As quaint as it may now seem, in a special report on banking technology in our 100th edition, Banker Middle East reported,
It has been asserted that banking will change more in the next 10 years than it has in the last 100 years. How? Much of the change that is coming [and that is already being implemented by many institutions] will involve matters that customers, both retail and corporate, will not themselves see. – Robin Amlôt –
“Currently, cheques and cash rule much of the Middle Eastern region as it still heavily relies on paper-based transactions and manual cheque clearing houses.” It has been asserted that banking will change more in the next 10 years than it has in the last 100 years. How? Much of the change that is coming [and that is already being implemented by many institutions] will involve matters that customers, both retail and corporate, will not themselves see. Banks will implement improved technology solutions that will allow them to manage their processes in a seamless, speedy and secure manner. Paper transactions will be replaced by straight through processing, banking systems will be become omnichannel and banks are coming to terms with the fact that their competition is coming not just from other banks but from technology companies and solutions such as Apple Pay and Samsung Pay, and from retailers whose service quality is ahead of what many banks currently offer. This is happening in the face of changing demographics in the region and of changing customer habits. There remains a place for the bank branch although watch over the coming years for closures and staff reductions. Increasingly, customers, both retail and corporate, require banking services to be available to them at a time and place of their choosing on a 24/7 basis and on a multiplicity of devices. WHAT NEXT? Fintech? Cryptocurrencies? Blockchain? Of two things, you may be certain: first, change is coming and more quickly than you think; and second, that Banker Middle East will be in print and online to keep you informed and up-todate about the latest developments in banking and financial services across the region as they happen.
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news
bites
Middle East to reach cyclical peaks for M&A and IPO activity in 2019 The easing of key economic and political risks and the emergence of positive macroeconomic deal drivers will accelerate global deal activity in 2018, reveals the third edition of the Global Transactions Forecast issued by Baker McKenzie. The report predicts a cyclical peak in 2018 for several macroeconomic and financial deal drivers, with 2018 marking the high point of the deal cycle for the world’s largest transaction centres and Africa M&A activity is forecast to peak at $41 billion and domestic IPOs at $7 billion in 2019. Will Seivewright, Corporate/M&A partner at Baker McKenzie Habib Al Mulla in the UAE, said, “In the Middle East, investors are still drawn to the regional demographics, GDP growth and the UAE’s role as a hub for the region and into Africa, and they appear to have adapted to the headwinds witnessed regionally in 2017. M&A activity has continued to fare well through 2017 and is likely to remain at similar levels in 2018, with improvements in oil prices offset by increased regional instability. Fortunately, investors appear to be ultimately more influenced by long term strategic decision making than short term economic considerations.” Zahi Younes, Capital Markets/ M&A partner at Baker McKenzie’s associated firm in Saudi Arabia, added, “In the Middle East, economic reforms and privatisation plans of nations such as Saudi Arabia and Egypt are likely to drive a significant level of IPO activity in 2018. Aside from governmentlinked activity, the IPO pipeline is also looking strong for those companies biding their time to realise their exit strategies or succession planning ambitions.”
Abu Dhabi prices $10 billion multi-tranche bonds on the back of strong demand The Emirate of Abu Dhabi has successfully priced a $10 billion multi-tranche international bond offering on 3 October 2017. The bonds were well received having high oversubscription levels, with over 500 orders exceeding $30 billion. The transaction comprised three tranches: (i) $3 billion 2.5 per cent due 2022, which priced at 65 bps over US Treasuries; (ii) $4 billion 3.12 per cent due 2027, which priced at 85 bps over US Treasuries and; (iii) $3 billion 4.12 per cent due 2047, which priced at 130 bps over US Treasuries. The final geographical allocation for the bonds stood at 78 per cent from foreign investors, and 22 per cent from investors. The final geographic allocation for the five-year bonds was 78 per cent foreign investors (eight per cent to Asian investors, 29 per cent to European and UK investors, 41 per cent to US investors) and 21 per cent to investors from the Middle East. The allocation for the 10-year bonds was 67 per cent foreign investors (eight per cent to Asian investors, 28 per cent to European and UK investors, 31 per cent to US investors) and 33 per cent to investors from the Middle East. The allocation for the 30-year bonds was 92 per cent foreign investors (15 per cent to Asian investors, 30 per cent European and UK investors, 47 per cent to US investors) and eight per cent per cent to investors from the Middle East. The final investor type allocation for the five-year bonds was 21 per cent to banks and private banks, 66 per cent to fund managers and eight per cent to agencies, pensions and insurance, five per cent to others. The final investor type allocation for the 10-year bonds was 39 per cent to banks and private banks, 55 per cent to fund managers and four per cent to agencies, pensions and insurance, two per cent to others. The final investor type allocation for the 30-year Bonds was 11 per cent to banks and private banks, 73 per cent to fund managers and 14 per cent to agencies, pensions and insurance, two per cent to others.
RATINGS REVIEW Entity
Abu Dhabi
LT IDR/LT Rtg (FC)
Bahrain Egypt Iraq
Lebanon
Kuwait Ras Al Khaimah Turkey
ST IDR/ST Rtg (FC)
AA
F1+
B
B
BB+ B-
B-
B
B
B
LT IDR/LT Rtg (LC)
ST IDR/ST Rtg (LC)
AA
F1+
B
B
BB+
B-
B
B
B
B-
B-
UAE
Bahrain Egypt
Iraq
Lebanon
AA
F1+
AA
F1+
AA+
A
F1
A
F1
AA+
UAE
BBB-
F3
BBBAA
Turkey Saudi Arabia Qatar
BB+
B
A+
F1+
A+
F1+
Qatar
AA-
F1+
AA-
F1+
Under Review
AA+
BBB+
Country
Kuwait
Saudi Arabia
UR
Country Ceiling
KEY Positive Negative Evolving Stable
AA
OUTLOOK
WATCH
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bites
9
ADDED and ADGM agree on dual-licencing regime for companies Abu Dhabi Global Market (ADGM) and Abu Dhabi Department of Economic Development (ADDED) have signed an agreement on mutual licence recognition for dual licencing of eligible entities established in ADGM’s jurisdiction. The agreement between ADGM’s Registration Authority and ADDED allows entities established on Al Maryah Island to hold both an ADGM commercial and an ADDED trade licence on condition that they satisfy and fulfil the respective licencing requirements of each jurisdiction and operate according to their respective rules and regulations. This dual licencing also allows for ADGM registered entities to service their clients in the Capital without the need of having an office presence in Abu Dhabi mainland. ADGM entities seeking to provide financial services to clients in the Emirate of Abu Dhabi will remain subject to any other relevant regulatory obligations and applicable laws, including any licencing requirements which may be imposed by any Federal regulators of financial services. This agreement is an enhancement of the 2015 MoU between ADDED and ADGM that supported doing business for existing entities with Abu Dhabi DED licences based on Al Maryah Island. The new agreement has expanded the ease of doing business from ADGM to include existing Abu Dhabi entities and new ADGM registered firms to be under the remit and oversight of the Registration Authority of ADGM and ADDED. The MOU will allow an entity to have two licences permitting them to engage in activities within the ADGM and the Emirate of Abu Dhabi, from a single office located on Al Maryah Island.
GLOBAL TRANSACTIONS FORECAST 2018 DEAL APPETITE RISING
M&A
$3.2 trillion
Total global M&A in 2018 (23% YoY increase)
Top 3 Sectors by M&A in 2018
Consumer Goods
$633 billion
Finance
$616 billion
Industrials
$531 billion
Most attractive country environments for M&A and IPO activity 1 Hong Kong 2 Singapore
4 Switzerland
3 Luxembourg
5 Netherlands
Deal activity by region 2018 North America:
IPO
$290 billion Total global IPOs in 2018 (55% YoY increase)
$1.5 trillion M&A $78 billion IPO
Asia Pacific: $710 billion M&A $74.2 billion IPO
Top 3 Sectors by IPO in 2018
Finance
$84 billion
Consumer Goods
$60 billion
Industrials
$56 billion
Paul Rawlinson, Global Chair
EMEA: $893.5 billion M&A $65 billion IPO
Latin America: $108 billion M&A $6 billion IPO
After a few soft patches in 2017 we have a more optimistic outlook for the global economy in 2018 as dealmakers and investors gain greater confidence in the business prospects of acquisition targets and newly-listed businesses.
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10
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markets
GCC economy: recovery expected Vijay Valecha, Chief Market Analyst at Century Financial Brokers provides a detailed overview of the present capital market landscape in the GCC
W
ith the benefit of hindsight, it can be said that the oil price crash which rocked GCC economies over the past few was a blessing in disguise for these six member states. Forced to awake from their slumber, most of these GCC countries have since embarked on deep seated structural reforms across all economic, social, and political sectors. This coupled with improved OPEC compliance is beginning to show economic recovery for the Middle East economies. The Kingdom of Saudi Arabia (KSA) fiscal balancing has also been
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the
(PHOTO CREDIT: SHUTTERSTOCK/TSIDO SUN)
markets
instrumental in steering the Kingdom out of the red with its fisical deficiency falling from a high of $39.7 billion to $19.4 billion in first half of 2017. Subsidy cuts and the redeployment of resources saved have also been essential for the weaning away of the economy from oil dependancy. Non-oil growth in KSA is expected to be 1.7 per cent in 2017 while overall GDP growth is estimated to be 1.1 per cent in 2018. On the other hand UAE’s economic growth for 2017 and 2018 is expected to rise to 1.3 per cent and 3.4 per cent respectively ahead of the much awaited EXPO 2020. Overall the Gulf economies are likely to expand by 1.1 per cent, 2.4 per cent and four per cent in 2017, 2018 and 2019 respectively. Another key event is the introduction of a five per cent GCC-wide VAT, which is expected to slow down consumer spending growth from 4.2 per cent to 2.5 per cent on average between 2010 and 2016. It is however, also expected that the tax revenue will improve the long term economic health of Governments in the region.
Gulf economies are likely to expand by
1.1%, 2.4% and 4% in 2017, 2018 and 2019, respectively ECONOMIC RECOVERY SUPPORTS EQUITY MARKET EXPANSION The most pivotal exchanges determining the Middle-Eastern capital market scenario are that of Dubai Financial Market (DFM), Abu Dhabi Exchange (ADX), Saudi Stock Exchange (SSE) and Qatar Exchange (QE) amongst others. The MSCI GCC IMI Index, which is a measure of the GCC equities showed an overall decline of -0.8 per cent quarter-to-date (QTD). However, with swifter economic growth and rising corporate profitability, the GCC equity market is expected to recover strongly in the coming months.
11
ADX encompasses several sectors of services; however, the most important of those are telecommunication and financials, which comprise almost 80 per cent of the entire listing. DFM, which comprises mostly of the financial sector and real estate, recently had an inflow of around AED 1.3 billion from foreign investors in 2017. Strategic investment tie-ups with listed companies are helping the exchange recover pace. Emaar Properties, which is UAE’s largest listed developer, holds a major share of this Middle Eastern exchange. It has been a huge driver for the entire index and is expected to boost it further up in the coming weeks. Being a forerunner, Emaar is setting the base right for the primary market. Apart from Emaar, financial institutions like Emirates NBD and Dubai Islamic Bank are helping to hold up the index pretty well despite generic market views. EQUITY OVERVIEW: SAUDI ARABIA AND QATAR GCC markets are dominated by KSA, which commands 47 per cent of total GCC market capitalisation. When considering Saudi’s equities, a faint idea crosses the mind, that it might be dominated by energy (oil and gas), however that is not entirely true. cont. overleaf
Top performing GCC equities SAUDI BASIC INDUSTRIES CORP
SABIC AB Equity
Saudi Arabia
EMIRATES TELECOM GROUP CO
ETISALAT UH Equity
UAE
SAUDI TELECOM CO
STC AB Equity
Saudi Arabia
FIRST ABU DHABI BANK PJSC
FAB UH Equity
UAE
QATAR NATIONAL BANK
QNBK QD Equity
Qatar
AL RAJHI BANK
RJHI AB Equity
Saudi Arabia
NATIONAL COMMERCIAL BANK
NCB AB Equity
Saudi Arabia
SAUDI ELECTRICITY CO
SECO AB Equity
Saudi Arabia
EMAAR PROPERTIES PJSC
EMAAR UH Equity
UAE
Source: Century Financial Brokers
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the
markets
cont. from page 11
The material sector along with financial services comprise of 65 per cent of the market. However ARAMCO, (Saudi Oil Extraction Company) the world’s leading oil supplier, is not yet listed on Tadawul , so while oil still does not fully dominate, once the listing is done, there will be a heavy tilt towards oil and gas sector. The KSA financial sector has two major players; the Riyadh-based Al Rajhi Bank with a market cap of $28 billion and Jeddah’s National Commercial Bank with a market cap of $27 billion, in which the Saudi Royal Family has majority shareholding and would therefore benefit from the ongoing reforms in the Kingdom. Qatar, the third largest equity market in the GCC region, is also dominated by financial services sector, which accounts for 50 per cent of the market cap. This sector is led by the Qatar National Bank with a market cap of $30 billion. Recent blockades from the GCC member nations (KSA and UAE) have resulted in depressed share prices as companies are unable to efficiently source goods and services. The situation is however expected to ease with the upcoming FIFA World Cup and Government stimulus expected to cushion the economy. IPO FRENZY This year GCC markets are bracing themselves for a wave of IPOs. While GCC economies have not fully diversified completely from oil, restructuring and reforms have contributed immensely towards the growth of a strong non-oil private sector. Early this year, Saudi’s 10 IPOs raised some $400 million, which gave an impression that stock markets would hit off. However, the rage did not last long with things cooling down by the second quarter.
GCC market capitalisation by sector Real Estate 11% Utilities 3%
Miscellanious 0%
Energy 2% Materials 10%
Telecommunication Services 5%
Industrials 16% Consumer Discretionary 7%
Information Technology 0%
Consumer Staples 4%
Financials 33%
Health Care 9%
Source: Century Financial Brokers
Market capitalisation by country Country-wise Market Cap (in USD) Kuwait 10%
Bahrain 2%
Oman 2%
United Arab Emirates 26%
Source: Century Financial Brokers
Saudi Arabia 47%
Qatar 13%
All is not gloom as the region still expects bigger IPOs with UAE leading the way this time round. that is not all! Out of the total IPOs expected, there are at least five which are worth billions dollars. The most popular one is the Emaar Properties IPO, with a suggested market capitalisation of around $6 billion and IPO value of about AED 42 billion. These public offerings include companies from petroleum distribution, chemicals, banking, insurance, and retail. The primary reason for this surge in IPO’s inside UAE are the sweeping reforms that have
been initiated in its financial market within the past few years. Key among them include the permission to carry out the book building process for price discovery. The other is the permission for businesses to divest only a minority stake during IPO’s. This is clearly a positive trend as it would increase the market depth and liquidity of local market in the long term. Indeed, it is also a victory for regulatory reforms compared to a previous scenario where companies like NMC Healthcare and Al Noor had chosen to list in London instead of local markets. cont. on page 14
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page 10-14 The Markets_Century Financial Brokers.indd 12
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markets
cont. from page 12
Shifting focus to Saudi Arabia, the much awaited Aramco’s IPO still remains on track. Saudi authorities are aiming to list up to five per cent of the world’s largest oil producer on both the Saudi exchange and one or more international markets that could raise over $100 billion. However, there is no pain without gain. All major reforms have a cost. In this case the cost is that while new IPO’s might be a long term positive, they are a short term negative. Existing investors lured by the new IPO’s might liquidate a part of their proceedings to invest in them and this might create a dearth for buyers. This could be the reason for the pause in indices this year. But these could be short term factors and a market recovery should be in place by the end of this year or beginning of 2018. GCC AGGREGATE BOND AND SUKUK MARKET This comprises of central bank issuances as well as bonds and Sukuk issued by GCC sovereigns, corporate entities and financial institutions. This market has been significantly active over the past two years, primarily driven by sovereign issues as GCC governments resorted to debt markets for financing the budget deficits stemming from declining in oil revenues. A total of $167.54 billion was raised in the primary market, 41.20 per cent higher in comparison to $118.6 billion raised in 2015. Sovereign issuances by GCC countries totalled $65.82 billion, 64.3 per cent higher as compared to $37.95 billion in 2015. Saudi Arabia led sovereign issuances by issuing $17.5 billion in eurobonds and $25.8 billion (SAR 97 billion) in domestic currency bonds, followed by Qatar ($9 billion), UAE ($6.4 billion), Oman ($4.5 billion) and Bahrain ($2.6 billion).
As of 31 December 2016, the total amount outstanding corporate and sovereign bonds and Sukuk issued by GCC entities was $352.08 billion. Government issuances accounted for 39.9 per cent of the total amount. Sukuk issuances represented 25.54 per cent of the total amount outstanding. OUTLOOK FOR GCC BONDS AND SUKUK MARKET While the outlook for GCC debt is an encouraging one for 2017 and 2018, there are still a number of possible speed bumps that could restrict the activity. If crude oil prices continue on a downward spiral, it easily damages investor confidence and oil exporters’ debt markets. Investors also need to keep a close eye on the interest rate path that the US Fed adopts in 2017-2018. According to the FOMC’s summary of economic projections, the Fed Funds Rate for the near term is expected to be in the range of 1.5-2.5 per cent. If the Fed raises interest rates more aggressively than what the market
If crude oil prices continue on a downward spiral, it easily damages investor confidence and oil exporters’ debt markets. Investors also need to keep a close eye on the interest rate path that the US Fed adopts in 2017-2018. – Century Financial Brokers –
currently anticipates—three rate hikes to two per cent federal funds rate by end of 2018—we could see the yield spread tightening further. These concerns aside, valuations across GCC fixed income remain captivating. Moreover, the popularity of Sukuk has been growing worldwide as an attractive investment option, especially given its link to the rapidly growing Islamic economy. These securities appeal to a broad range of investors—institutional and individual, Islamic and non-Islamic. Though these securities have a regulatory risk attached to them, the probability of these risks transpiring is unlikely. Ultimately, it’s important for investors to assess their appetite and ability to bear market-related risks and carefully analyse available options. FOREX All the GCC countries, excluding Kuwait, have their currencies pegged to the US dollar. The UAE dirham has been fixed at a rate of 3.6725 to $1 since 1997. The Kuwaiti dinar is pegged to a basket of currencies, after scrapping its dollar peg in 2007. Although, we saw the dollar depreciate in the last year, President Donald Trump’s new tax plan could cause a tidal wave of internationallyheld cash to flood back into the US. This would lead to an increase in demand for dollar and we could see the currency appreciate. The repatriation tax plan, is designed to incentivize US-based companies that do big businesses overseas to bring those profits back home. Looking at all US-based companies, according to Citigroup, there is a whopping $2.5 trillion of capital stashed internationally. If the policy comes into play, we could see the dollar appreciate and subsequently the UAE dirham would follow suit relative to the other currencies.
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16
legal
perspective
(PHOTO CREDIT: SHUTTERSTOCK/BrAt82)
The effectiveness and exhaustiveness of the new bankruptcy law Mazen Boustany, Baker McKenzie Habib Al Mulla provides a deeper insight into the workings of UAE’s new legislation
T
he UAE’s new standalone bankruptcy law, Federal Decree-Law No. 9/2016, is now in full force. In effect, it has repealed the former bankruptcy regime that the nation lived with for over 20 years, as set out in the Commercial Transactions Code (Federal Law No. 18/1993), while maintaining the insolvency regime applicable to civil individuals (or non-merchants) and which is briefly regulated in the Civil Transactions Code. The enactment was driven by a strong desire to adopt a functional and modern bankruptcy protection regime that would give investors’ confidence in their ability to recover debts and rescue businesses; and the key question is whether the new law will be exhaustive and effective enough to fully support the UAE’s economic infrastructure. During the drafting process, the new bankruptcy law was publicised as a law drawn on the best bankruptcy
protection laws around the globe, with the aim of facilitating doing business in the UAE and boosting credit markets, and, to a great extent, it does follow the models adopted in a number of jurisdictions which are seen as having successful bankruptcy infrastructures. The new law is relatively exhaustive as it covers all aspects of insolvency. For example, it has broadened the scope of its application and now applies to traders, whether physical persons or body corporates (the latter even if owned by the government, provided that their Articles of
The law’s effectiveness may be hampered by the fact that it is procedurally heavy. – Mazen Boustany –
Association mention that they would be subject to the insolvency law), companies incorporated in free zones (with the exception of financial free zones, which have their own insolvency laws) and civil professional companies (which were previously subject to the provisions of the Civil Transactions Code). The law has also introduced a financial re-organisation committee, simplified the preventative composition process, set a monetary threshold for initiating bankruptcy, made debt restructuring an option, suspended crimes of dishonoured cheques, relaxed the limitation to seeking new financings, and attributed more powers to bankruptcy trustees. However, many areas remain fundamentally unchanged, such as directors’ liabilities and enforcement actions by secured creditors, and the process of filing for bankruptcy, and potentially enable debt restructuring, has not materially changed with the new legislation. cont. on page 18
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legal
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cont. from page 16
With all proceedings continuing to be administrated and supervised by courts (potentially except for financial re-organisations), the insolvency process continues to be procedurally heavy. The new law provides for two distinctive paths for initiating debt restructuring proceedings—a preventative composition scheme (whereby the debtor initiates debt restructuring proceedings in the Insolvency Courts when debts have accrued for less than 30 days) and a financial restructuring scheme (whereby a creditor or several creditors can institute the proceedings to recover debts of more than AED 100,000 due for more than 30 days). A voluntary arrangement may only be proposed before the opening of the insolvency proceedings (whereas the old law provided for a voluntary arrangement before or after insolvency proceedings), while a restructuring plan may be proposed after the opening of the insolvency proceedings. The law’s effectiveness may be hampered by the fact that it is procedurally heavy. The courts, experts, trustees and controllers continue to be heavily involved, which inevitably leads to a protracted process, and only through its practise by the courts will it be clear whether or not these procedures are ultimately user friendly. The fact that the new law has brought an unfortunate definition of the “negative financial position”, that restricts the jurisprudential role of courts and may also narrow its effectiveness, as it does not give the courts the full liberty to assess the solvency of a company. The new law does not decriminalise the bouncing of a cheque (although that is currently the subject of several other initiatives), which may impede the
Mazen Boustany, Baker McKenzie Habib Al Mulla
law’s effectiveness. However, it does suspend the criminalisation of the cheque if the court has approved the launch of either a preventative composition procedure or a financial restructuring procedure. Secured creditors are able to continue with their lawsuits during these proceedings, which does not protect failing businesses. It would have been more helpful for debtors had the law suspended those actions from the moment the preventative composition or restructuring proceedings begin, rather than after the court’s approval of the preventative composition plan or the financial restructuring plan. The law’s effectiveness would be reflected by debtors and creditors alike having stronger incentives to use the law. The suspension of the criminal aspect of the cheque during preventative composition or a financial restructuring proceedings is a significant incentive for a debtor, particularly if (and it is a big if) the court sticks with the strict timelines provided by the law. From the creditor’s perspective, the economic
or business incentives is less clear, which might have an impact on its widespread use and effectiveness. Banks usually prefer to ‘go it alone’, particularly if they are secured creditors, and would not rather launch collective proceedings such as insolvency proceedings that will complicate the recovery of their loans. Some provisions of the new law make it incumbent on the court to assess the plan proposed by the debtor, with no mention of the appointment of an expert for assistance, so judges will need to be insolvency specialists to gauge arrangement plans. This would require a paradigm shift with judges having to move from a heavy reliance on experts to more reliance on their own expertise, and this is one of the major pitfalls and challenges for the effectiveness and use of the new law. However, if such experience proves successful, then this trend may generalise and we might see a swifter and more efficient judicial system. In order to judge the new bankruptcy law’s true effectiveness and impact on the Emirates’ investment and business communities, we will have to wait to see its implementation in the courts by specialist judges. The old law was largely untested, except in a very few cases, and although the new law has introduced a number of modern concepts that may support businesses facing financial difficulties, no cases have been brought under its jurisdiction as yet. Specialised judges will be needed in order to avoid a negative impact on the law itself and on its use, and, once issued, secondary legislation on financial re-organisation will enhance the effectiveness of the new law. The sooner the new law is tested, the better, so that courts and/or the legislators can fill any gaps and improve its effectiveness.
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Where banking is more personal
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20
COVERSTORY
Mohammed Alardhi, Executive Chairman, Investcorp aims to have $50 billion in AUM by 2022.
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COVERSTORY
21
Global wealth creator Mohammed Alardhi, Executive Chairman at Investcorp, has an ambitious vision to propel the alternative investment firm’s international presence and to broaden its returns and offerings to clients
F
ifty billion dollars of assets under management (AUM)—that is the size Mohammed Alardhi, the executive chairman of Investcorp, a global private equity and alternative investment firm, is targeting within five years, almost doubling its current portfolio size. He wants to achieve most of this by growing organically. “We want to grow AUM both in response to client needs and because we can draw on a lot of operational leverage,” said Alardhi, a former Omani air force chief. The focus of the five-year plan will come mainly from growth in Investcorp’s core businesses: private equity, real estate, alternative investment solutions and the credit management business, Alardhi explained. In August, the company said it was targeting ten investments across the private equity and real estate segment in the current financial year. With oil prices sinking in 2015 and Gulf economies tightening their purse strings, many companies in the region were hurt by the challenging Gulf macro environment, meanwhile with Alardhi taking the helm two years ago, Investcorp’s assets under management have almost doubled to about $21.3 billion and the firm has distributed $3.4 billion to its clients during the 2017 fiscal year—the highest level in the firm’s history.
“Our global footprint is really increasing; our global brand is strengthened and we are no more just a bridge between the Gulf and the US and Europe. We are a global company that is providing a suite of alternative investments to investors all over the world,” said Alardhi. Since its incorporation in Bahrain in 1982, Investcorp had positioned itself as the bridge between Gulf investors and investment opportunities in the west. Nemir Kirdar, the founder, had pioneered
Investcorp aims to have an AUM of
$50 billion by 2022 Investcorp has distributed
$3.4 billion to its clients during the 2017 fiscal year, the highest level in the firm’s history
private equity in the region in the 1980s and in the early 1990s, following the acquisition of Tiffany & Co. and Gucci, managing to raise Investcorp’s international profile. Up until 2015, the firm built a golden brand name with approximately $11 billion in assets under management, comprising of corporate investments in Europe, the US and the Middle East, real estate investments across North America and the US based hedge fund business, known as Alternative Investment Solutions. After Alardhi took over as Executive Chairman, Investcorp started to scale up and diversify its business even more, offering more choices to its investors. Not long into his new role, the Executive Chairman laid out ambitious plans to push the investment firm to think big and carve a global role by developing a strategy that paves the way for a transformation—and so far that transformation is developing well. In the current financial year the company hopes to offer its clients 15 new investment opportunities spanning a range of different asset classes and its credit business, a record for the company. Traditionally, Investcorp used to offer between four to five opportunities a year. cont. overleaf
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COVERSTORY
cont. from page 21
Executive Chairman, Mohammed Alardhi leading a meeting of senior executives at Investcorp’s London office in Mayfair.
Alardhi’s ambitious growth target for the company can only be delivered by its people—and he believes that this is where the true strength of the company lie. “A challenging vision is nothing without drive. You need an ambitious, entrepreneurial team who believe in the vision, and are laser-focused on making it happen,” asserts Alardhi. To help catapult itself as an international contender amongst leaders in the industry, Investcorp has recently invited onto its advisory board some renowned names from the financial world including Mohamed El Erian, Chief Economic Advisor at Allianz and former Chief Executive of Pacific Investment Management Company (PIMCO), the behemoth investment management company.
“He brings a lot to the table—he is somebody who managed one of the biggest companies in the world. His real value-add has not only been on the investment side but on the policy and strategy side too, so he brings fantastic insight,” said Alardhi. Deepak Parekh, Chairman of Housing Development Finance Corporation (HDFC), India’s leading financial services conglomerate has also recently joined and sits on the advisory board which meets annually, and he is helping Investcorp in its quest to expand into Southeast Asia. EASTERN EXPANSION Though listed on the exchange in Bahrain, Investcorp has become a globally recognised name, and is exploring opportunities in emerging markets.
“There are new markets that we cannot ignore anymore,” said Alardhi, adding that looking eastward will be an exciting part of the company’s growth plan. Its office presence is expanding. Earlier this year it opened its first Asian office in Singapore, joining the six other locations it operates from including New York, London, Bahrain, Riyadh, Abu Dhabi and Doha. “Our portfolio companies have been active in China for many years, but we see it as an exciting market where we would like be more active as a Firm,” said Alardhi, adding that he sees the opening of Singapore’s office as a springboard to gain a better understanding of the region and to explore opportunities.
cont. on page 24
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Introducing NBF Elham Specialised banking for Emirati businesswomen
In the UAE, women play an increasingly vital role in society and business. As a firm supporter of the country’s socioeconomic progress for over 30 years, National Bank of Fujairah is pleased to introduce NBF Elham, a business unit dedicated to providing bespoke solutions to Emirati businesswomen. Leveraging the bank’s business expertise, local insight and experienced female Emirati relationship managers, you can be assured of NBF Elham’s support as you continue to break new boundaries. Find out how NBF Elham can help you realise your ambitions and achieve greater success. Call 8008NBF(623) or visit nbf.ae.
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COVERSTORY
cont. from page 22
A challenging vision is nothing without drive. You need an ambitious, entrepreneurial team who believe in the vision, and are laser-focused on making it happen. – Mohammed Alardhi, Executive Chairman, Investcorp – India is another country that Investcorp is evaluating as part of its growth plans and the Executive Chairman thinks that the country has made great strides in creating a business environment that is encouraging and conducive for growth, translating into potential deals. BANKING ON SAUDI’S HEALTH About one third of Investcorp’s AUM originates from the Gulf, the lion’s share of which comes from Saudi Arabia, and Alardhi is determined to invest in the future of the Kingdom, helping it deliver on its objective to privatise key sectors and stimulate additional growth. “We expanded our team in Saudi and we are focused on supporting the National Transformation programme and mainly the privatisation efforts,” said Alardhi. Healthcare is one of the sectors Investcorp finds most attractive. As part of the National Transformation programme, KSA’s massive economic reform plan, the government expects the private sector’s contribution in total healthcare spend to reach 35 per cent by 2020, from the current 25 per cent. Acquisitions of government assets are one way to benefit but also participating in the growth from demand for healthcare is another. Industry experts have recently identified that Saudi Arabia is lagging in terms of number of hospital beds— currently the Kingdom has 2.2 beds per 1,000 people, compared to the world average of 3.1.
2017 WAS A YEAR O F G R EAT ACH IEVEMENTS FO R INVESTCO R P
Assets Under Management
$21.3 billion 98%
34%
33%
Net Income
EPS
$120.3 million
$1.25
68% Fundrasing
$4.1 billion
“This has been a pivotal and successful year for Investcorp. We have made significant progress towards delivering on our ambitious growth strategy, as well as producing robust financial results for our investors. The Firm is making great headway executing a number of initiatives that are designed to diversify the Firm’s client base, product offering, geographical reach and, ultimately, better serve the needs of our clients wherever they are in the world.” Mohammed Mahfoodh Alardhi Executive Chairman
OTH ER H IG H LIG H TS Capital returned
$
Total investment activity
$3.4 billion
$2.1 billion
127% New geography
ASIA
37%
New business line: Investcorp Credit Management
European real estate team established
Source: Investcorp
cont. on page 26
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COVERSTORY
cont. from page 24
Though the bulk of our long term growth will come from organic growth, an important part will come from inorganic growth because it will help us achieve another key target of the five-year plan which is to broaden the suite of alternative offerings. – Mohammed Alardhi, Executive Chairman, Investcorp – However, the privatisation drive will help plug the gap with the rest of the world, according to a report by Arqaam Capital entitled, KSA, Healthcare, Ready, Set, Merge. Investcorp has already been active in this space. Last year it bought a stake in Saudi Arabia’s Al Borg Medical Laboratories, one of the largest private medical laboratory chains in the region. Education and infrastructure are other sectors that are on Investcorp’s watch list in the Gulf’s largest economy. The Executive Chairman also believes that there are opportunities to be sought after from Aramco, whether indirectly by seeking out investments in auxiliary companies, such as petrochemical companies, or assets that may be spun off, as the Saudi Kingdom continues to reshape Aramco. COMPLETING THE CIRCLE Rigidity can only stifle growth, and this is another facet of the company’s new growth plan—to be dynamic and nimble. “Our approach is centered around developing innovative solutions for our clients' evolving needs. In recent months we've created new offerings in real estate and alternative investment solutions, and are hard at work to broaden our client solutions
further,” said Alardhi. Seven months ago, the firm acquired 3i Group Plc’s debt management arm, taking Investcorp’s AUM to nearly $22 billion. The acquisition led to the launch of a new business line, Investcorp Credit Management, broadening Investcorp’s capabilities and offerings. “Though the bulk of our long term growth will come from organic growth, an important part will come from inorganic growth because it will help us achieve another key
target of the five-year plan which is to broaden the suite of alternative offerings,” he added. Infrastructure and secondary markets in private equity are just two of the areas the company is exploring to help expand its offerings to clients. Additionally, a new focus for the company is institutional investors— both regionally and globally—as well as to improve ties with regional sovereign wealth funds. Last year, Abu Dhabi’s state investment fund, Mubadala, became Investcorp’s largest shareholder, acquiring 20 per cent of the alternative investment firm, to become a strategic partner that Alardhi sees as complementary to Investcorp’s growth plan. “It was not possible for Investcorp to simply remain a boutique firm and continue to increase its profitability and attract new opportunities, investors and funds,” said Alardhi. “Everything that we are doing is driven by our investors’ needs. Our ambition is large and we have the right team and resources to make it happen.”
A new focus for the company is regional and global institutional investors, said Alardhi.
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country
spotlight
Confidence in Kuwait Boasting one of the lowest fiscal breakeven Brent oil prices amongst in the GCC, key challenges for the sovereign remains hydrocarbon dependence and parliamentary opposition to deep structural reforms
F
airly stable, Kuwait has always been a country that has maintained its economic and fiscal stature. The financial health of the nation took a hit from the plunge in oil prices. The government witnessed a decrease in oil-export revenues and related government receipts, which hurt the country’s fiscal and external positions. Kuwait has traditionally been low-key and adopted a noninterventionist foreign policy. This is a stance that appears to be respected within the GCC and it is believed that regional conflicts will not directly impact Kuwait or its
ability to trade. Key challenges for the sovereign remains hydrocarbon dependence and parliamentary opposition to deep structural reforms. ECONOMY Heavily dependent on oil, OPECrelated oil production cuts also weighed on the country’s growth impacting economic activity in the non-oil sector, with growth rates dropping from five per cent in 2014 to 3.25 per cent in 2016. At the time of press, the IMF projects Kuwait’s GDP to shrink by one per cent in 2017, following a 3.6 per cent increase in 2016.
The organisation points out that hydrocarbons account for nearly half of the country’s GDP, and the OPEC’s June decision to extend production cuts until the first quarter of 2018 has weighed on oil output and exports. “Kuwait is well positioned to contain the impact of lower oil prices. Large financial buffers and low debt provide policy space to implement the necessary fiscal consolidation gradually, while increasing public investment to support growth. In addition, the financial sector has remained sound and credit conditions are favourable,” said Stephane Roudet, IMF’s Mission Chief for Kuwait.
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(PHOTO CREDIT: ARLO MAGICMAN/SHUTTERSTOCK)
29
Non-oil growth is expected to pick up to
“In light of this, non-oil growth is projected to rebound to about four per cent over the medium term, supported by the country’s ongoing Five-Year Development Plan. The fiscal and external positions are also projected to improve as adjustment proceeds and oil prices gradually recover,” she added. Outside the oil sector, activity remained supported by the implementation of the Five-Year Development Plan (2015/162019/20) which contains several large infrastructure, transport and refinery projects. The government also released the New Kuwait 2035
Strategic Plan in January, which aims to transform the country into a regional, financial and commercial hub as part of its long-term economic diversification efforts. Similar to IMF’s predictions, Fitch expects Kuwait’s real GDP to fall 3.5 per cent in 2017 (after a 3.5 per cent growth in 2016), as oil production cuts in line with the OPEC agreement will imply an 8.3 per cent drop in production from 2016 average levels. The ratings agency expects non-oil growth to pick up to three per cent in 2017-2019 from two per cent in 2016 amid higher government spending, particularly on investment. Despite increases to fuel prices, inflation has been muted, which along with higher oil prices and continuation of government spending should help retail trade and confidence indicators recover from their dip in mid-2016. BANKING SYSTEM The banking sector in Kuwait remains adequately capitalised, liquid and profitable. Although generally healthy,
3% in 2017-2019 from
2% in 2016 bank lending to both firms and households has slowed over the past year. However, growth in lending to ‘productive’ business sectors (this excludes real estate and securities lending) remained resilient at 8.4 per cent year-on-year in July. On the Shari’ah compliant side, Islamic banks had a 41 per cent market share of total domestic banking system assets at the end of the first half. According to Fitch Ratings, assetquality metrics for Kuwaiti Islamic banks improved in 2016 and the first half of 2017. However, concentration risk remains the biggest risk for the Islamic banking system. cont. overleaf
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country
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cont. from page 29
Impaired financing ratios improved since the financial crisis as Islamic banks have been cleaning up their financing books; nevertheless, the average impaired financing ratio rose slightly in the first half of 2017. The ratings agency also highlighted that operating profitability metrics have improved due to lower financing impairment charges and remain slightly above conventional banks’. Slowing financing growth, issuance of additional Tier 1 Sukuk, reduction of higher risk assets and reasonable internal capital generation have helped Islamic banks maintain adequate capital ratios for their risk profiles. Fitch projects asset quality to remain sensitive to concentration risk and volatility in the real estate sector. Financing growth is expected to remain above that of conventional banks as Islamic banks build their franchises. Financing growth will be in the high-single digits in 2017, compared to the mid-single digits for conventional banks. FISCAL HEALTH The IMF in a recent report noted that Kuwait’s external positions remain strong and supportive of the country’s currency peg, backed by a sovereign wealth fund that is estimated at over $500 billion and supported by a modest recovery in oil prices over the past year. Kuwait posted a current account deficit of 4.5 per cent of GDP in 2016, a significant deterioration from a surplus of 45 per cent in 2013. According to the report, Kuwait’s current account balance is shifting back into a modest surplus quarteron-quarter on the back of rising oil receipts. Import growth has also remained robust, with capital goods imports rising by 25 per cent yearon-year in the first quarter, reflecting healthy domestic demand related to government infrastructure projects.
Kuwait is well positioned to contain the impact of lower oil prices. Large financial buffers and low debt provide policy space to implement the necessary fiscal consolidation gradually, while increasing public investment to support growth. – Stephane Roudet, IMF’s Mission Chief for Kuwait –
Although improving, the fiscal position remain constrained, reflecting the dependence on oil revenues of nearly 90 per cent of government income. With low oil prices persisting, the government has posted consecutive deficits of 17 per cent of GDP over the past two years, a steep fall from double-digit surpluses it recorded before 2014. However, on a general government basis, public sector finances are in a modest surplus. Despite expenditure rationalisation efforts, the IMF suggests that fiscal reforms remain contentious. The Government began raising utility prices in September 2016; however, rate increases in the second round of electricity and water tariff reforms currently being implemented are lower than what was initially proposed. Plans to introduce a corporation tax, at a fixed rate of 10 per cent, have also been shelved. Accordingly, the Government has been forced to look for cost-savings elsewhere, including to PPPs (public private partnerships) to finance infrastructure projects, the implementation of a VAT (expected in January 2019) and privatisation of state assets.
In spite of Kuwait’s maiden $10 billion international bond issuance in March, gross public debt remains low at approximately 20 per cent of GDP. Fuel price increases were also implemented in September 2016, but inflation remained muted, averaging at 1.7 per cent since the start of the year due to declining housing costs and persistently weak food inflation. The peg to an undisclosed basket of currencies, in which the US dollar has a heavy weighting, meant that the Central Bank of Kuwait (CBK) has raised interest rates in tandem with the US Federal Reserve. However in June the CBK opted to keep its key policy rate on hold despite the US Federal Reserve hike. Kuwait Investment Authority’s (KIA) assets are estimated to exceed $514 billion or 453 per cent of GDP at the end of 2016. Of this amount, the Reserve Fund for Future Generations (RFFG) accounted for almost $400 billion and continues to increase, due to investment income and the statutory transfer of 10 per cent of government revenue. Meanwhile, the value of the General Reserve Fund (GRF), which holds the accumulated government surpluses of previous years, is estimated to have fallen for a third year in a row, to $116 billion, as the government tapped the GRF for financing. cont. on page 32
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31
KUWAIT
in numbers GDP GROWTH
POPULATION
4.43 million
1m
COMPETITIVENESS
Ranked
-1
%
5m
Source: Kuwait Public Authority For Civil Information GDP Growth
38
Kuwait’s GDP anticipated to shrink by 1% in 2017, following a 3.6% increase in 2016. Growth is expected to rebound to 3.5% in 2019.
out of 138 for macroeconomic competitive environment
Source: The Global Competitiveness Report 2016-2017, World Economic Forum
Source: World Bank
KUWAIT: MACRO OUTLOOK INDICATORS (annual per cent change unless indicated otherwise)
Real GDP growth, at constant market prices Private Consumption Government Consumption Gross Fixed Capital Investment Exports, Good and Services Imports, Goods and Services Real GDP growth, at constant factor prices Agriculture Industry Services Inflation (Private Consumption Deflator) Current Account Balance (% of GDP) Financial and Capital Account (% of GDP) Net Foreign Direct Investment (% of GDP) Fiscal Balance (% of GDP) Debt (% of GDP) Primary Balance (% of GDP)
2014 0.5 4.9 0.8 2.7 1.4 8.0 0.9 7.3 -0.5 3.5 2.9 32.5 -36.1 -9.0 18.7 3.1 18.8
2015 0.6 1.5 0.5 -0.7 1.0 1.4 -1.4 2.9 -1.8 -0.8 3.2 4.5 -8.1 -12.7 0.0 5.2 0.1
2016 e 3.6 1.0 0.4 4.3 5.2 6.0 3.4 2.5 4.0 2.5 2.6 -4.5 0.8 -5.0 0.5 10.0 0.5
2017 f -1.0 2.0 3.4 12.1 -3.2 4.5 -0.9 0.7 -3.5 3.7 1.7 0.1 -3.7 -3.0 1.7 22.3 1.8
2018 f 1.9 2.0 -1.8 8.2 2.8 5.0 1.8 2.3 2.0 1.6 1.8 1.8 -5.4 -2.0 1.6 27.6 1.9
2019 f 3.5 3.0 0.2 13.9 2.3 5.0 3.4 3.4 1.6 6.4 1.8 2.8 -6.5 -2.0 2.5 31.7 2.9
Sources: World Bank, Macroeconomics and Fiscal Management Global Practice, and Poverty Global Practice. Note: e = estimate, f = forecast
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Kuwait / Government balances, per cent of GDP
per cent of GDP
Kuwait / Domestic interest rates
per cent
40
8
30
7
20
6
10
5
0
4
-10
3
-20 2012/13
2013/14
2014/15
2015/16
General government basis Ex. Investment income Ex. Investment income and transfers to SWF
Source: Ministry of Finance, World Bank, Haver
2016/17
Central Bank discount rate Interbank deposit rate: overnight offer rate
2 1 0 Mar-00
Mar-03
Mar-06
Mar-09
Mar-12
Mar-15
Source: Central Bank of Kuwait, Haver
cont. from page 30
CHALLENGES According to IMF anaylsts, key external risks include spillovers from geo-political tensions and conflict. A strong resurgence of US hydrocarbon output as business regulations are loosened under a new US presidency could weigh on global oil prices, particularly if the US emerges as a major energy exporter. Longer-term challenges are pinned on Kuwait’s dependence on the hydrocarbon sector. A poor business environment and the large size of the public sector have hampered the development of the private non-oil sector. Comprehensive reforms are needed to rebalance the economy away from the energy sector to a more diversified growth path underpinned by innovation, private sector entrepreneurship and job creation as well as the quality of its labour force. RATING Fitch Ratings in October affirmed Kuwait’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘AA’
with a stable outlook. The country’s Short-Term Foreign- and LocalCurrency IDRs is affirmed at ‘F1+’; its Country Ceiling at ‘AA+’; and the issue ratings on Kuwait’s long-term senior-unsecured foreign-currency bonds is also affirmed at ‘AA’. According to the commentary on the rating affirmation, Kuwait’s key credit strengths are the sovereign’s exceptionally strong fiscal and external metrics albeit, at a forecast of $50/ bbl, one of the lowest fiscal breakeven Brent oil prices among Fitch-rated oil exporters. These strengths are however tempered by Kuwait’s heavily oil-dependent economy, geopolitical risk, weak governance and a poor business environment. A generous welfare state and the large economic role of the public sector present increasing challenges to public finances given robust growth of the Kuwaiti population. The main factors that could individually or collectively lead to a negative rating action is the erosion of fiscal and external positions—for
example due to a sustained period of low oil prices or an inability to address structural drains on public finances. On the other hand, the main factors that could individually or collectively lead to a positive rating action is the improvement in structural factors such as reduction in oil dependence, and a strengthening in governance, the business environment and the economic policy framework. OUTLOOK The IMF projects a rebound in growth to 3.5 per cent in 2019, as OPEC related production cuts are tapered off and oil output and exports increase. The government plans to invest $115 billion in the oil sector over the next five years, which should also boost oil production. With additional support from public investment spending, growth is estimated to rise to about 2.7 per cent over the medium term. Current account and budgetary pressures are expected to ease on the back of a partial recovery in oil prices and rising output.
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liquidity
management
Tackling the liquidity gap Slower growth across the Middle East, coupled with stagnating oil prices, is weighing heavily on liquidity conditions for the region’s corporates. Emma Clark, Falcon Group’s Head of Business Development, explains how non-bank lending can help such businesses with their working capital woes
Emma Clark
W
hile oil prices have somewhat recovered following the 75 per cent decline—which took place between mid-2014 and early 2016— many countries across the Middle East continue to feel the after-effects. Heavily dependent on oil, government fiscal revenues have slowed—in turn, tightening liquidity in the banking sector, dragging down economic growth and forcing
some countries to adopt austerity measures. But that is only part of the problem. A hike in US interest rates—which invariably impacts those currencies pegged to the dollar—added to recently implemented Basel III regulations are further inflating the cost of bank funding. With interbank rates spiking and money supply slowing, it comes as no surprise that many banks have become increasingly selective with respect to loans. And despite total loan growth for 2017 expected to register at 4.9 per cent, this is far lower than the average annual loan growth of 9.2 per cent recorded between 2012 and 2016 (according to a report from Coface). STRAINED AT ALL LEVELS Meanwhile, the continued low oil price environment is also hitting the cash management of many Middle Eastern corporates. In fact, a recent study by PwC reports that an overall decline in revenues has led to a further deterioration of the working capital cycle—in other words, the average duration that it takes to turn investment into cash and profit.
While 2016 saw a nine-day
(7%) decline in working capital performance, the region has experienced cumulative 14-day
(11%) deterioration since 2014
While 2016 saw a nine-day (seven per cent) decline in working capital performance, the study reports that the region, on the whole, has experienced cumulative 14-day deterioration since 2014 (11 per cent). Furthermore, the squeeze, which was initially felt by smaller businesses, has since spread to mid-market and large companies lower sales volumes—stemming from weaker trade and tightened liquidity— resulting in delays in payment or changes in payment terms. cont. on page 36
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liquidity
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cont. from page 34
More worryingly, this is a trend that is becoming the norm for the region. In fact, many companies are lengthening payment terms, not because they are unable to pay, but simply because others suppliers are doing so. As such, many corporates, regardless of size or sector, are operating with a negative net operating cash flow—in other words, with less money to make their business work. AN UNTAPPED SOURCE OF CASH Managing working capital is complex and challenging. Yet it has never been as important to a company as in today’s environment. No matter how large the organisation, or how strong its sales, working capital is a critical resource funding day-to-day operations. Inventory, in particular, consumes a great deal of working capital. More specifically, large amounts of slowselling or obsolete inventory can be detrimental to working capital performance—and it is precisely this issue that is causing trouble for corporates in the Middle East. Although the amount of capital tied up in stock and unpaid invoices have increased, many businesses have not been able to respond fast enough to the situation. As PwC reports, the days sales outstanding (DSO) in the region increased by eight days while the number of days inventory outstanding (DIO) increased by four days between 2016 and 2015. To quantify, the Middle Eastern businesses surveyed, in absolute terms, had AED 6 billion more tied up in inventory—the total figure of accounts receivables increasing from AED 211 billion in 2015 to AED 217 billion. It, therefore, comes as no surprise that with so much cash tied up in non-performing assets, many corporates are finding it hard to pay their suppliers and debtors.
Unlike banks that tend to take a blanket approach, alternative financiers have both the financial expertise and sector experience to understand and create bespoke solutions suited to specific business needs. – Emma Clark, Head of Business Development, Falcon Group –
SPECIALIST SOLUTIONS Of course, there are several steps that corporates can take to improve cash management and boost liquidity. For instance, internal levers—such as implementing better processes or using data analytics—may help to optimise capital. Short-term financial solutions can also be a valuable way to improve a business’s working capital position. The only problem, however, is that banks—the traditional solution to such matters—are retreating from this space. Given this (from trade-finance facilities and invoice financing solutions to letters of credit and forfeiting), we are seeing more companies than ever looking to alternative financiers for their funding needs. Providing flexible and innovative solutions, these players offer a variety of products that are
increasingly helping businesses to release cash tied up in their sales ledgers, thus reducing the impact of cash flow fluctuations. Invoice factoring, for instance, allows companies to sell their accounts receivables to improve their working capital, providing them with immediate funds that can be used to pay company expenses. Trade finance, while similar to invoice factoring in that the focus is on physical stock rather than services, aims to facilitate international trade—often involving prepayment for shipment of goods from overseas. Meanwhile, supply chain finance optimises cash flow by allowing businesses to lengthen their payment terms while providing the option for their suppliers to get paid early Certainly, there are many more ways to finance working capital besides these examples. Yet no matter what the chosen solution, working capital finance is a vital resource for optimising cash flow and keeping businesses moving. What’s more, unlike banks that tend to take a blanket approach, alternative financiers have both the financial expertise and sector experience to understand and create bespoke solutions suited to specific business needs. LOOKING AHEAD Low oil prices coupled with evolving bank regulations—and their corresponding impacts on the banking industry—have placed a strain on business liquidity in the Middle East. Exploring the working capital solutions offered by alternative financiers will not only help to ensure survival through this changing landscape, but also help companies grow and strengthen their position for the future.
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compliance
risk
(PHOTO CREDIT: AlexLMX/SHUTTERSTOCK).
38
Bank compliance risk management Two banks have recently been in the news for non-compliance. Aziz Ur Rahman, Principal Risk Consultant at Mayfair Business Consultants, highlights that compliance to risk management and anti-money laundering laws are crucial, especially when operating across multiple jurisdictions
O
n 24 May 2017 Banca della Syizzerra Italiana, a Swiss merchant bank, lost its licence after a 143-year stint in Singapore. The Monetary Authority of Singapore revoked the licence for serious breaches of anti-money Laundering (AML) requirements, poor management oversight and gross misconduct. Major elements of an effective AML compliance framework were non-existent. The bank had missing risk management culture, poor governance, and major failures in client due diligence, misclassification of high risk clients, unreported dealings and many other shortcomings.
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compliance
risk
The other bank which came under the scrutiny of the New York State Department of Financial Services (DFS) is the New York Branch of Habib Bank Ltd. The DFS has been conducting an investigation concerning serious deficiencies identified in the New York branch’s programme devoted to complying with New York and Federal laws and regulations concerning antimoney laundering (AML) compliance, including the Bank Secrecy Act (BSA). This investigation was undertaken pursuant to the 15 December 2015 Consent Order among the department, the bank and the branch (the 2015 Order), which had identified previous significant deficiencies in the bank’s BSA/AML compliance. The evidence presented before the department demonstrated that compliance failures found at the New York branch were serious, persistent and apparently affected the entire Habib banking enterprise. They indicated a fundamental lack of understanding of the need for a vigorous compliance infrastructure and the dangerous absence of attention by Habib Bank’s senior management of the state of compliance at the New York branch. According to the report, the bank’s recent misconduct had produced grave risks to itself, to banking institutions in the state of New York and the US as well as to the financial system as a whole. Although the Bank had been given more than sufficient opportunity to rectify its deficiencies, it had utterly failed to do so, demonstrating a sheer inability to accomplish remediation, a stubborn unwillingness to do so, or both. The indictment comprised of 53 charges for breaching US banking laws. The superintendent sought to impose a civil monetary penalty
There should be a client due diligence programme to understand who the bank is dealing with—robust processes need to be included to ensure adequate investigation into the client’s background, profession, dealings and source of money. – Aziz Ur Rahman – upon respondents in an amount up to $629,625,000, if this penalty is upheld by the courts as the charges are very serious. The case was finally settled with a penalty payment of $225 million dollars and the closing of the branch. The above noted two incidents that highlight the necessity of having an extremely robust compliance programme to protect the bank. Compliance starts at the top. It will be most effective in a corporate culture that emphasises standards of honesty and integrity and in which the board of directors and senior management lead by example. It concerns everyone within the bank and should be viewed as an integral part of the bank’s business activities. A bank should hold itself to high standards when carrying out
39
business and at all times. It should strive to observe the spirit as well as the letter of the law. Failure to consider the impact of its actions on its shareholders, customers, employees and the markets may result in significant adverse publicity and reputational damage, leading to severe financial penalties. WHAT IS COMPLIANCE MANAGEMENT? According to Basel I, “It is an independent function that identifies, assesses, advises on, monitors and reports on the bank’s compliance risk that is the risk of legal or regulatory sanctions, financial loss or loss to reputation a bank may suffer as a result of its failure to comply with all applicable laws, regulations, codes of conduct and standards of good practise.” IMPORTANCE OF COMPLIANCE The scope of compliance is greater than the internal control function. The reason is new challenges confront banks due to fast changes in business environment. Regulatory standards are being reviewed very frequently and being rapidly upgraded new products are being designed adding to the medley of risk faced by banks. To set up a compliance department the following requirements must be met: • Clearly defined structure with clear reporting lines to preserve independence of the function and demonstrate senior management commitment. • Providing adequate financial and human resources with no reliance on business units for budgets. Similarly, conflict-free human resources policies with regard to recruitment, remuneration and performance criteria. cont. overleaf
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compliance
risk
cont. from page 39
• A clear charter setting out roles, responsibilities and scope of activities. • Realistic and well documented annual plans. • Periodic independent verification to assess compliance function, effectiveness and improvements. SENIOR MANAGEMENT RESPONSIBILITY Board and senior management have to set high ethical standards by setting up consistent and even accountability standards at levels in the bank. They should ensure effective application of compliance enabling technology for a better compliance management programme, communications, monitoring and reporting. There should be development of early warning systems and effective dispute resolution processes. THE BASEL COMMITTEE The Basel Committee has laid down 11 principles for an effective compliance programme. They are not discussed in this article as they can be easily retrieved from the BIS website. Every banking regime has its own guidelines on management of compliance risk. All banks operating within their respective banking regimes and their compliance departments should ensure compliance with the required regulations. Detailed below are the requirements that should form part of a comprehensive bank compliance programme. These are generic in nature, but very comprehensive as each banking regime/regulator would have in its compliance guidelines: 1. Risk assessment; 2. Internal controls review; 3. Independent testing (audit); 4. BSA/AML compliance officer;
Aziz Ur Rahman, Principal Risk Consultant at Mayfair Business Consultants
5. BSA/AML compliance training; 6. When operating in a foreign country the concerned bank must become familiar with that country’s banking laws and ensure full compliance to prevent problems. Risk assessment: many different financial institutions have different risk profiles and each institution in a group differs from the others in the group. The regulators recognise this variation and do not expect a one size fits all compliance programme. Nevertheless, each institution is expected to create and maintain an effective compliance programme that fits its risk profile.
Therefore, the risk assessment is the crucial first step in developing a compliance programme. Banks should carefully identify the risks inherent in their business, looking at products and services, customers, and geographic locations. Then, these risk categories should be evaluated for risk, with the aggregation of the risks yielding the risk profile. Internal controls review: the internal controls review should evaluate the policies, procedures, and processes of the financial institution with respect to their ability to achieve AML compliance. This set of practises amounts to the Anti-Money cont. on page 42
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compliance
risk
cont. from page 40
Laundering Programme (AMLP) of the institution, and will cover both personnel and structural elements. Internal responsibilities should be clear, and procedures should adhere to secure standards like dual controls and segregation of duties. Mandated reporting is at the heart of AML regulations, so systems have to be designed to generate these reports and record keeping and retention is critical. Independent testing (audit): a basic principle of risk management is to include independent, third-party audits in the system review. For AML compliance, a review every 12 to 18 months—and possibly less for higher risk financial institutions—is the recommended best practice. This should be a risk-based audit that is responsive to the organisation’s risk profile. BSA/AML compliance officer: every bank’s board should designate a BSA/AML compliance officer. This person should be expert in BSA/AML regulations, have the ability and resources to design and implement a programme, and ensure that both the board and senior management are aware of the organisation’s compliance status. BSA/AML compliance training: employees of the bank should be trained in appropriate parts of the BSA/AML programme. In general, the anti-money laundering responsibility of the organisation should be communicated to every employee, and those people whose jobs place them in a specific risk category, should be aware of how mandated reporting and responsibilities apply. This training should be reviewed periodically, especially when people change jobs. The compliance officer should be fully trained and given frequent opportunities for refreshers. Senior management should receive enough training to model a ‘culture of
Compliance with law and regulation must be managed as an integral part of any bank’s business strategy. – RAziz Ur Rahman –
compliance’ and understand the importance of the internal reviews, audits, and compliance reports they receive. In addition to the above noted, there should be a client due diligence programme to understand who the bank is dealing with—robust processes need to be included to ensure adequate investigation into the client’s background, profession, dealings and source of money. This usually is done by the front office. Determining the customer’s propensity to committing money laundering or engaging in terrorist financing is essential. Monitoring for suspicious customer transactions is necessary to prevent suspicious activities going through the bank. The bank should have automated systems to cheque for suspicious activities. The bank also should have a data analysis system that analyses the thousands of transactions that pass through the banking system on a daily basis. BOARD AND MANAGEMENT SUPERVISION AND ADMINISTRATION Compliance with law and regulation must be managed as an integral part of any bank’s business strategy. The board of directors and management must recognise the scope and implications of laws and regulations
that apply to their bank. They must establish a compliance management system that not only protects the bank, but also uses resources effectively and minimises disruptions in daily activities. To ensure an effective approach to compliance, the board and management should make compliance a high priority. The participation of senior management in the development and maintenance of a compliance programme is essential. The board and senior management periodically should review the effectiveness of its compliance management system. This review should include reports which identify any weaknesses or required modifications due to changes in laws, regulations, or policy statements. Prompt, capable management response to those weaknesses and required changes is the final measure of the compliance system’s effectiveness. Senior management must assign well qualified staff and resources to properly implement and administer the compliance programme. Participation at all levels in the compliance management system is important to its success. For example, the State Bank of Pakistan has issued compliance guidelines with which the BOD, Senior Management and the bank staff responsible for compliance must be familiar to carry out their duties in a responsible and professional manner to ensure the safety, soundness and profitability of the bank.
Aziz Ur Rahman was the Former Chief Credit Officer of European American Bank, New York, and Former Chief Risk Officer at CresBank Lahore, Pakistan.
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remittances
Getting to tango with start-ups A blossoming idea and a bit of guts is what fires up a start-up initially, but there comes an inflexion point where these innovators need a nurturing ecosystem to test and launch their concept into the real world of business, says Promoth Manghat, CEO, UAE Exchange Group
Promoth Manghat, CEO, UAE Exchange Group
W
hen disruption is synonymous with innovation, incumbents steeped in the ways of the legacy entrepreneurial world order need to sit up and take notice. In the fintech space, where start-ups and digital evangelists are offering new transformational business models supported by ubiquitous technology, I believe collaboration cannot be just a possibility but an imperative to leverage the innovation landscape. This is exactly what steers UAE Exchange, and a host of businesses in the region, to start-ups as well as partnerships that incubate and nurture new entrepreneurial ideas, which can have far reaching advantages, and in our case, to the payments and remittance industry specifically. Some of these entrepreneurial ideas may be green shoots still. However, when one looks at the history of start-ups, from those Silicon Valley garage ventures to the dedicated innovation labs or sandboxes of our times, who knows which of these maverick entrepreneurs may have a big seed of an avant-garde business up their sleeves. Or for that matter, a disruptive idea which would help us do business in a better and agile format in line with the changing times of consumer expectations. These are interesting times for fintech start-ups in the region. Challenges remain, but some of it, which is typically categorised as formidable like in the case of regulatory hurdles, are certainly being looked at in a benign perspective and with more perceptive understanding. This is evident from the innovation ecosystems created by governments and other public entities in the region. cont. on page 46
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remittances
cont. from page 44
The participation of private sector players like us and others add another significant dimension to this, particularly when some of these start-ups testing the mettle of their concepts in controlled environments, may eventually be our partners. For start-ups, the involvement of all stakeholders—government, regulators, corporate entities—in the UAE is empowering and purposeful. The UAE in particular has emerged as a cynosure of innovation, attracting the lion’s share of the investments into start-ups in the MENA region. In the last 24 months or more, with UAE Exchange on the digital innovation journey, I have been fortunate enough to meet a number of start-up entrepreneurs. More so in the fintech space, as part of our continuing endeavour to better user experience, and probably offer lower remittance rates by deploying business models that can cut through the clutter of the traditional maze. I am convinced that innovation has become a critical need in financial services, particularly in these challenging times for the cross-border money transfer industry with issues such as de-risking choking remittance flows. In such a scenario, we have to look at alternate, innovative money flow routes that are much more de-layered, agile and transparent, yet noncompromising to subversive activities like money laundering and terrorism financing, like what blockchain technology offers for instance. Being digitally savvy has become unavoidable with the changing customer demographics across the first and last mile. Today, nearly 20 per cent of our customers prefer digital to brick and mortar channels. This is a huge change, and one which will catch up further, forcing all of us to be on our toes and get shock-triggered to transform.
I am convinced that innovation has become a critical need in financial services, particularly in these challenging times for the crossborder money transfer industry with issues such as de-risking choking remittance flows. – Promoth Manghat, CEO, UAE Exchange Group –
The context of our partnerships stem from our conviction that fintech innovation is what will make us stay relevant and sustainable in the long run. For instance, we have joined hands with the New York University Abu Dhabi (NYUAD) to advance Fintech innovation in the UAE through startAD. It is in the same vein and passion that we have associated with the region’s first fintech accelerator, Fintech Hive of Dubai International Financial Centre (DIFC). As a ‘corporate mentor’, we would address the most critical issues start-ups face in their entrepreneurial journey, helping them scale up and test their concepts in a real-world environment. Another significant partnership is with Abu Dhabi Global Market (ADGM), with its RegLab focused on developing and deploying business solutions in the remittance, payments and foreign exchange space.
I would like to call these initiatives as a celebration of entrepreneurship and collaboration, one which will lead to the creation of new opportunities and new ways of working. In one of my random readings, I came across this comparison of advantages between start-ups and incumbents. Start-ups are credited with the spirit of innovation, better agility, guts to experiment and take risks; and a vision to raise the bar on digital businesses, be it products or services. Existing players are perceived to be slow movers, weighed down by their brick and mortar legacy of yesteryear. That said, it needs to be remembered that legacy operators have built tremendous process maturity coupled with customer loyalty and trust on their side, compared to digital fintech startups. What pull start-ups and incumbents to each other are these opposites—and when ways are found to prudently balance strengths and cancel out weaknesses, it would be a very symbiotic relationship. This is the thought that drives the collaboration potential between startups and legacy players. In the financial services industry that I represent, particularly in the remittance segment where we have built up loyalty at the grassroots levels, digital disruption will add to our strength. In a business like ours where we touch the lives of millions of migrants, technological partnerships with start-ups usher in greater degrees of customer delight and operational efficiency, leading to benefits in both cost and experience. If you have a vision for the future, you cannot ignore this advantage offered by the new economy. So, whatever we may call it—disruption, interruption or innovation—the writing on the wall is either change or perish.
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islamic
finance
(PHOTO CREDIT: KENARY820/SHUTTERSTOCK)
How loyal are Islamic banking customers? Based on conclusive research, Dr. John Ireland, Associate Professor at the Rochester Institute of Technology, Dubai, provides cumulative evidence and a frank commentary on what drives customer loyalty in Islamic banking
S
hari’ah finance is a growing industry and a centrepiece of Dubai’s plan to be the capital of the Islamic economy. However, Shari’ah finance is still much smaller than conventional finance, even in Muslim majority nations. For example, while six per cent of Malaysians are Muslims, Islamic banks only capture 21 per cent of Malaysian banking assets. In the UAE, 76 per cent of residents are Muslim, yet Islamic banks only hold 19 per cent of banking assets. One would expect Muslims to choose Shari’ah banks and products over conventional offers when both are available. The question then is—why would Muslims choose conventional banks when Halal options are available? Clearly there are many possible explanations but my research focuses on the relevance of interest or profit rates. There are two good reasons for paying attention to interest rates. First, research has found that the chief reason for Muslims choosing conventional banks was, “better rate of return”.
Second, several scholars have hypothesised that Islamic banks have to be more expensive than conventional banks because they have higher transactions costs. Combining the two, it seems that many Muslims will switch to conventional banks to obtain better rates of return that Islamic banks cannot match. You might be wondering, why study this issue again if several researchers have already said that the
Dr. John Ireland
problem is price? Good question. The problem for bankers is that knowing that the issue is price, tells them neither how big the problem is nor how to solve it. Bankers need to know just how many customers would shift from Islamic to conventional banks for a given change in interest rates (price elasticity). This, together with their cost data, will allow them to set prices in a rational manner. The best way to obtain this information would be with an experiment. However, the reality is that price experiments—raising and lowering prices to see what happens—are just too dangerous and expensive. Thus, sophisticated businesses commonly use a market research technique called conjoint analysis to study how markets will react to price changes. Conjoint analysis works like an experiment but without the costs and risks. In the conjoint analysis experiment used in my research, Islamic banking customers were offered two Shari’ah-compliant and two conventional offers on a computer display. cont. on page 50
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islamic
finance
cont. from page 48
To make the experiment more realistic, all products were properly described in terms of the offering bank, the interest or profit rate and the product category, (a savings account, investment or car finance). Consumer choices among the products were fed into a computer simulation that calculated the expected market share for each bank and product at a given interest rate. Altogether, 2,400 choices from 600 customers were studied. The results are a bit curious. First, 25 per cent of Islamic banking customers preferred conventional banks and products when interest rates were the same. The questions arise—why do they use Islamic banks if they prefer conventional banks and they offer better rates? Are they somehow trapped? More on this later. When conventional banks offer one per cent better interest rates, the share that would switch to conventional banks rose from 25 per cent to 44 per cent. This shows tremendous price sensitivity. Finally, an additional 18 per cent would
25%
of Islamic banking customers have no choice
35%
use both Islamic and conventional banks
40%
of Islamic banking customers remain loyal to Islamic finance
Relation between interest advantage and the estimated market share of conventional products CHOICE SHARE OF CONVENTIONAL PRODUCTS 0.65 0.62
0.6 0.55 0.5 0.45
0.44
0.4 0.35 0.3 0.25 0.2
0.25 Conventional and Islamic have same interest
Conventional have 1% interest advantage
Conventional have 2% interest advantage
Source: Rochester Institute of Technology, Dubai
switch if conventional banks offer two per cent better interest rates. Thus, we see that most 62 per cent Islamic banking customers would switch to conventional banks to obtain two per cent better interest (or less)—refer to Figure 1. These results are a bit confusing; why is it that these consumers continue to use Islamic banks when conventional banks actually do offer better rates? Why do 25 per cent of Islamic banking customers use Shari’ah banks when they prefer conventional banks? To answer these questions, my marketing research students asked Islamic banking customers, “Why do you use an Islamic bank when you prefer conventional banks?” One finding was that some Islamic banking customers only used Islamic banks because their employers deposited their pay in an Islamic bank. Thus, they weren’t given a choice. A second group used both Islamic and conventional banks. Thus, when Islamic banking customers say that
they would use conventional banks to obtain one per cent better interest, it is because they are already using the conventional system as well as the Shari’ah one. Thus, to quantify, about 25 per cent of Islamic banking customers had no choice while another 35 per cent use both Islamic and conventional banks. The final group, about 40 per cent of Islamic banking customers are truly loyal to Islamic banking, most likely for religious reasons. They try hard to use Shari’ah-compliant alternatives and will not switch for slightly better rates. These results surprised me. I expected to find that all Islamic banking customers would only use Islamic banks and that they would generally be loyal to Islamic banks unless the difference in rates became too great. In reality, some Islamic banking customers came to it because of their employment and others use both Islamic and conventional banks. It is only the final group—less than 40 per cent—that are truly loyal to Shari’ah finance.
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in-depth
Managing transformation Michel Accad, Group CEO of Al Ahli Bank of Kuwait with Robin Amlôt of CPI Financial.
Al Ahli Bank of Kuwait Group CEO Michel Accad explains how to make a difference
T
he takeover in November 2015 and subsequent rebranding of Piraeus Bank Egypt to Al Ahli Bank of Kuwait-Egypt effectively transformed Al Ahli Bank of Kuwait (ABK) from a domestic to a regional player. In the latest in our CEO Leadership series, Banker Middle East turns the spotlight on ABK’s Group CEO, Michel Accad. (What follows is an edited transcript of the interview, you may view it in full on our YouTube channel, CPIFinancialTV.)
What are the next steps in growing the bank? For several years, we had a small presence outside Kuwait with a couple of branches in the United Arab Emirates [in Abu Dhabi and Dubai] but they accounted for less than five per cent of our top line and bottom line. With the acquisition in Egypt we have become a regional bank. Egypt alone accounts for a bit more than 10 per cent of our numbers. Today our structure is more 85-15 between local and
regional revenues. Over time we would like the split to be closer to 70-30. This is going to take a few years but this is our aspiration. We will be, primarily, a Kuwaiti bank but with a significant regional presence.
How do you expect to achieve that growth—do you have ambitions to expand operations to other countries? I do not think that in the relatively short term that it is achievable on a purely organic basis.
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The bank in Egypt will grow faster than our operations in Kuwait. Nevertheless, I feel most of the growth will come inorganically from further acquisitions, if not of a bank perhaps portfolio or asset acquisitions.
What is your view on the Kuwaiti banking sector? What do you see as the key trends this year and next? Kuwait has performed better than other GCC countries, due to greater fiscal discipline and the ability to sustain lower oil prices than surrounding countries. So, Kuwait is at a slight advantage and the banks here have been performing a bit better than elsewhere in the GCC. Growth is, however, single digit and there is no question that the reduction in oil prices has impacted the economy.
In August 2017 Fitch Ratings commented that ‘large assetliability mismatches remain’ among Kuwait’s banks— would you agree and if so, is this a cause for concern? I agree but I do not know if it is a feature that is exclusive to Kuwait or more of a regional issue. Maybe Kuwait has a little bit more of this mismatch. However, certain banks (we were the first) have remedied this situation in large part through the issue of bonds. We were the first Kuwaiti bank to issue a senior bond after the Government of Kuwait issued its debut senior issue. [In March 2017, ABK raised $500 million in a private placement of bonds, the bank’s debut issue. At the time, Michel Accad was reported as saying, “Our plan is to use the proceeds of the issue to further diversify our funding sources and to better match the tenor of our assets through longer-dated liabilities.”]
We are very pleased with the result [of the bond issue] and it has indeed rebalanced our asset and liability maturity in a much better way. It was extremely successful, sold internationally in Western Europe, Asia, and the Middle East and was very, very well received. The pricing was extremely attractive.
Do you foresee any issues with the proposed implementation of IFRS 9 in the Kuwaiti financial sector as of 1 January 2018? I do not foresee any problems for us at ABK and, in general, I do not foresee any problems for all, or most of the Kuwaiti banks either. The banks have accumulated precautionary reserves in relatively large amounts that are more than sufficient, a multiple of what would probably be required under an IFRS 9 scenario. We have run simulations and it seems as far as we are concerned, that the extra provisions that are required
These are our key priorities: continuing the drive to ‘simplicity’ and moving forward on a regional basis. We will also develop our channels, all banks have to adapt and become more digital, relying a bit less on physical branches. – Michel Accad, Group CEO, Al Ahli Bank of Kuwait –
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would be around 10 per cent of the precautionary reserves that we already have so the impact will be minimal.
How does the market-place and business in Egypt differ from that of Kuwait? We have got to be realistic. If a country provides you with significantly faster growth than another country, then the risk is also higher. However, Egypt is very much an underbanked market. That is why there are many more opportunities for growth. If you look at Kuwait, Kuwait is very adequately banked so it is difficult to grow If you want to gain market share, here you need to steal it from someone else! In Egypt, there is a lot of untapped market potential. That makes it much easier to grow.
In 2016, you chose Infosys Finacle to drive the bank’s technology transformation with implementation beginning in 2017. [The bank is deploying a suite of Infosys Finacle solutions including Core Banking, Trade Finance, Wealth Management, CRM, e-banking, Payments, Treasury, Alerts, SMS Banking, Liquidity Management, Retail, and Corporate Loan Origination. Our interview with Michel Accad took place less than 24 hours after the bank’s new Core Banking system went live.] This is an extremely exciting time, we have just migrated to our new core banking system. Many banks migrate, upgrade, or change systems. There is nothing new in that. However, as far as we were concerned our system was getting rather antiquated. It is not that the system was bad but it was three versions old and so heavy with customisation that it was not even close to the original any more so even an upgrade of the old system would have required significant work. cont. overleaf
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What we did was to move to a completely different system. The move took place over the weekend. It involved a large number of people, many of whom did not get much sleep! But to be honest it is the smoothest transition I have ever seen. We were working towards it for about 18 months. It came in one month earlier than planned and under budget! That is a unique situation as far as I am concerned. Today is the first day of operation and we have had only a few minor issues… we were expecting more teething problems. I am almost worried that it has gone too well!
As people migrate to online banking in both retail and commercial banking, is there still a role for the bank branch now? Yes, there still is—we would be making a mistake if the idea is to move away from branches and only to digital channels. What has happened and will continue to happen, maybe at an accelerated pace, is that the alternative channel will play a greater and greater role going forward but branches are not going to disappear. Maybe a new bank starting from scratch would do so with a minimum number of branches but I feel that for the next couple of decades we will still need a significant number of branches. I’d like to add as well, on some of the capabilities of the new system, is that it will allow us a much smoother transition towards these digital channels. Of course, all banks have online and mobile banking, Even under our old system we had a very nice customer-facing mobile banking offering but it wasn’t straight through processing. People viewed our system from a client perspective as very smooth but behind it you had staff running around inputting transactions.
Now it is straight through and that is almost revolutionary as far as we are concerned.
What are the top priorities now for ABK? What we have worked on very hard is our strategy about ‘simplicity’, making our clients’ lives much easier. I think we have moved a long way towards this. If you want to open an account with ABK, the process is smoother and faster than most other banks but we do not give an inch in terms of ‘Know Your Customer’, there are ways to do things behind the scenes that the customer doesn’t see. The concept of ‘simplicity’ is one of the things we will continue to focus on. The other key thing that we will focus on is being more of a regional bank, having our branches or banks outside Kuwait contributing more and more to our revenues going forward. These are our key priorities: continuing the drive to ‘simplicity’ and moving forward on a regional basis. We will also develop our channels, all banks have to adapt and become more digital, relying a bit less on physical branches. [In its domestic Kuwaiti market, ABK has 31 branches while ABK Egypt operates 39 full service branches. And the UAE have 3 branches].
In Egypt there is room for growth in terms of branches, in Kuwait maybe only for one or two more. Overall, I do not see growth in physical branches but in other channels, this is what will help us deliver the bottom line to our shareholders.
Finally, you are on record in the past as describing your current position as ‘the last job’ of your career. What ambitions do you still hope to achieve? Well, I also described my previous job as the last in my career! What makes this job so interesting is the transformational strategy that we are following with the Bank. ABK used to be a very conservative bank, not doing a lot of new things—its strategy was undifferentiated. Now the market sees us differently. I hope that we will continue to surprise the market and continue to differentiate ourselves significantly from the competition. The new core banking system is transformational, the acquisition in Egypt is transformational; over the next six months there will be another couple of transformational transactions or initiatives that will be implemented but I cannot tell you about them right now!
Michel Accad became the Chief Executive Officer and Chief General Manager of Al Ahli Bank of Kuwait in May 2014. Previously he had been CEO of Gulf Bank of Kuwait from 2009, overseeing its turnaround following the 2008 financial crisis. Between 2006 and 2009, Michel Accad was Assistant CEO for Arab Bank PLC. He spent 27 years with Citigroup, having joined the bank in 1979. His final position in Citigroup was Managing Director and CEO for the Middle East and North Africa Division; before that, he was the Country Head for Egypt and Regional Head for North & West Africa. He held a number of CEO and Country Head positions for the bank, including Nigeria. Michel Accad holds a Masters’ Degree in Business Administration from the University of Texas.
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Maintaining healthy relationships
Alex MacDonald-Vitale
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In an exclusive interview with Banker Middle East at the 9th Middle East Investor Relations Association Annual Conference, Alex MacDonaldVitale, Chairman of the association, reminds us of why investor relations is an important function for an institution
ell us about the nature of investor relations in this region.
Today, it is fast becoming an established principle across the region, with tremendous efforts from the regions’ capital markets authorities to help fast-track listed companies’ capabilities, including more than one country making the basic principles of IR mandatory. Still in its early stages however, the role and profession of IR is still shedding a legacy of challenges here. Let’s rewind the clock back to around 10 years ago, when a wide variety of international banks and multinationals from the US, UK and other European centres maintained an active presence here, bringing with them global perspectives and insight. Continually in touch with the broader investor community, they quickly identified that despite local markets’ active policy to attract FDI, access and engagement remained inconsistent among local corporates. Moreover, investors who had bought in to the opportunity, were often seen to fold or pull out within a few months, regardless of the issuers’ performance. As a result, the region’s markets and issuers adopted the view that international investors were just harbingers of ‘hot money’ and the wrong kind of volatility. The impression left at the time by hedge funds and others was one of predatory investment, taking advantage of relatively nascent markets, adding little value and encouraging poor trading practises. Not altogether untrue, this failed to address the real issue—that of welcoming capital commitments without the structure and governance necessary to harness its benefits. Collaborating with the exchanges and capital markets authorities, we began to study challenges facing the investors:
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it became apparent that the fundamental principles of transparency, disclosure and access, standard in any developed market, were almost entirely missing in the day to day approach of most issuers here. A major disconnect between the markets’ conceptual understanding of the importance of communications and engagement, and the actual quality of PR and IR they deployed was making it impossible for many investors to commit. In simple terms, institutional investment analysts coming from developed markets have to fulfil strict ‘due diligence’ prerequisites, reporting back to their CIO’s (Chief Investment Officers) with clear evidence and justification for their commitment to any given stock. Beyond reading the financials published in line with statutory reporting, they must gain access to c-suite and so develop a personal view of a company’s strategy and the management’s ability to deliver on that strategy. The problem arose that while this access was often made available at the outset (otherwise it would be a non-starter), and at least one executive at CEO or CFO level and with the delegated authority to speak on behalf of the company would meet the investor, they seldom made the effort at the second meeting. For the investor, failure to secure follow-on meetings with c-suite would be a fail and the investor’s commitment would be unlikely to receive approval, often leading to withdrawal of commitment. All too often, local companies will still tell an investor that all the information they need has already been published, with quarterly financial reporting every quarter in addition to the AGM being more than enough to be getting on with. In practise, this is never enough—an investor has to understand the company’s story, cont. overleaf
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and build trust that its executives or stewards are capable of managing the company over the short and medium term, while also taking the strategy forward and growing the business in a sustainable manner. Let’s reinforce this point: given current uncertainties, executives are under greater pressure to demonstrate their ability to deliver, and that they understand all the economic, geopolitical and peer group contexts that can affect their business three key components that rarely translate into the financials (although they can be included in an investor presentation). So management has to tell a story, through which they can inform and build market confidence around the relevance of their business and their ability to grow and maintain the current performance. Furthermore, these requirements have become increasingly rigorous over the past 10 years as market regulations in the US, UK and EU continue to evolve. In turn these pressures are driving the analysts’
Once you do engage consistently and authentically, you build a franchise; a network of people that will vote for you and your company’s success story, and which ultimately translates into positive valuation. – Alex MacDonald-Vitale, Chairman, MEIRA –
and investors‘ need to seek more access, transparency and disclosure, and the ability to acquire public information and the context around it becomes an unavoidable constraint. On the plus side, once you do engage consistently and authentically, you build a franchise; a network of people that will vote for you and your company’s success story, and which ultimately translates into positive valuation. There are buy-side and sellside views as well as dedicated research analysts and consensus to consider, so maintaining accurate representation in the market remains key, helping raise people’s confidence and conviction that your company is worth investing in.
Would you say companies in the GCC are keen on attracting investors from overseas? A number of companies in the GCC are probably still afraid to take on international investors because they know that this brings more scrutiny. It drives transparency and many are uncertain of whether they have the capabilities [or the mandate] to fulfil this expectation. This is where the role of the exchange and regulatory bodies have a part to play here; by offering clear guidance on best practise, they are actively driving up the standards needed to make local markets more attractive. There are a number of additional initiatives that contribute to this, including adoption of the latest IFRS reporting standards in Saudi Arabia, the UAE and an increasing number of other countries around the region, as well we bringing in tools such as XBRL. An important technical advance, XBRL is complimentary to standard reporting; once in place, Finance teams can generate a “push” mechanism with each update to automatically refresh the spreadsheets of analysts
connected to the issuers’ network. With individually coded references assigned to each cell, the platform significantly improves the accuracy and speed of analysis.
What about other Middle East countries apart from the GCC, are they more open towards overseas investors? Until recently has been a disparity between the GCC and the other countries in the Middle East, with the breadth and depth of experience among the bankers and industries that are present in those countries stretching some way ahead. Through our active chapters in Egypt, Jordan, Lebanon and Palestine, we’ve been able to see how other regional countries, with the benefit of their longer experience and well-diversified market structures, are still relatively advanced. In many respects having gone through more challenges over time, they are more tested and have greater depth. The institutional knowledge of years in advanced accounting practises, the quality and sophistication of their executives, as well as the willingness to drive best practise in investor relations and governance makes for a more engaged and smooth running relationship with the broader investor community. However the Gulf is catching up fast and although some GCC countries are moving faster than others, the overall pace of change is now at breakneck speed and there is a real sense of coherent forward strategy to establish international standards. Regional economies are working hard to meet the needs of a young and fastgrowing demographic, building their economic and market capabilities for the long term.
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Technology: an unstoppable force In an exclusive interview, Banker Middle East sat down with Diebold Nixdorf’s Chief Executive Officer, Andy Mattes, and Habib Hanna, Managing Director, Middle East, to discuss the future of banks in an era of aggressive technological development
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ow do you envision banking and finance in the next five years?
Andy Mattes (AM): I see a lot of innovation taking place in the banking world. The main theme for banks around the globe today is to take their digital initiatives to the next level— we call it connected commerce. Connected commerce is the notion of connecting the physical world of cash with the digital world of cash to create the experience of, “a bank for one”—a bank that interacts with each consumer individually according to their needs, the way they like to be communicated with, and does so in a way that is proactive and customer centric, while automating the bank’s backend processes. We as consumers want and will expect to have this kind of interaction with our bank.
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What is your view on the technological development of financial institutions in the Middle East? AM: Interestingly enough, the Middle East has the whole gamut. On one end of the spectrum financial institutions are still modernising, and on the other end there are highly advanced banks driving the change. I believe the Middle East will be in a leading position in the next five years— there is a lot of innovation taking place there to not take notice of the region. I also believe that financial institutions who are still trailing,
are catching up at a rapid pace. The Middle East is one of the regions in the world where our industry has a double digit growth rate. It’s a very exciting market for us.
Can you provide an overview of recent developments in financial technology in the region? HH: We can see five dimensions that are changing the way the financial services industry is progressing. Many financial institutions (FIs) have moved from being product centric to consumer-centric. Consumer centricity is the single most important reason for FIs to invest in financial technology, to enable them to enrich the encounters between consumers and FIs, and make their experience much more enjoyable. Furthermore, many banks are investing in innovations to position themselves as leaders in the technology front, and to simultaneously deliver an elevated consumer experience. Another thing is the way that fintech is coming to the market, progressing and delivering a digital platform and competing with traditional legacy banks on
It’s either you become a consolidator in this game, or you get marginalised. – Andy Mattes, Chief Executive Officer, Diebold Nixdorf –
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The emergence of multifunction terminals and services, therefore, is something that will continue to rapidly develop moving forward. The last two dimensions are efficiency and security. A lot of banks, while they are expanding, want to do more with less to make sure they drive productivity gains and automation all the way from the branch to how cash is being handled. Today there is a convergence between financial institutions and retailers to not only deliver a better consumer experience, but also achieve greater operational efficiencies in their processes. This is where the term ‘as a service’ comes in, where banks partner with specific institutions that have the expertise in this and are able to assist them in this aspect. But innovations are only useful if they are secure, because trust plays a critical role in banking. That is why we support many banks in the region in implementing the latest security mandates and becoming PCI-compliant, and provide them with anti-skimming and malware protection solutions. Habib Hanna (left) and Andy Mattes (right), at Diebold Nixdorf’s 30th International Management Seminar in Amsterdam; an event that elaborated on transformational strategies in retail banking and the aim to bridge the digital and physical worlds.
customer relationships. This adds to the complexity but it is also has positive momentum because banks have realised that they need to position themselves not only through the content of the service but also through the context of the service. These two go hand-in-hand and I think this is an important drive for innovation and investments. Another major differentiator for the Middle East is how financial institutions are expanding—we believe the ratio of digital branch expansion to traditional branch expansion is about four to one. You’ll witness many financial
institutions expanding presence points by delivering or establishing a digital self-service branch that mimics traditional branch services, which were only conventionally present in a branch. One example of this is remittance services which can be provided on a multifunctional terminal. Printing a debit card or credit card, as well as cheque book printing, on a multifunctional terminal takes just under two minutes, whereas it used to take several minutes to days to complete these transactions on the traditional channel. This is a major game changer in consumer interaction and speed of service.
What do you think is the biggest challenge in technological progression in banking and finance in the GCC? HH: Specific to the Middle East, one area that needs to be worked on is the regulatory framework. The regulatory framework needs to evolve as fast as technological innovation and adoption. For example, digital signatures are not recognised in some jurisdictions and this could be a problem for banks that want to provide digital onboarding—as they’ll still need a customer to ink a document and this document would have to be retained for seven to 10 years in certain countries and in others sometimes for an indefinite period. cont. overleaf
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The other challenge is consumer adoption, which varies from country to country depending on consumer digital fluency and demographics. There are still places where consumers are not as digitally savvy as in other places. In this context, technological simplicity is extremely important in any service that comes to the market—the ease of using a service should be well thought of before it hits the market. Consumer adoption is not just the technology but it is also about the ease of using this technology. AM: From a global perspective, the challenges are the same. However, the manifestations are different. For example, in Europe, the biggest challenge now is the PSD II initiative. The fact that banks need to share data about their clients with another bank is a huge change for the market. Another issue is the remittance market—it is a huge market—with hundreds of billions of dollars sent back and forth. But the way that it is being done today is still very much archaic. While the regulation between countries adds a layer of complexity, there is a huge opportunity to innovate here, as Habib mentioned earlier, through the use of multifunction kiosks.
Dubai aims to become the first blockchain-powered government by 2020 to utilise the technology for all of its transactions. Can financial institutions also leverage blockchain for transactions on the self-service channel? HH: Blockchain is basically the platform for cryptocurrencies, and the UAE has recently launched emCash, a cryptocurrency for the country to operate in parallel with the current ecosystem we have. The ability for that to be used for small
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A major driver in the financial technology movement would be mobility—not as a standalone but part of the ecosystem. – Habib Hanna, Managing Director, Middle East, Diebold Nixdorf – and high value payments, from things such as coffee to rent, can enable closing of the gap between digital currency and the physical currency ecosystem. This enables the convergence between cryptocurrency and physical cash. Self-service plays an important role in how we advance the use of blockchain, as an enabler for elevated consumer experiences and relationships. As financial institutions launch various initiatives to capture millennial customers, how effective do you think these digitisation efforts are in boosting bank profitability? AM: Digitalisation efforts boost a bank’s sustainability more than profitability. We talked about cryptocurrency and digital wallets. How many digital wallets do you think consumers can digest? How do you keep track of these things? This situation is one that is parallel to credit cards. Right now, digital wallets are still new and exciting. But once, for example, your shoe store has a digital wallet, your bank has a digital wallet, your grocery hypermarket has a digital wallet—it gets very confusing. Therefore, this means banks need to drive digital innovation. If they leave this to someone else, they’ll just become background
utility providers—like a power company. Banks are at a very pivotal moment—do they stay relevant to the consumer’s life? Or do they go back to the role that a power company or a telco plays? And this depends on where you want to take your financial institution. If you want to stay relevant, digital innovation is the only way to get there. Additionally, all this has to be done in the context of security while abiding with the laws and security of the country. It’s either you become a consolidator in this game, or you get marginalised.
What is your outlook on the development of financial technology in the region over the next three to five years? How do you see things evolving? HH: A major driver in the financial technology movement would be mobility—not as a standalone but part of the ecosystem. There is a need to enhance the ability of the consumer to start a transaction on a mobile device and to transfer it onto another channel seamlessly, providing a unified experience and fulfilling a transaction in a seamless manner. I believe this is something that will greatly evolve as we go forward. The second outlook is the use of big data and smart analytics to understand consumer behaviour and spending patterns. So, by leveraging big data, banks can push customised and personalised marketing on selfservice terminals. We will see a lot of banks continue to expand into digital branches and move more services that are conventionally performed at the branch to self-service platforms. Finally, if we look at the customer’s perspective in the next few years, artificial intelligence is going to play a major role in driving better customer connection and interaction.
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Mobile biometric optimisation An exclusive roundtable dialogue discusses the dire importance of secure authentication methods in banking transactions
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n a world where technological evolution is developing faster than it ever was before, the need to be ahead of the curve is a pertinent aspect in safeguarding an institution as well as its customers against cybersecurity threats. There currently are various ways and means to authenticate a remote customer. Nevertheless, in spite of these processes, cybercriminals still manage to breach the security system.
Researchers in a 2009 study successfully gained answers to knowledge questions from
92%
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With an aim to address this issue in a collegiate manner, the exclusive roundtable discussion was held at Jumeirah Emirates Towers on 23 October 2017, gathering industry players from various financial institutions. Attendees included: Hussein Bahgat, Head of Information Security, Standard Chartered; Patrice Favre, Regional Head of Information Security & Risk, HSBC MENA; Hariprasad Chede, Chief Information Security Officer, National Bank of Fujairah; Sameer Bedi, Head of Information Security (CISO), Mashreq Bank; Muhammad Aslam, Vice President, Head of IT Architect & Channels Projects, Dubai Islamic Bank; and Mustafa Dülgerler, Enterprise Architect for a major financial institution in the UAE. The discussion was hosted by Robin Amlôt, Consultant at CPI Financial, together with Schalk Nolte, Chief Executive Officer and Tertius Wessels, Product Manager from Entersekt. AUTHENTICATION CHALLENGE In his presentation at the beginning of the event, Nolte pointed out that the banking industry is facing an authentication challenge—an aspect that is sometimes overlooked by financial institutions. Authentication methods that are prevalently used by banks today include hardware tokens, virtual keyboards, SMS one-time passwords and challenge questions. A key shortcoming of knowledgebased authentication processes, such as challenge questions, for example, is that they can quite easily be surpassed. Google’s account recovery data reveals that answers to challenge questions can be guessed— there is a 19.7 per cent success rate at guessing answers to the question “Favourite food?” Answers are also often forgotten—the success cont. overleaf
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rate for “Favourite food?” is 74 per cent after a month, and only 53 per cent after three months. Moreover, social engineering is relatively easy nowadays—researchers in a 2009 study successfully gained answers to knowledge questions from 92 per cent of users via email phishing. This shows a significant problem with the effectiveness of knowledgebased authentication methods, but another fatal flaw is inherent in authentication methods such as hardware tokens, virtual keyboards and SMS one-time passwords: they all rely on the primary channel (the browser) to complete the user authentication process. According to Avivah Litan, VP & Distinguished Analyst: Security and Privacy at Gartner, “fraudsters are beating strong two‐factor authentication and are proving that any authentication method that relies on browser communications can be defeated.” STRONG DIGITAL SECURITY As it is the financial institutions’ responsibility to safeguard their customers’ money, the burden of protecting customers from digital fraud also falls on them. Fraudsters are increasingly utilising advances in technology for their own purposes, which means that it is up to financial institutions to keep abreast of the latest digital security measures and to create tools to help customers protect themselves from digital fraud. “Banks have to prioritise digital security and put in place measures to protect their customers, because customers cannot be expected to protect themselves. In this day and age of ever-evolving threats and technologies, you cannot expect your entire customer base to be up to speed with the latest technology,” said Nolte.
Robin Amlôt, CPI Financial
Schalk Nolte, Chief Executive Officer, Entersekt
cont. on page 68
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He suggests that financial institutions proactively provide tools to enable customers to educate themselves about their digital security. “If you have a broad base of customers, it means that they may or may not be tech savvy. Thus merely alarming your customers without protecting them is just looking for trouble,” he said. Strong digital security entails message integrity, multi-factor authentication and an out-of-band communication channel. Message integrity involves making sure that you are communicating with the intended recipient without having communications intercepted or altered. Multi-factor authentication combines knowledge-based factors (something the user knows), possession-based factors (something the user has) and inherence-based factors (something the user is) for authentication. An out-of-band channel for communication means using a separate communications channel that does not rely solely on the internet browser. A common misconception in terms of digital security is that simply adding more layers to the authentication process will solve the digital security problem. In many cases, this approach in fact introduces another problem, namely increasing the burden on customers. User-friendliness and customer convenience, high priorities in the banking industry, must be taken into account—adding multiple layers to the authentication process could mean running the risk of losing customers in the long run. Balancing strong digital security with user-friendliness has become a critical concern for most financial institutions. Keeping up with customers’ demands for ease-ofuse does need not mean limiting
Banks have to prioritise digital security and put in place measures to protect their customers, because customers cannot be expected to protect themselves. In this day and age of ever-evolving threats and technologies, you cannot expect your entire customer base to be up to speed with the latest technology. – Schalk Nolte, Chief Executive Officer, Entersekt –
the availability of digital banking services, however. Empowering customers by allowing them to authenticate sensitive transactions, for example, gives them a sense of control. Making sure that authentication messages are sent via a secure and encrypted communications channel established between the bank and the customer’s mobile phone means that the customer can be assured that they are transacting safely, while the bank can expand their digital services to make customers’ lives easier. BIOMETRIC INTEGRITY Biometrics are currently widely used as part of authentication processes. “Biometrics means ease of use—it is basically another PIN. Liveness detection and facial recognition allows us to be sure that the biometrics presented by a user can be trusted. The liveness detection works by asking the user to wiggle, for example, which a photo cannot do,” explained Nolte. However, at this stage, a number of things can still be spoofed, meaning biometrics have to be used cautiously. Entersekt believes that biometric technology undeniably
offers compelling capabilities, but that it has to be balanced with user behaviour. Commenting on how Entersekt leverages this technology, Nolte explained, “Biometrics is just an enabler. We leverage biometrics for access to our secure communications channel, offering a login experience, for example, that makes the most of biometrics’ ease of use. At the same time, our technology ensures that communications between the customer’s mobile device and the financial institution are securely encrypted and that the mobile device is uniquely identified.” THE WAY FORWARD There are two types of organisations—those that have been hacked and those that do not know that they’ve been hacked. This is scary. We think the goal for organisations should be to find a partner with a global footprint who can focus on employing the latest innovations in digital security to keep the organisation safe. This way the organisation can focus on its customers.
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Profiles in Leadership An important new series from CPI Financial, the Middle East’s leading financial and business publishing house. In challenging times, clear and dynamic leadership is the key to business success. CPI Financial’s new series Profiles in Leadership will identify and define those qualities necessary to succeed, profiling successful individuals and their businesses.
CPI Financial TV CPI Financial TV is proud to launch a new online Leadership series. We are conducting a series of in-depth, on-camera, face-to-face interviews with the key players in the Middle East banking and financial services sector. Dubai Islamic Bank The longest-established modern Islamic bank is one of the leading financial institutions and our interview with its Group CEO launched our Leadership series on 10 September 2017. You may watch the full interview online or alternatively view key segments of the interview individually. Who’s next? Our Leadership series launches with Dr. Adnan Chilwan of Dubai Islamic Bank. Look out for more great interviews in the coming weeks. We already have Patrice Couvegnes, CEO of Banque Saudi Fransi, and HE Abdul Aziz Al Ghurair, CEO of Mashreq, lined up with even more to come… Unparalleled insight Understand how the region’s top bankers view the challenges and opportunities their institutions face… and the plans they intend to implement. Identify ambition Whether in the domestic, regional or international arena you will be able to see for yourself just what is in store in the evolution of one of the world’s most dynamic economic arenas and for the institutions helping to bring economic dreams into successful reality. Bookmark CPI Financial TV Bookmark CPI Financial TV now to make sure you stay in touch and on top of these unique insights into the region’s banking and financial services industry.
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personality
70
Suzzanna Ali Head of Compliance & MLRO, Ahli United Bank
H
ow did you begin your career?
I started my career as a lawyer in Kuala Lumpur in 1996. Technically speaking, my career started in 1998 when I joined the Securities Commission as an Investigation Officer in its Enforcement Division. When I left the Commission, I was a Senior Legal Market Analyst where I am more involved in the formulation of policies in the Malaysian Capital Market. After I left the Commission, I assumed the role as Head of Compliance in various financial institutions both in Malaysia and abroad. I started as Head of Compliance in UBS Malaysia and after 14-month stint, I joined UBS Group Compliance based in London. The 2007-2008 financial crisis brought me home to Malaysia for another two years. In 2010, I left my country to join an investment bank in Qatar. I came to Dubai in 2014 when I was offered a job in DIFC and have been here since. My career in compliance therefore started in 2005 when I joined UBS Malaysia.
What is your biggest achievement thus far? I am not so sure if you can consider what I listed as achievements as I still feel that I have yet to accomplish anything profound. On a personal level, probably when I am able to change the mindset of an organisation towards what compliance is—to be able to convince senior management to change their culture towards compliance.
What is your biggest concern for the industry going into 2018? I am very worried about the industry. There are so many things which I am concerned about in this industry and one of them is lessons that people never learn. Humans are too greedy pursuing profits. They are easily seduced by the promises of making easy money and profits without any work. What perplexes me most is why we do not acknowledge the fact that there is nothing called easy money. Another issue is what I refer to as the ‘Cosmo Kramer Syndrome’ in this industry. This terminology is used without thorough understanding of certain matters. I am terrified of such people because they are to me, a major risk in this industry. In my years of being in compliance, I notice that there are some who will vilify you when asked to clarify matters with the response of “I do not think you are sophisticated enough to understand.” I do not buy that because no matter how complex an issue can be, even if one is not able to comprehend the matter in its entirety, at least they will have a general idea what the matter is all about. When I encounter such bullying hubristic behaviour, I know that person is actually in defensive mode masking their weaknesses. I can go on and on with the concerns I have, but I think I shall just limit it to two right now.
What is your outlook on the region’s financial market? I am optimistic but at the same time a realist. There are so many opportunities in the financial market here considering the wealth in this region. Notwithstanding the price of oil, a more non-oil reliance and diverse economy propounded by the leaders of this region is indeed signalling opportunities to bankers. If you are creative and know how and when to seize the opportunity, you will benefit. The Middle East is positioned in an ideal geographical location and should benefit from both the east and west of the globe. My current concern is the political disability which are emerging in this region, which to me, could stifle the economic growth of this region. Stability is key to the development of this region. Middle East is already catching up with the emergence of several new economies. However, this is only sustainable if this region Suzzanna Ali continue to remain stable.
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