#201 - December 2017

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DECEMBER 2017 | ISSUE 201

Prioritising future solutions

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Simon Eedle, Regional Head, Middle East, Natixis

Dubai Technology and Media Free Zone Authority

“Natixis has just announced its next strategic plan, New Dimension, which will run from 2018 to 2020, with the expansion of our Middle East platform specifically identified as a target.”

INSIDE:

12 2018 AND BEYOND

page 3-4 contents.indd 1

22 PLUGGING THE GAP

30 HUNT FOR THE NEXT UNICORN

46 EMBRACING CHANGE

14/12/2017 15:38

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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14/06/2017 18/07/2017 09:49 17/10/201711:20 17:16

CONTENTS

DECEMBER 2017 | ISSUE 201

C

oming to a close, 2017 has been quite an interesting year. Despite the continual struggle adapting to the new normal in oil prices, higher crude oil rates and continued public spending buoyed non-financials in the GCC. Remaining fairly stable, GCC banks continue to take comfort in their strong financial fundamentals—high capital levels, low cost and stable deposit-based funding, and elevated liquidity buffers.

Although overall growth in the GCC is expected to bottom out in 2017 at 0.5 per cent, non-oil growth is expected to recover to about 2.6 per cent in this year and 2.4 per cent in 2018. Market players should leverage on the global upswing and improving the business environment to identify opportunities and contribute to boosting growth in the private sector.

2017 has in fact seen quite a number of feats for the financial sector in the region. We’ve had a healthy pipeline of capital market activity—both in IPOs as well as the bond and Sukuk market.

16

3

E D I TO R ’ S L E T T E R forward and align themselves with international standards and best practices. Although some markets still do lag behind, sentiments from larger banking systems have a spillover effect on these smaller markets, motivating them to keep up.

As you peruse through our last edition for the year, you can see how things have improved—albeit at humble levels—and have an insight into how 2018 will look. As usual, we wish you a productive read.

We’d like to take this opportunity to thank you for your continuous support and wish you a Happy New Year.

See you in 2018!

On the deals side, we’ve seen quite a number of investments made by alternative investment managers and sovereign wealth funds. Investors can be seen to further diversify their investments, indicating cautiously optimistic sentiments. Regulators have also stepped up, rolling out pertinent legislative standards for their respective jurisdictions both in the conventional and Shari’ah compliant sectors.

Banks this year have thrived in advancing their technological capabilities.

2017 witnessed an array of core banking upgrades amongst banks in the UAE. The market also saw several financial institutions launch their respective digital banks, introduce artificial intelligence into their service touchpoints and accelerate their payment systems to include both Samsung and Apple Pay. In spite of the still-challenging macroeconomic landscape, the banking and finance industry in the GCC and wider MENA region demonstrate resilience and a strong will to move

10

6 8

Nabilah Annuar Nabilah Annuar Editor

BankerMENA CPI Financial

A brighter horizon News highlights

THE MARKETS

10 Oil remains key risk factor 12 2018 and beyond

COVER INTERVIEW

16 Prioritising future solutions

26

STRUCTURED FINANCE 22 Plugging the gap

CAPITAL MARKETS 26 Where is the value?

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DECEMBER 2017

| ISSUE 201

NOVEMBER 2017 | ISSUE 200

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OCTOBER 2017

| ISSUE 199

om

UST RY ND

IN

G

INDUSTRY PROGRESS

ADVERSITY

60 ANTICIPATING

HEADWINDS

BUDDING

Prioritising future solution s

Simon Eedle, Regiona

10 GCC ECONOMY:

RECOVERY EXPECTED

34 TACKLING THE

LIQUIDITY GAP

52 MANAGING

TRANSFORMATION

60 TECHNOLOGY:

AN UNSTOPPABLE FORCE

l Head, Middle East,

Get the next issue Banker MiddleofEast before it is published.

Full details at: www.bankerme.c om

Natixis

INSIDE:

12 2018 AND BEYOND

22 PLUGGING THE

GAP

30 HUNT FOR THE

NEXT UNICORN

Zone Authority

Full details at: www.bankerme.com

INSIDE:

and Media Free

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

Mohammed Alardhi

Executive Chairman, Investcorp

Dubai Technology and Media Free Zone Authority

Dubai Technology

“Natixis has just announced its next strategic plan, New Dimension, will run from 2018 towhich 2020, with the expansion of our Middle East platform specifically identified as a target.”

Global wealth creator

CUSTOMER

70 DATA ANALYTICS FINANCIAL SERVICES

EXPERIENCE IN

Zone Authority

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

Full details at: www.bankerme.com

TO ENHANCE

30 RISING ABOVE

and Media Free

l Bank of Dubai , CEO, Commercia

Dr. Bernd van Linder

14 FACILITATING

TH

"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."

What the wants customer INSIDE:

YEARS IN

Dubai Technology

aspect “The most visible is on the of new technologybiggest front end but the back-end.” impact is on the

18

EI

CELEBR AT

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

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

SARY I VER SS NI

UE

AN

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46 EMBRACING

CHANGE

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page 3-4 contents.indd 3

18/12/2017 11:07

4

CONTENTS

DECEMBER 2017 | ISSUE 201

34

SOVEREIGN WEALTH FUNDS 30 Hunt for the next unicorn

ISLAMIC FINANCE

34 Harnessing product creativity

HUMAN CAPITAL

www.bankerme.com

36 Measuring innovation

46

CRYPTOCURRENCY 43 Bitcoin: friend or foe?

FINTECH

45 The Magnifintech Seven

IN DEPTH

46 Embracing change 48 A merger of strengths 52 Recovering circumstances

52

TECHNOLOGY

54 The test phase-out 56 Reaching new frontiers

48

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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6

news

analysis

A brighter horizon On the back of resilient progress this year, things are looking up for the financial industry in 2018

M

arket outlook on GCC banks next year is fairly stable. This reflects strong financial fundamentals, particularly in the largest banking systems, that provide resilience to profitability and loan quality challenges from slower economies. Nonetheless, fiscal and geopolitical risks continue to pose challenges for various countries.

Providing an outlook on the region, Ali Janoudi, Head of Wealth Management Central and Eastern Europe, Middle East and Africa, France and Benelux International at UBS Wealth Management said, “GCC countries are still adjusting to the new economic reality of lower oil prices, despite the recent recovery.

Ambitious reform plans across the region are balancing the need for a more broad-based, diversified economy with respect for local traditions. We think the progress achieved so far brightens the region’s outlook and expect GDP growth to rebound to 2.3 per cent in 2018 from 0.6 per cent this year.

Capital levels in banks will remain broadly stable and well above Basel III minimum regulatory requirements, in a context of modest credit growth in 2018.

Combined with high loan-loss reserves, this provides banks with strong loss-absorption capacity, suggested Moody’s in a recent commentary. Tangible Common Equity (TCE) ratios will remain broadly in the 11-16 per cent range and problem loan coverage approximately at 95 per cent+ across the region according to the ratings agency, is high.

Low cost and stable depositbased funding, combined with elevated liquidity buffers remains a credit strength of GCC banks.

Liquidity injection from sovereign international debt issuance eases a lengthy funding squeeze stemmed from low oil prices.

Individually, in the UAE, Saudi Arabia and Kuwait, which account for around 75 per cent of GCC banking assets, the outlook is stable.

However Bahrain and Oman are

GDP growth in the region will increase from

0%

in 2017 to

2%

in 2018

more weakly positioned in respect to their fiscal position. In Qatar, a diplomatic row with several other GCC members has severely impacted trade and tourism, putting pressure on banks’ loan quality.

Problem loans for the region’s banks will edge higher in 2018 following sluggish economic activity in 2017, and banks remain vulnerable

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18/12/2017 11:19

news

analysis

GCC countries are still adjusting to the new economic reality of lower oil prices, despite the recent recovery.

Ambitious reform plans across the region are balancing the need for a more broadbased, diversified economy with respect for local traditions.

– Ali Janoudi, Head of Wealth Management Central and Eastern Europe, Middle East and Africa, France and Benelux International, UBS Wealth Management –

(PHOTO CREDIT: ELENAMIV/SHUTTERSTOCK)

to high borrower and sector loan concentrations, as well as uneven disclosure in the corporate sector.

Profitability will also decline slightly, albeit from high levels, as low credit growth will weigh on interest income and on fees and commissions.

Moody’s forecasts that real GDP growth in the region will pick up to two per cent in 2018 from zero per cent in 2017, as oil prices stabilise between $50 and $60 a barrel. Although fiscal consolidation efforts in the region will persist, key regional infrastructure projects, such as UAE Expo 2020, World Cup Qatar 2022 and the Saudi National Transformation Programme will support capital spending and credit growth which should expand by five per cent in 2018.

Central banks are expected to tighten monetary policy and in some cases raise interest rates in 2018.

This is viewed as an opportunity for the financial services industry, except in the unlikely event of significant hikes. However, amid rising rates, UBS suggests for investors to prepare for higher volatility, higher dispersion of returns from individual stocks, and in some cases higher correlations between equities and bonds. This may conversely benefit alternative and other active asset managers.

Additionally, social, environmental, and technological change continue to present both opportunities and risks.

For the stock market, UBS suggests that the long-term tech themes that will remain prevalent include: digital data, automation and robotics, as well as smart mobility. Investors are suggested to put capital to work in a variety of social and environmental fields across sustainable investing, including multilateral development bank bonds and impact investing as well as listed equities.

7

MENA sees a 23 per cent rise in deal value The third quarter of 2017 witnessed a total of 76 announced deals. Although this was a decrease of 10 per cent compared to the 84 deals in Q3 of 2016, in terms of value, merger and acquisitions (M&A) experienced a 23 per cent hike to $4.3 billion, up from $3.5 billion in Q3 2016 according to the EY Q3 2017 M&A report.

Domestic M&A saw the largest year-on-year improvement, increasing by 17 per cent in number and 343 per cent in value. The average size of domestic deals rose by 258 per cent compared to Q3 2016. However, inbound and outbound declined by 21 per cent and 26 per cent, respectively compared to Q3 2016.

Saudi Arabia ranked the highest among the MENA countries by value in Q3 2017 with five deals amounting to $1.6 billion. Pending regulatory approvals and completion, the largest deal announced last quarter was the acquisition of a minority stake in Banque Saudi Fransi for $1.5 billion

by Kingdom Holding Company. Kuwait followed with five deals valued at $914.8 million, and the UAE with 21 deals amounting to $547.4 million.

Of the 76 MENA deals in Q3 2017, banking and capital markets was the top performing sector by deal value reaching $1.5 billion, followed by the telecom sector with a total deal value of $847 million.

Commenting on this flow of activity, Phil Gandier, MENA Transaction Advisory Services Leader at EY, said, “As we look ahead, M&A will remain a vital component of MENA companies’ growth strategy in the foreseeable future, as they continue to take advantage of low interest rates and low growth environment to secure an enduring competitive edge.”

A survey conducted by EY found that MENA executives feel pressured as current business models undergo change due to the impact of digital technology and transformation as the primary force propelling changing customer behaviours and heightening threats from digitally-enabled competitors and start-ups.

In spite of the macroeconomic challenges, executives expressed favourable sentiments towards corporate earnings and is more optimistic about credit availability. They intend to actively pursue deals in the next 12 months and understand that they need to ‘buy’ versus ‘build’ to remain competitive.

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8

news

highlights

GHOS finalises Basel III post-crisis reforms In an aim to make the capital framework more robust and improve confidence in banking systems, the Basel Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), has endorsed the outstanding Basel III post-crisis regulatory reforms.

The reforms endorsed by the GHOS include: a revised standardised approach for credit risk, which will improve the robustness and risk sensitivity of the existing approach; revisions to the internal ratings-based approach for credit risk, where the use of the most advanced internally modelled approaches for low-default portfolios will be limited; revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modelled approach and the introduction of a revised standardised approach; a revised standardised approach for operational risk, which will replace the existing standardised approaches and the advanced measurement approaches; revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (G-SIBs), which will take the form of a Tier 1 capital buffer set at 50 per cent of a G-SIB’s risk-weighted capital buffer; and an aggregate output floor, which will ensure that banks’ risk-weighted assets (RWAs) generated by internal models are no lower than 72.5 per cent of RWAs as calculated by the Basel III framework’s standardised approaches. Banks will also be required to disclose their RWAs based on these standardised approaches.

ADNOC Distribution floats IPO, largest on the ADX over the past decade Set to raise over AED 3 billion for ADNOC, ADNOC Distribution’s initial public offering which closed on 7 December 2017, has attracted a strong response from investors. The retail tranche of the offering secured significant local interest and was oversubscribed by 22 times at the initial tranche size, raising AED 3.49 billion in retail subscriptions alone.

This enabled the issuer to double the size of the retail tranche from five to 10 per cent of the total offering size. The institutional tranche has garnered substantial engagement from high quality, global institutional investors, and was oversubscribed multiple times. The price was set at AED 2.50 and the deal size comprises 10 per cent of all shares of ADNOC Distribution.

The IPO represents the first time ADNOC has listed any of its group companies and follows on from the first ever capital markets bond issuance for an ADNOC company, Abu Dhabi Crude Oil Pipeline LLC (ADCOP) in November.

CMA issues new corporate governance regulations The Capital Market Authority (CMA) regulating joint stock companies listed on the Saudi Exchange (Tadawul) has issued new Corporate Governance Regulations. The final regulations are effective from 31 December 2017 and all listed joint stock companies will be required to adhere to these new regulations or face producing an explanation as to why they have not complied.

The regulations extend the rights of shareholders, boards and stakeholders and require greater corporate transparency in listed companies. It sets detailed provisions on the composition of Board of Directors and Committees in terms of competencies, responsibilities, meetings, members’ rights and duties as well as setting effective governance arrangements and access to information in Tadawul-listed companies.

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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news

highlights

Bahrain rolls out ETF regulations

9

IIRA and IIIW partner to integrate Waqf into Islamic capital markets

As part of the its commitment to further enhance The Islamic International Rating Agency (IIRA) and the International the Collective Investment Undertakings (CIUs) in Institute of Islamic Waqf (IIIW) has signed a Memorandum of the Kingdom of Bahrain under Volume 7 of CBB Cooperation (MoC) for the provision of rating services, capacity building Rulebook, the Central Bank of Bahrain (CBB) has and the enhancement of transparency and standardisation across the released directives for both offshore and locallyWaqf sector in both Muslim and non-Muslim countries. domiciled exchange-traded funds (ETFs).

The collaboration is critical step forward in efforts to establish greater The new directives will expand the categories accountability in the management of Awqaf assets. It potentially mobilises of locally domiciled mutual funds to include a massive and largely idle pool of Islamic capital, which is estimated to be ETFs as another type of Collective Investment GCC the untapped value anywhere betweenMENA $100 billion to $1 trillion and unlocks Undertakings (CIU) that may establish in Bahrain MENA IPO Eye of distressed Awqaf assets by creating well-structured Shari’ah-compliant and listed by banks and other financial institutions Five deals financial products that helpdeals Waqf beneficiaries andFive Islamic finance markets. on licenced exchanges.

It will also permit the Volume Q3 2017 review (400% increase on Q3 2016)will(no deals in Q3 2016) Cooperation between the organisations include joint efforts registration of listed offshore ETFs as detailed in strengthening human capital across charitable Waqf organisations in CBB Rulebook Volume 7. Additionally, the and foundations globally through seminars, conferences, training US$236.7m US$236.7m new directives recognise both conventional and Value programmes and workshops.

(20% increase on Q3 2016) (no deals in Q3 2016) Shari’ah-compliant ETFs, to accommodate for a wider range of investors’ preferences.

MENA IPO activity

MENA IPO activity (Q1 2016-Q3 2017*)

Capital raised (US$m)

700

11

$598.0

600

12

$619.9

10

8

500

$397.2

400 200

$197.2

2

1

100 0

Q1 16

8

$401.1 5

5

$218.9

$236.7

6

300

Q2 16

Q3 16

Q4 16

Capital raised (US$m)

Q1 17

Volume (number of IPOs)

(Q1 2016–Q3 2017*)

Q2 17

Q3 17

6 4 2 0

Volume (number of IPOs)

*As at 3 October 2017.

Note: the number and value of IPOs have been updated in certain quarters post Q4 2016 to include IPOs related to the Saudi parallel market (NOMU) and REIT funds on the Saudi Arabian stock exchange main market (Saudi SE or Tadawul), which were previously excluded.

Source: EY

Key trends

• In Q3 2017, MENA IPO activity was primarily driven by three IPOs on the Saudi SE (main market), including Musharaka REIT Fund, which raised US$95.1m and was the largest IPO by capital raised in Q3 2017, followed by Zahrat Al Waha for Trading Company, which raised US$62.0m and Al Maather REIT Fund, which raised US$49.7m.

• After a gap of two years, Muscat Securities Market (MSM) witnessed two IPOs, Vision Insurance and Al Ahlia Insurance Company, raising US$29.9m in Q3 2017.

• In the last year, the GCC markets have witnessed an increase in activity and demand in the region’s relatively new REIT market.

(400% increase on Q3 2016) (no deals 2016)two REIT funds were Saudi Arabia opened its stock market to REIT funds in 2016 and has seen six REIT listings since.in In Q3 Q3 2017, listed on the Saudi SE (main market), collectively raising US$144.8m.

• No new listings were recorded in the Saudi NOMU market during Q3 2017. This follows nine IPOs in H1 2017 after the launch of the (capital raised) exchange segment in February 2017. The NOMU index continued to decline during Q3 2017 and was down by 43% from its launch (20% increase on Q3 2016) (no deals in Q3 2016) date to the end of September 2017.

• Oil prices increased to a two-year high at the end of September 2017, due to OPEC’s production cuts and the recent disruption to oil production in the US following the impact of major hurricanes. Oil prices have increased by more than 15% in the last three months due to production cuts by OPEC, Russia and several other producers of about 1.8 million barrels per day (bpd) since the start of REIT fund Industrial manufacturing Insurance 2017.

• The US Federal Reserve left interest rates in the range of 1.25% to 1.5% in Q3 2017, with one rate hike expected at the end of 2017, which may impact investor appetite for equities versus debt instruments going forward. However, in Q3 2017 the global capital markets indices continued to trade at high levels, due to robust company earnings, increasing macroeconomic stability and strong investor sentiment.

• Q3 2017 saw 330 IPOs globally, with total proceeds of US$37.6b, driven by 10 US$1b+ deals pushing stock exchanges in Brazil, and India onto the list of the world’s top 10 stock exchanges by capital raised, behind Shanghai and Hong (no deals in Q3 2016)Singapore, Switzerland (two deals) (two deals) (one deal) (two deals) Source: EY Kong. Asia-Pacific continues to dominate IPO activity both by number of deals and proceeds, accounting for 60% of IPOs and 42% of capital raised worldwide so far in 2017.

• Global IPO volume in the first nine months of 2017 has already exceeded the full-year total for 2016, with 1,156 IPOs globally (up 59% on YTD 2016) and proceeds of US$126.9b (up 55% on YTD 2016).

Volume

IPO MENA

Value

MENA IPO Summary Q3 2017 MENA

GCC

Five deals

Five deals

US$236.7m

US$236.7m

Top exchanges by capital raised Saudi SE

MSM

US$206.8m

US$29.9m

Top sectors by capital raised

US$144.8m

Exchanges by capital raised — Q3 2017 page 8-9 News Bites.indd 9

Saudi SE

Muscat SM

US$62.0m

US$29.9m

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Cross-border listings 18/12/2017 11:21

the

Oil remains key risk factor Hussein Sayed, Chief Market Strategist at FXTM provides a succinct projection of market conditions next year

T

he resurgence of oil prices in 2017 and a subsequent new two-year high, has supported Middle Eastern economies and suggests that we have finally entered the recovery phase, after bottoming out in the second quarter of the year. However, economic performance varied from one country to another due to multiple factors.

Low inflation and global synchronised growth implied higher real wage growth, while healthy global demand propelled the region’s external growth. Many countries are pushing towards diversifying their economies, but the implementation has been a little slow and needs to be accelerated to benefit from the global growth momentum. On the other hand, the outlook for countries with geopolitical conflicts remains highly uncertain.

The region is adapting to lower oil prices. I think we’re likely to see deficits continue to grow,

although at a slower pace. We will see continuation of debt issuance to finance the deficits in 2018, but at a lower scale compared to 2017.

Given that oil prices are likely to stabilise around $60, governments and investors’ focus should shift towards fiscal consolidation and diversification.

FINANCIAL MARKETS Equity market performance varied from one country to another. While Egypt was clearly the top performer with EGX index rising 14.5 per cent YTD, Qatar’s stock market lost a quarter of its value. Unfortunately, most Gulf indices underperformed this year; with Saudi, Abu Dhabi, Dubai, and Oman in negative territory for the year, by contrast, emerging markets, are at decade highs. Despite recent geopolitical tensions, risk to financial stability remains low and this is reflected in fixed income markets, but the outlook remains gloomy at the moment.

RISKS Oil price direction remains a key risk factor to consider for 2018.

It can even be argued that OPEC has already reached its target oil price and may lose the necessary motivation to keep up the strenuous work of compliance, amid open clashes between key member states. Fiscal consolidation, structural reforms and diversification plans should be monitored closely next year, as it provides a key indicator on how seriously Gulf economies are willing to diversify from the energy sector.

(PHOTO CREDIT: EGOROV ARTEM/SHUTTERSTOCK)

markets

10

OPPORTUNITIES With countries continuing to seek diversification, many opportunities will evolve. For instance, Saudi Arabia plans to build a new city on the Red Sea coastline which will boost private investments and create jobs. Although this mega city is geared towards the tourism sector, many sectors will benefit from it.

Hussein Sayed

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19/06/2017 11:59 12/09/2017 18/06/2017 10:34 11:46

12

the

markets

Arindam Banerjee

2018 and beyond Steady global hydrocarbon prices will be a driver of growth in the GCC over the coming years, explains Arindam Banerjee, Assistant Professor, Finance at S P Jain School of Global Management, Dubai

www.bankerme.com

A

s we transition from 2017 to 2018, many economies in the Middle East, especially those in the GCC, will achieve several milestones in 2018. In UAE, households and firms will adapt to the implementation of Value Added Tax, (VAT) starting January and important social change will take place in Saudi Arabia, to name a few. After a period of emergency austerity (which saw public spending cut by almost 20 per cent from 2015-2017 at the GCC level),

the

markets

public finances now look to be on a more sustainable path in most economies, allowing spending to start gradually recovering.

Various credible researches show that economic growth in the GCC will strengthen from 2018 onwards, with the UAE and Qatar outperforming the rest of the region. Factors that have weighed on expansion in 2017, such as hydrocarbon production cuts and ‘lower for longer’ oil prices—will soften in 2018, boosting government revenues and improving consumer and investor confidence across the region. Further, economic growth is expected to pick up in all Gulf Cooperation Council (GCC) member states over the medium term (2018-2021). Steady rising global hydrocarbon prices will be a key driver of growth in the GCC over the years ahead, as hydrocarbons account for over half of government revenue in all member states, and prices therefore have a major impact on public spending.

ESTIMATES Against this backdrop, GDP growth in the region is expected to gain momentum in the years ahead.

The forecast is a GDP growth of 2.8 per cent in the GCC in 2018 (after growth of just 0.3 per cent in 2017), and an acceleration from 1.4 per cent to 3.2 per cent in the wider Middle East. We will see a broad spread of growth performance though, with GCC economies bound by the OPEC agreement to keep oil output low, growing slower than other economies (although non-oil sectors are forecast to pick up).

With oil production cuts likely to be maintained through 2018, and reversed in 2019, GDP growth is expected to pick up to around four per cent in both the GCC and wider Middle East.

Within this, we forecast oil GDP to rebound from a 2.3 per cent contraction in 2017 to growth of 1.7 per cent in 2018 and around one percentage point stronger in 2019. Growth in the non-oil sector is forecast to pick up from 2.4 per cent in 2017 to 3.7 per cent in 2018 and 4.7 per cent the year after.

THE INTERNATIONAL Monetary Fund (IMF) expects the UAE economy to surge to 3.4 per cent in 2018. Thanks to its rapid economic diversification, the UAE enjoys sustained growth despite low oil prices. The UAE non-oil sector economy is expected to grow 3.1 per cent this year and accelerate to 3.5 per cent in 2018. According to IMF estimates, the UAE’s economic activity is expected to strengthen slowly in the coming years with firming oil prices and other global indicators, and an easing pace of fiscal consolidation. VAT is expected to be introduced in January 2018, and we estimate that the government could earn 1.6 per cent of GDP in the first year of its introduction.

UAE’s economic indicators continued to reflect a gradual recovery in real non-oil activity in 2017, with some moderation of the headwinds seen in 2016. After three years of deceleration, a Dubai-led

GDP growth is expected to pick up to around

4%

in both the GCC and wider Middle East

13

firming of investment activity drove the recovery, including projects linked to Expo 2020. It is also believed that this is resulting in an easing of fiscal consolidation, a moderate pick-up in external demand, supported by trade and tourism. Positively, the impact of higher central bank interest rates in the US and UAE has been limited by the improved domestic banking sector liquidity, thereby reducing the upward pressure on market interest rates.

NON-OIL GROWTH We can also expect to see a further pick-up in non-oil growth in 2018 and beyond as investment momentum builds ahead of Expo 2020 Dubai. However, the pace of recovery will likely be dampened by the introduction of VAT in 2018, resulting in a more gradual acceleration. Despite signs of a pick-up in non-oil activity in 2017, a number of external and domestic factors are checking the pace of the recovery. Thus, real non-oil expansion will likely stay below the pre-2015 trend levels in our two-year outlook period.

Oman’s economy is benefitting from trade diversion, as exporters use Omani ports for transit to and from Qatar. In conjunction with the implementation of VAT, the impact of austerity on public sector wages and welfare will maintain pressure on household budgets. Household spending is expected to rise by just 3.4 per cent in 2017, and 2.9 per cent in 2018 and 2019—substantially slower than the 5.6 per cent average rate from 2011-2016. Oman’s reliance on debt issuance to finance a fiscal deficit, the consequence of these deficits is that government debt will have risen from just five per cent of GDP in 2014 to 57 per cent of GDP in 2018. cont. overleaf

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the

markets

cont. from page 13

More positively, the economy is expected to get a boost from the gas sector in 2018, when the Khazzan gas field comes fully on-stream (boosting gas output by an estimated 25 per cent). Also, Oman is one of non-OPEC countries that agreed to OPEC deal so if oil output reverts to pre-OPEC deal levels in Q1-2018, GDP growth could rebound to five per cent in 2018. But if OPEC’s production cut deal is to be extended, GDP growth is expected to be substantially slower.

However, the region is not insulated from the geological risks that will emerge from politics and security. Iran is expected to be a great performer, with GDP growth of four per cent forecast for 2018, boosted by rising output (not being a signatory to the OPEC-plus deal), and many sanctions having eased in recent years. Meanwhile the missile attack from Yemen into Saudi Arabia risks increasing Iran-Saudi tensions. And the relations between Qatar and other GCC members have deteriorated, with Bahrain recently calling for suspension of Qatar’s membership of the group. Although the direct economic impacts have so far been

relatively modest, the strains could undermine regional cooperation on economic policy issues, and broader investor confidence in the region.

HURDLES One of the key challenges for the Middle East economies as we move into the final months of 2017 and into 2018 is the ongoing pinch on household incomes. The upcoming GCC Value-Added Tax is expected to increase the cost of living in impacted economies by around 2.5 per cent in 2018, and 0.5 per cent in each year from 2019-2022. Households in many countries are also feeling the squeeze from higher energy costs—fuel prices were raised by six per cent in the UAE earlier this year and are expected to rise in Saudi Arabia in early 2018.

Together with the impact of a weaker dollar on import costs, these pressures are expected to drive consumer price inflation at the GCC level from just 1.2 per cent in 2017 to 4.7 per cent in 2018, and 3.5 per cent in 2019.

Consumer spending is also expected to grow 2.5 per cent in 2018 and 2019— compared to an average of 4.2 per cent per annum from 2010-2016.

One of the key challenges for the Middle East economies as we move into the final months of 2017 and into 2018 is the ongoing pinch on household incomes.

The upcoming GCC Value-Added Tax is expected to increase the cost of living in impacted economies by around 2.5 per cent in 2018, and 0.5 per cent in each year from 2019-2022.

– Arindam Banerjee, Assistant Professor, Finance, S P Jain School of Global Management, Dubai –

Growth in the non-oil sector is forecast to pick up from

2.4%

in 2017 to

3.7%

in 2018 and

4.7%

the year after MOVING FORWARD More positively, evidence is emerging that the acceleration in world trade has been felt in the Middle East region. Those economies which are the most diversified appear to be seeing the greatest benefits. Growth in the non-oil sector in the UAE accelerated to a two-and-a-half year high in August, according to the survey-based Emirates Bank Purchasing Managers Index. Growth remains well above the long-run average. Meanwhile in less-diversified Saudi Arabia, the same metric has picked up through the year, but remains well below the historical norm.

GCC countries need to shift focus towards deeper, multi-dimensional fiscal policy and institutional reforms.

These will help to secure long term fiscal sustainability, and also support the development of vibrant private sectors. Furthermore, by boosting investor and market confidence, they can also start a virtuous cycle of stronger investments, including FDI, and output growth in the near term.

www.bankerme.com

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16

COVERSTORY

Simon Eedle, Regional Head, Middle East, Natixis

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COVERSTORY

17

Prioritising future solutions In an exclusive interview with Banker Middle East, Simon Eedle, Regional Head, Middle East at Natixis, discusses his vision for the bank’s future

D

escribe Natixis in the Middle East today. What have you achieved over the past five years?

Natixis has had a presence in the Middle East and Dubai since 1998, and we opened our branch here, in the Dubai International Financial Centre (DIFC), in November 2006. The Dubai Branch serves as Natixis’ regional platform for the Middle East. Ninety per cent of our revenue is generated in the GCC countries, but we equally cover Egypt and the countries of the Levant.

When I joined in 2012, our business in the region was based primarily around structured finance—one of Natixis’ areas of historical expertise—with a focus on the fields of energy and commodities, and project finance.

Under Natixis’ 2014-17 strategic plan, named New Frontier, the bank has reshaped the way it deals with its clients to create a true client-centric approach based around understanding our clients’ needs and delivering value-added solutions to meet them.

To achieve this in the Middle East, we invested significantly in our team of coverage bankers. We subsequently built teams around a number of the bank’s other areas of expertise

including investment solutions, primary debt markets, advisory and trade finance, in addition to the existing structured finance business.

We also added expertise in Islamic finance, and today have a dedicated Shari’ah board.

Under New Frontier, we targeted a threefold increase in corporate and investment banking revenues from the Middle East, which we will achieve despite having faced some challenging economic and geopolitical conditions.

How do you differentiate Natixis’ offer to clients?

The competition from local, regional and global players in the region is intense. We need to constantly ask ourselves why our clients should work with us rather than our peers.

We see three clear reasons.

First, our complete client focus.

This is ultimately about taking a long-term approach in which we always put our clients’ interests first.

It is the cornerstone of the way we do business globally, and implies a consistency in relationship that is particularly vital in this region that has seen its fair share of volatility over the past 25 to 30 years.

We achieve this client centricity by being selective. We do not try to do everything for everyone. Instead we only serve clients to whom we know we can bring value, and only in Natixis’ areas of expertise.

Our originate-to-distribute model, implemented under New Frontier, was designed with this in mind. By rotating our balance sheet we are able to ensure that we can support our clients’ financing needs.

Natixis has just announced its next strategic plan, New Dimension, which will run from 2018 to 2020, with the expansion of our Middle East platform specifically identified as a target.

– Simon Eedle – cont. overleaf

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COVERSTORY

cont. from page 17

Equally, by always maintaining a portion of all loans on our books, we stay aligned with investor clients’ interests, while providing them with exposure to otherwise inaccessible asset classes.

Second, the proximity of our teams to our clients. The local setup we have put in place over the past five years allows us to meet our clients regularly, on a face-to-face basis.

This has been especially successful in structured finance, where our clients greatly appreciate being able to work on complex transactions with our Dubai-based specialists.

Third, a solutions-driven approach.

We do not emphasise flow or transactional business, and the flow offering we do have is designed to support our solutions. This is the complete opposite of the productdriven approach that large-scale flow operations tend to lead to.

Our solutions focus has been particularly successful in our global markets investment solutions business, and in trade finance. It sets us apart from our peers, and reinforces our client focus by ensuring we always work to provide answers to our clients’ business challenges.

90 %

of Natixis regional revenue is generated in GCC countries

What’s the plan for the coming years?

Natixis has just announced its next strategic plan, New Dimension, which will run from 2018 to 2020, with the expansion of our Middle East platform specifically identified as a target.

This is about continuity; building on our successes of the past five years, both through the businesses we have already established in the region, and through new ones.

One example is equity derivatives, where Natixis is a widely-recognised global leader. We have taken the decision to expand our franchise in the Middle East through an on-theground team in Dubai, following the successful model we employed to establish our fixed income solutions business here. We will do the same

Our house forecast is that oil remains at current levels over 2018 supported by OPEC output cuts and increased global demand on the back of solid economic growth. On this basis, a global economic shock or recession would likely have outsized implications for the region’s economies.

– Simon Eedle, Regional Head, Middle East, Natixis –

with equity finance, once again building a local presence on the back of Natixis’ global expertise.

The biggest development, however, will be the creation of a local investment banking team. Our approach will be very focused, offering advisory services in Natixis’ sectors of global expertise, namely energy and natural resources, infrastructure, aviation and real estate.

On the investor side, we want to strengthen our business with governments and sovereign wealth funds, which are very important clients now on both sides of the balance sheet, as well as with family offices, many of which are larger than the regional asset management firms in terms of assets under management.

In terms of geography, our main challenge is to increase our wallet share in Saudi Arabia. We see many opportunities in the country in the coming years as its economy looks set to open further to global capital flows with a larger role for the private sector.

You are currently the largest shareholder in EFG Hermes, the Middle East regional investment bank. How does this fit in with your Middle East strategy?

Our investment in EFG Hermes is an advantage to help us to develop our relationships with clients through the expansion of our investment banking capabilities.

EFG Hermes is the premier regional investment bank, leading the rankings on ECM deals so far in 2017, and provides us a unique insight to the region that would be impossible on our own.

The two banks are totally independent, but we are working together on various initiatives where we believe the combination of our strengths provides greater value to our clients than the sum of the two parts.

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COVERSTORY

19

The biggest development for Natixis in the region will be the creation of a local investment banking team, focusing on offering advisory services in energy and natural resources, infrastructure, aviation as well as the real estate sector.

In addition, as the region’s number one equity research and brokerage house, EFG Hermes has unparalleled access to institutional investors, to whom we can potentially offer our range of investment and hedging solutions.

We have great confidence in the ongoing success of EFG Hermes, particularly with the positive outlook

for Egypt whose recent fiscal reforms should lead to an improving economy and increased opportunities in the coming years.

What are the biggest uncertainties for your business in the region?

Uncertainty is part of life in this region. A recent example is the

seismic shift in the fiscal situation in the GCC since the decline of the oil price in 2015. Taking a step back, however, we should bear in mind that four of the six GCC countries are rated ‘A’ or above, meaning their credit quality is still much stronger than most emerging markets.

Furthermore, the fact that the region’s main export is priced in US cont. overleaf

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COVERSTORY

cont. from page 19

Geopolitics is, as ever, the wild card, and is highly relevant for us through the uncertainty it can create for the private sector and the subsequent economic impacts.

– Simon Eedle, Regional Head, Middle East, Natixis – dollars provides stability to the local currencies that have been pegged at the same rate for many years.

Of course the big worry is of another large oil price decline, which would weaken the economic circumstances of the GCC, leading to more severe austerity measures or unsustainable fiscal deficits. Our house forecast is that oil remains at current levels over 2018 supported by OPEC output cuts and increased global demand on the back of solid economic growth. On this basis, a global economic shock or recession would likely have outsized implications for the region’s economies.

Geopolitics is, as ever, the wild card, and is highly relevant for us through the uncertainty it can create for the private sector and the subsequent economic impacts.

Overall, however, we see plenty of opportunities as the GCC economies welcome private investment as part of a diversification away from the hydrocarbon sector and away from the state-owned model.

funding, and so were able to continue to lend; second, that much of the additional borrowing by governments was done in the bond market. The result is that most institutions are hungry for assets, which looks set to continue in 2018, putting conditions very much in borrowers’ favour.

This being said, we see a number of interesting opportunities in the coming year. The rising wave of privatisations in the government sector and the continuing opening up of local markets to foreign investors create clear opportunities

for advisory services. On the financing side, there is the huge ongoing renewables programme as governments meet both additional demand for power but also look to replace old, inefficient plants. As one of the leading renewables banks in the Middle East, we will look to continue to enable this trend.

Finally, regional investors will be looking to diversify their investments globally, making us very well placed to provide investment and hedging solutions backed by our global offering.

What is your outlook on the financial sector and deal flow in this region for 2018?

2017 was interesting. The lower oil price did, as expected, lead governments and government-related entities (GREs) to borrow more, but this did not translate into the bumper year that many international banks had expected.

The reasons are twofold: first, that local banks quickly succeeded in diversifying their own sources of

Simon Eedle sees financing opportunities in renewables.

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Where banking is more personal

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22

structured

finance

Plugging the gap Speaking to Banker Middle East, George Traub, Founder and Managing Partner at Lumina Capital Advisers provides an insight into the realities of mid-market capital dearth

W

hat is your view of the financing landscape in the UAE and wider Middle East?

The financing landscape is currently seeing some challenges and opportunities across the region.

Bank lending is facing low levels of liquidity, inflexible lending practises and concern over asset security, which make it challenging for assetlight companies seeking financing for growth, particularly owner-managed entities whose business models are more suited to cash flow lending.

This need, is to a certain extent, being serviced by the emergence of private debt funds (mostly funds managed by the traditional private

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structured

(PHOTO CREDIT: DAVORANA/SHUTTERSTOCK)

finance

delivering the growth. While they are more proactive and flexible than banks, private debt in isolation is sometimes viewed as more ‘expensive’ if seen in a pure cash flow sense.

For longer-term infrastructure and project financing requirements, non-recourse project finance is rare. This type of financing is however much needed in the region, particularly to fund the development of the ambitious infrastructure financing requirements that the region presents over the next few years.

The financing gap is primarily driven by a lack of long-term capital providers such as pension funds, insurance companies and other financial institutions that, in more developed markets, are active investors in longer term infrastructure financing projects.

23

George Traub

What gaps do you see in this area?

equity players) which provide the advantage of greater flexibility, with more appropriate terms for growing companies. These funds can also provide the added benefit of playing a more active role in a strategic capacity, to assist management in

Many companies that seek financing face frustrations including a lack of professional advice, which is increasingly necessary as a number of ‘alternative’ financing sources become more widespread in the market. Companies need to broaden their financing options beyond pure debt or pure equity and gain an appreciation of the more diverse options available to them depending upon their growth strategies.

Private debt funds, mezzanine lenders and other pools of finance that are capable of servicing the needs of the structured capital market for mid-market entities are miniscule compared to the overall demand.

– George Traub –

Additionally, there is clearly a huge gap in the market for financing of owner managed businesses, although this is nothing new in the region. On the one hand, banks and other institutions are under pressure to manage the levels of delinquencies on their lending portfolio, which leads to overly conservative lending, and on the other hand a lack of appropriately structured lending to the owner managed entities leads to these delinquencies in the first place—so in short, a viscous cycle that continues to permeate the region. Unless there is a shift in thinking and a deeper understanding and assessment of the risks and rewards of a particular transaction by lenders and better preparedness from companies, I do not see any huge change in this dynamic in the near future. cont. overleaf

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structured

finance

cont. from page 23

How would you describe the appetite for structured capital amongst mid-market companies in this region?

The structured capital appetite for mid-market companies is significant, especially for infrastructure, real estate and other project financing requirements. A more pertinent question is just how prepared lenders are to structure these products, and how prepared banks and other finance providers are in matching their own funding profile in order to be able to cater to these project financing requirements. Therefore the key question still remains of how prepared are the banks and other finance providers in matching their own funding profile, to be able to offer these products amid increasingly burdensome capital ratios and other regulatory requirements for balance sheet presentation.

The private debt funds, mezzanine lenders and other pools of finance that are capable of servicing the needs of the structured capital market for mid-market entities are miniscule compared to the overall demand. To fill this gap, the development of the insurance, pension funds and other governmentrelated investment entities’ allocation to structured capital products requires significant development.

How does the nature of structured capital in this region compare to those in developed markets? And how do they fare amongst their emerging market peers?

There are strong parallels to be drawn between the nascent stages of structured capital development in the region, with those that Asian markets experienced during their early days as the tiger economies—something

The structured capital appetite for mid-market companies is significant, especially for infrastructure, real estate and other project financing requirements.

– George Traub, Managing Partner, Lumina Capital Advisers –

that I have witnessed develop during my investment banking career in the Far East. There are a number of reasons for this, some of which I have alluded to above, including the lack of long-term capital providers such as pension funds, insurance companies and government allocations to the sector.

In addition, while the sophistication of banks in flexible corporate lending and transaction understanding is developing away from the pure ‘vanilla’ lending, this aspect still has a long way to go. The other key aspect where the region lags behind is the corporate and legal framework that facilitates these structured transactions, for example ownership of real assets, the sometimes-grey areas of Sukuk financing which have led to a number of high profile disputes and the lack of bankable public private partnership legislation.

All these aspects, whilst not new, face their own individual challenges for effective implementation, both from a legislative and corporate framework, and these areas will continue to develop over the next 10 to 15 years.

As banks become more stringent in lending, many non-bank financial institutions (NBFI’s) have stepped up to fill in this gap.

How do you see the competition evolving going forward?

Banks in the region have a distinct advantage over NBFI’s—a huge client and customer base to tap into. The challenge that they face is how to do this effectively, profitably and to also structure products and services in line with the changing market demands. NBFI’s are much more agile in this respect, and have less stringent regulatory requirements, which enable them to provide more bespoke lending to borrowers.

Having said this, the current state of play is that the amount of capital available from NBFI’s, private debt funds and the like are particularly low compared to the market requirements, so there is huge room for growth in those areas. The real challenge for NBFI’s and other participants is how they can effectively manage their own funding costs to provide competitive financing terms. After all, no matter how well the finance is structured, if the cost comes at equity rates, most companies will revert to seeking equity capital.

What is your outlook on the financial sector in the UAE and wider Middle East in 2018?

The dynamics of the financial sector in 2018 are unlikely to be materially different from 2017. Change is occurring gradually, despite the market demands evolving rapidly, which is a key feature of rapidly developing and growing markets. Regional instability continues to impact confidence in many sectors, although the ambitious pace of development in the region will continue to generate significant interest from investors and a healthy pipeline of financing transactions.

www.bankerme.com

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12/12/2017 09:12

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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26

capital

markets

O

ne of the big debating points now is: ‘Are equities getting expensive? In particular, US equities?’ The more expensive equities get, the more investors need to diversify their equity risk.

The problem is that investors traditionally would have chosen to diversify into US treasuries and bonds but the returns are really low.

Put simply, getting out of equities into an asset class that offers lower returns is not very attractive. There is also a worry that the US Fed is going to raise interest rates, which will hurt bond returns.

It’s a bit of a dilemma for investors. The question is: ‘Are there other options?’ The good news is we do believe there are extensive alternatives to equities and traditional high-grade bonds.

Where is the value?

US EQUITIES VS. LOCAL BONDS We really like emerging market debt. The main reason is, if you take a basket of emerging market sovereigns like India, Indonesia, Mexico and Malaysia, the average yield on those bonds is about six per cent. The gap in yields between emerging markets and developing markets is bigger than it’s been for a long time. cont. on page 28

Craig Mackenzie, Senior Investment Strategist at Aberdeen Standard Investment, explains that value is in emerging market bonds rather than US equities

Craig Mackenzie

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capital

markets

cont. from page 26

Local currency bonds now offer high yields. Over the last five years there was a problem because the currencies of local bonds were quite expensive versus developed markets.

Now most emerging market currencies are fair value compared to the dollar so there is no structural currency risk.

Inflation in many emerging markets is falling at the moment and as inflation falls, the central banks will take interest rates down and falling yields mean you get a bit of a capital return on top of that income yield. If you think equities are getting a bit expensive, as we do, you want to diversify, and emerging market debt is a very good proposition.

Three years ago we would have held five per cent of our portfolio in emerging markets bonds. We now hold 25 per cent of our portfolio in emerging market bonds for this reason.

INVESTOR APPETITE Most of our clients in the UK and Europe tend to like us to invest in the best-known indices and the standard best-known indices do not yet include Middle East bonds.

However, there is a frontier index so we do now invest in that for the Middle East. Again, the yields are considerably higher than developd market bonds at five or six per cent.

The Middle East represents about ten per cent of our emerging market exposure, which is not huge, but I’m sure over time as the region matures, it’s going to get included in the main emerging market indices and it will enter our portfolio on a wider basis.

We talked to a range of investors from small investors to big institutions in the GCC. The biggest institutions in this region are at

Over the last five years there was a problem because the currencies of local bonds were quite expensive versus developed markets. But now most emerging market currencies are fair value compared to the dollar so there is no structural currency risk.

– Craig Mackenzie, Senior Investment Strategist at Aberdeen Standard Investment –

least as sophisticated as Europe.

In many cases, the senior investors went to the same universities and have the same financial qualifications. There are some very sophisticated investors here with some very sophisticated strategies and allocations to ranges of investments.

In today’s climate, traditional diversifiers like government bonds offer such low returns, and over the past five years we’ve worked really hard to find alternatives.

There are a whole range of more exotic asset classes like trade finance, litigation finance and catastrophe bonds. I was positively surprised to find that in this region, investors are well aware of these assets and they allocate to them.

They understand the benefits and risks. Maybe 25 years ago, there might have been quite a big difference between investors in London and investors in the Middle East but that has disappeared now.

ALTERNATIVES For a HNWI there are lots of niche opportunities that offer diverse investments. As equities get more expensive they’ll want to shift out into emerging market debt and listed infrastructure funds. We think these are really attractive asset classes. There is liquid access with some meaningful diversification from equities.

We also like asset-backed securities. Many people have read about what caused the financial crisis and they know that securities got a bad name because subprime mortgage backed securities defaulted. While the bad reputation was deserved for this sector, it is underserved for the class of assets as a whole, which saw low default rates during the crisis.

Asset-backed securities offer significantly higher returns than conventional bonds for the same credit rating. They also offer floating rates so that when the Fed raises interest rates the yields that they pay rise too, which is the opposite of conventional bonds where you end up losing money.

Emerging market debt, infrastructure and asset-backed securities would be a set of very good alternatives and diversifiers to the traditional bonds. What’s more, given how tight spreads are these days, traditional bonds have a much smaller role to play in portfolios than they did previously.

The value of an investment is not guaranteed and can go down as well as up. An investor may get back less than they invested.

www.bankerme.com

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30

sovereign

wealth funds

Hunt for the next unicorn Investing in technology is mutually beneficial for SWFs and their beneficiaries. (PHOTO CREDIT: KATJEN/SHUTTERSTOCK)

Investing in digital and technology businesses can offer SWFs valuable insight into the practices, tools, and trends that are likely to shape the global economy for years to come. Markus Massi, Senior Partner and Managing Director and Alessandro Scortecci, Principal, both at the Boston Consulting Group Middle East, write

T

he technology industry has spawned some of the world’s most valuable companies whose innovations have reverberated throughout society; and now, they have even begun to pique the interest of Sovereign Wealth Funds (SWFs)—a branch of finance perhaps least expected to get behind the business of technology.

SWFs have established a reputation for focusing exclusively on mature industries—such as healthcare, consumer and retail, energy, and financial services— with a vertical approach intended to strengthen specific sectors on multiple levels within an industry.

However, as technology has grown into the pervasive entity it is today, SWFs are reevaluating their

strategies and adopting a horizontal approach to generating value.

Technology is becoming increasingly versatile with a remarkably broad scope of impact, and digitalisation has come to characterise modern business, being integrated across sectors; and to capitalise on the digital opportunities created by these phenomena, SWFs are considering equally versatile means of involvement in the technology industry.

THE RISE OF INVESTMENT IN DIGITAL, TECHNOLOGY, AND DISRUPTIVE INNOVATION Beyond the insights and capital to be gained by supporting technology businesses, investing in the digital transformation is also a means to diversify and ‘future proof’ the economies that SWFs operate in.

Economic diversification is a top priority for entities around the world,

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sovereign

wealth funds

and particularly in the Middle East, where efforts to expand beyond the dependence on resources and commodities are in full swing.

In economics, diversity equals sustainability—and building a thriving technology sector is a surefire way to bolster the knowledge-based economies that countries around the world strive to establish. Taking an in-depth look into investments coming from the region, we see the increasing trends towards investment in information technology from big players such as the Investment Corporation of Dubai and the Mubadala Development Company. Saudi Arabia, through its Public Investment Fund, supported Vision 2030 plan, has invested in Uber, e-commerce player Noon, and the SoftBank Vision Fund as a way to accelerate technology transfer, skills, and productivity upgrades to different sectors and industries. Similarly, Bahrain’s SWF, Mumtalakat, used its 2016 investment in Envirogen Technologies to help serve the country’s growing domestic demand for effective water treatment solutions.

Markus Massi

Technology is becoming increasingly versatile with a remarkably broad scope of impact, and digitalisation has come to characterise modern business, being integrated across sectors.

– Markus Massi –

SWFs PURSUING A MIX OF ENTRY POINTS Investing in technology is mutually beneficial for SWFs and their beneficiaries. For SWFs, these partnerships can provide access to the technology life cycles that may lead to larger and more rapid returns as well as insights that can inform both their national strategic agendas and the growth strategies of their existing portfolio companies.

For businesses in the digital and technology sectors, SWFs can be a major source of strategic capital, with their longer-term investment horizons, relatively deep pockets, and access to key markets.

Consider: at the end of 2016, six of the top 10 revenue-generating companies in the world were technology companies—compared with just one at the end of 2006. The growth and strength of technology as a sector in today’s world is undeniable; and the resulting opportunities for SWFs to break from tradition and benefit from this momentum are palpable.

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In the same vein, investing in the progress and innovation of the technology industry helps prolong and sustain the stamina of a diverse economy. Moreover, an active digital and technology investment strategy and business portfolio creates an innovation pipeline that can provides SWFs with advanced insights into emerging trends, which can inform future investment decisions and help SWFs rebalance their portfolios in order to channel resources toward high-growth opportunities.

KEY STEPS FOR CAPITALISING ON THE DIGITAL OPPORTUNITY Investing in technology is unquestionably advantageous for SWFs and the economies they operate in, but it isn’t easy to do.

The classic investment playbooks for traditional sectors cannot be applied effectively to investments in the digital and technology sectors, as can be seen in the 25 per cent of digital and technology businesses in the growth stage that fail to return their initial investment. To navigate these challenges, SWFs cont. overleaf

Alessandro Scortecci

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sovereign

wealth funds

cont. from page 31

must remodel their investment models to suit the businesses that are propelling the technology transformation, and all its benefits, forward.

The Boston Consulting Group has suggested four key steps for capitalising on the digital opportunity presented by technology industry investments: 1. Develop a strong value narrative and clear objectives. Key elements of a clear strategy for entering the digital and technology sectors must include articulation of realistic objectives for returns, thorough understanding of sector risks, and clear comfortability with variable hold periods.

2. Have the right, experienced team and analytics in place to help predict the technology life cycle. Winning digital and technology investment

An active digital and technology investment strategy and business portfolio creates an innovation pipeline that can provides SWFs with advanced insights into emerging trends, which can inform future investment decisions.

– Alessandro Scortecci, Principal, Boston Consulting Group Middle East –

Deal volume and sector distribution Number of deals

500

400 110 +37.9%

300

94

96

74 113

200

35

84

45

100

0 Tech deals as a share of the total (%)

23 26 24 8 10 2012 22

7 5

42 18 23 17 13 2013 18

112

63

55 19 14 32 10

16 23 29 16

2014 26

2015 27

Technology Business products and services (B2B) Consumer products and services (B2C) Energy

55 25 27

115

56 28 31

48 9

54

2016 26

2017E1 27

11

Financial services Health care Materials and resources

Source: Pitchbook Data; Preqin; BCG analysis.

Note: Deals for which size was not disclosed, or completion was uncertain, were excluded.

1The estimates for the number of deals in 2017 were made on the basis of BCG analysis.

programmes require teams with deep digital, technology, and innovation backgrounds; exposure to companies across the development curve; and, ideally, experience in principal investing.

These teams then require access to cutting-edge analytics solutions and platforms that allow teams to iteratively model a particular innovation’s life cycle, from adoption to acceptance to maturity to eventual decline.

3. Prime the operating and risk models by developing internal knowledge and infrastructure. SWFs need to spend time up front designing the right protocols, performance metrics, incentives, and dashboards to monitor progress.

These funds also need to develop nuanced risk management models that blend nicely with existing processes but that take into

consideration the macro risk characteristics of this sector.

4. Invest throughout the cycle.

Although the digital, technology, and disruptive innovation sectors are relatively cycle agnostic, SWFs need to avoid the temptation to pull back on their investment activity during recessions.

Investing in digital, technology, and disruptive-innovation businesses, can spell future success for SWFs. Making shrewd investment decisions today can help accelerate the domestic development agendas of SWFs and help futureproof their portfolios. In order to derive success, however, SWFs require a fundamentally different investment approach—one that invests in the internal development and skills to effectively compete against other principal investors in this up and coming sector.

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islamic

finance

34

Harnessing product creativity Arif Amiri

Arif Amiri, CEO of DIFC Authority, provides his insights on innovation in Islamic finance, asserts that it is better cultivated from the roots than the branches

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islamic

finance

I

slamic finance refers to financial services that adhere to Shari’ah principles. This includes prohibition of paying or receiving interest (Riba), gambling (Maisir) and excessive risk (Gharar).

Although Islamic banking and Sukuk comprise the lion’s share of Islamic finance assets globally with $1.9 trillion and $350 billion, respectively, there are significant untapped opportunities in the securities, equity markets, investment funds, insurance and microfinance markets.

According to the Economist Intelligence Unit (EIU), by 2050 the population of Africa and Asia alone will comprise 7.7 billion of a forecast global 9.7 billion. Today, Muslims comprise large and rapidly growing segments of the world population, including 93 per cent in the Middle East & North Africa (MENA), 30 per cent in sub-Saharan Africa and 24 per cent in Asia-Pacific. Broadly speaking, in so far as Islamic finance promotes beneficial financial activities to society, and restricts harmful ones, through its ethical principles and focus on tangible assets, there is reason to believe that non-Muslims would also be inclined to adopt Islamic financial products.

When I think about what innovation means to me, the word ‘creativity’ resonates stronger than the word ‘adaptation’. Applying this thinking to product development, what is needed is a creative solution, as opposed to an adapted one, to solve an unmet market need. For Islamic finance to flourish, time would be more valuably spent creating new financial products that are Shari’ah-based rather than adapting existing conventional products to become Shari’ahcompliant. The innovative magic is in the roots, not the branches.

The root of Islamic finance is Shari’ah, which is underpinned by

When I think about what innovation means to me, the word ‘creativity’ resonates stronger than the word ‘adaptation’.

Applying this thinking to product development, what is needed is a creative solution, as opposed to an adapted one, to solve an unmet market need.

– Arif Amiri – the Holy Qur’an and teachings of the Prophet Mohammed (PBUH). So what exactly is the difference between Shari’ah-compliant and Shari’ah-based financial products? An Islamic financial product that is developed using the Shari’ah-compliant approach has its origins in conventional banking and aims to make the product compliant by omitting features or components that contradict Shari’ah principles and replacing them with those that do not. With this approach, an Islamic product is structured using an existing conventional product as a reference.

We are trimming a tree to fit a mould rather than planting a new one organically to yield the results we want.

One example of Shari’ah compliance is Ijarah, an adaptation of a conventional lease. There are many similarities and a few differences between the two,

35

across multiple dimensions such as ownership, risk, timing, profits and penalties. Taking risk as an illustration, a conventional lease is structured so that the lessor assumes and manages all the risks of the leased asset. With ‘Ijarah’, all ownership-related rights and liabilities lie with the lessor whereas all usage-related rights and liabilities lie with the lessee. Any damage or lost caused beyond the lessee’s control is borne by the lessor.

An Islamic financial product that is developed using a Shari’ahbased approach does not involve a conventional product as a benchmark.

It is a newly developed product based on Shari’ah principles and is therefore intrinsically compliant.

For example, a Mudharaba venture capital partnership model takes a Shari’ah-based approach. Here, a financing partner provides capital towards investment in a commercial enterprise to be managed by an entrepreneurial partner. The proportionate share in profit is determined by mutual agreement but the loss, if any, is borne only by the owner of the capital, in which case the entrepreneur gets nothing for his labour. Although a simple example, this Shari’ah-based model does not aim to replicate a conventional venture capital model, despite their similarities, but rather, creates an organic Islamic financial product directly from Shari’ah principles.

This is where the real innovation of Islamic finance is. The more the industry adopts this approach, the more growth it can expect. DIFC has created a dynamic ecosystem of 1,750 companies—many of which are Islamic finance institutions or offer Islamic solutions. We aim to continue driving the future of finance with a number of initiatives that support innovative thinking in the industry.

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human

capital

Measuring innovation Kip R. Krumwiede, Director of Research at the Institute of Management Accountants, shares his opinion on how accounting professionals can drive innovation in their respective organisations

L

ooking for ways to better serve its customers, HDFC Bank developed OnChat, a chat-based platform on Facebook Messenger which provides commerce services like bill payments, travel bookings, event bookings, etc.

OnChat uses artificial intelligence to understand its user’s intent based on free text input. Services available on HDFC Bank OnChat include mobile recharges, utility bill payments, cab and bus fares and even event booking fees. Within six months of the product launch, more than 50,000 unique users have interacted with HDFC Bank OnChat with more than 35 million interactions. The total transaction value of HDFC Bank OnChat has exceeded IDR 5 million (AED 285,000) within six months of launch.

It has never been so important to be innovative in today’s banking and finance world. In a recent survey conducted by IMA, 75 per cent of the senior financial executives said their organisations must significantly evolve or reinvent their business value propositions at least every five years. Add to that the impending implementation of IFRS 9, which will affect how banks treat financial

instruments and will require an assessment of, and, inevitably, a reinventing of their business models.

This article will cover how senior finance and accounting professionals can promote and lead innovation in their companies. This includes keeping it on the agenda for executive management, making innovation part of the planning and budgeting process, establishing processes for pursuing innovation initiatives, developing ways to track and measure innovation activities and success, and developing an implementation plan to achieve innovation goals.

FOUR-STEP PROCESS The following four steps can help a company measure and improve their innovation for a sustainable future.

1. Make innovation governance a strategic priority for executive management.

2. Establish processes and control systems for generating and pursuing innovation ideas 3. Develop leading and lagging measures for innovation success (i.e., balanced scorecard) 4. Develop an implementation plan to and achieve innovation goals.

Kip R. Krumwiede

Make innovation governance a strategic priority for executive management. Innovation is a competency that determines the ability of a company to create value for its customers, which, in turn, enables the company to achieve profitability and growth. Value-creating reinvestments build capabilities that extend competitive advantage. When companies fail to reinvest in the business, they tend to fade and ultimately can fail.

To help make innovation a strategic priority for executive management, it is crucial to get them to agree to make it part of strategic planning and budgeting. After making the case for the importance of innovation to achieving the company’s goals, try to do the following: • Put innovation goals in the strategic plan • Establish leadership responsibilities and make innovation part of operational reviews.

• Set money aside in the budget and capital plan for innovation development, • Put resources toward not only incremental continuous improvement efforts but also distinctive innovation projects, and breakthrough projects in new markets.

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Objective

Leading measures

Lagging measures

Have highly trained employees

· Training investment/hours per employee · Training investment/total revenue

· Number of employees trained in various tasks or functions · Number of Training sessions

Strong internal climate

· Percentage of compensation based on individual and team incentives · Frequency of team meetings

· Percentage of employees who consider the performance evaluation system useful · Employee satisfaction ratings

Attractiveness of company to new employees

· Employee satisfaction ratings · Compensation levels compared to industry

· Number of new employees younger than 30 · Employee turnover rates

Visibility of brand

· Net promoter score · Number of new products or services · Number of media placements

· · · ·

Develop online and mobile technologies

· Number of new online transaction capabilities · Average transaction time

· Number of transactions handled online · Percentage of transactions handled online

Develop new products and services

· Development investment/Total Revenue · New product development times

· Percentage of products that equal 80 per cent of sales · Percentage of sales revenue from new products · Number of new products or services

Increase innovativeness

· Number of employee suggestions implemented · Time spent with customers, providers, and other outside partners on developing new ideas

· Number of operating capabilities · New product development times

Percentage of market share Percentage of customer retention Quality rankings by other agencies Percentage of growth in new customers

Source: Institute of Management Accountants

• Incorporate innovation into risk management and vice versa.

Understand that the biggest risk is not innovating enough.

• Train employees to achieve cultural readiness and foster an excitement to innovate Establish processes and control systems for generating and pursuing innovation ideas.

Rather than rely on employees to come up with new ideas, it’s more effective to have multiple innovation channels including partners and customers. Potential channels include key suppliers, customers, general employee suggestions, key employees charged with innovation and idea creation, competitors, external agencies, consultants, institutions, crowdsourcing, and business challenge events. The process should include idea generation, scoping, building the business case, testing, and launch.

Develop leading and lagging measures for innovation success. Another way to encourage innovation is through a balanced scorecard approach. In this approach, nonfinancial measures are linked to financial outcomes.

The scorecard is ‘balanced’ in terms of both financial and nonfinancial measures, and both leading and lagging measures. All measures should be linked in a causal chain leading to successful financial outcomes. Similarly, leading and lagging measures for innovation can be linked to financial outcomes.

A full example of such a balanced scorecard is beyond the scope of this article. Table 1 provides various types of leading and lagging innovation measures.

Notice in the diagram that a performance measure can be both a leading and a lagging indicator.

For example, employee satisfaction ratings can be a lagging measure for frequency of team meetings and a leading measure for employee turnover.

Develop an implementation plan to and achieve innovation goals. Having good performance measures is not enough. The goal is to create a measurement and management system for sustainable innovation and growth. It is important to identify action items to drive each of the measures. Some potential action items include:

• Develop ways to capture, store, and report on innovation data and benchmarks. There should be a target and metric owner for each measure. If the data does not currently exist, then make a plan for how it can be captured.

• Train team leaders on how to conduct team meetings to create an environment that encourages expressing new ideas.

• Hire employees who embrace uncertainty and unknowns.

• Set up meetings with customers and other strategic partners to brainstorm new ideas.

CONCLUSION To conclude, banks must integrate their various operations to innovate. Learn how value is created and constantly look for ways to encourage it. Make innovation part of strategic planning, budgeting, and performance reviews.

Establish processes for generating and pursuing innovation ideas. Develop leading and lagging measures for innovation success. Try innovative solutions in each department. Like HDFC Bank with its OnChat idea, be willing to take calculated risks, make mistakes, and learn from them.

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38

- ADVERTORIAL -

Blockchain and digital currency A fair insight into the cryptocurrency market

A

lmost unknown before 2015, blockchain technology is now far more mainstream, and widely used by financial institutions and corporates around the world.

It promises a transaction system where individuals/entities will have full rights and control over an asset and be able to instantly transfer it to any person, company or machine, without having to rely on third party intermediaries such as lawyers, brokers, and bankers. The system does not involve a central bank or

a clearing house and is virtually immune to tampering, fraud, or political control since verifications are handled through algorithms and peerto-peer consensus, where participants are relatively anonymous.

This is the immense potential of blockchain which in simple terms, is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. Further, since every core transaction is processed just once, in one shared electronic ledger, blockchain offers to reduce

redundancies and delays that exist in today’s banking system.

The first and perhaps the bestknown use of blockchain technology is in the form of a virtual currencies/ cryptocurrencies such as bitcoin, ether, ripple, etc which eschewed a central authority for issuing currency, transferring ownership, and confirming transactions.

Bitcoin, the most popular of these cryptocurrencies, has a market cap of around $195 billion and is being used by millions of users, including a large and growing remittances market.

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(PHOTO CREDIT: DENCG/SHUTTERSTOCK)

- ADVERTORIAL -

To date, there are more than 1,000 cryptocurrencies with different features and aims and a combined market cap of about $350 billion and 24 hours trading volume of roughly $13 billion. Interestingly, the market cap of cryptocurrencies rocketed by 25 times in the past year (from $14 billion as of 5 December 2016), marked with extreme price volatilities (as much as 20 per cent in hours).

Bitcoin Price Value (2015-2017YTD) 12,000

Sharp increase in Bitcoin price since the onset of 2017

10,000 8,000 6,000 4,000 2,000 0 15 15 15 l-15 -15 v-15 -16 r-16 y-16 l-16 -16 v-16 -17 r-17 y-17 l-17 -17 v-17 p n n- r- yJu Sep No Jan Ma Ma Ju Sep No Ja Ma Ma Ju Se No Ja Ma Ma Price close (USD) Source: Thomson Reuters, Coindesk, Al Masah Capital Research

Blockchain Venture Investments (2012-2017 YTD) 120

700 601.2

101 600

100

490.5 500 361.5

400 300

80

66 58

349.2 60

36 31

200 95.1

40 20

100

0

0 2011

2011

2011

Deal value Source: Coindesk, Al Masah Capital Research

2011

2011

Deal volume

2011

39

Consequently, the world of finance remains divided between the ‘believers’ and the ‘non-believers’. Sceptics term cryptocurrencies ‘the very definition of a bubble’ and even ‘a fraud’ as they have no fundamental value as an asset, no stream of future income, no ultimate assurance of liquidity or security, and no alternative use (unlike gold for example).

On the contrary, cryptocurrencies are gradually (after initial hiccups from leading central banks such as European Central Bank) gaining favour with some governments such as Japan, Australia, the Philippines, Russia, etc, which are accepting or considering accepting the use of bitcoin in daily transactions.

Consequently, established venture capital firms like Sequoia, Andreessen Horowitz, and Union Square Ventures are pouring millions of dollars into cryptocurrency hedge funds. In its labs, Citi is testing CitiCoin, an open source bitcoinbased digital currency, which will be used for global payments and trade.

Further, rise of cryptocurrencies have also shaped a new fund raising platform—initial coin offering (ICOs), which is similar to crowdfunding and allows startups to offer token or digital currency equivalent to users stake in the firm. To date, over 400 start-ups raging from financial services, asset management, media and advertising, infrastructure and development, computing and storage, etc. have raised more than $4.5 billion in ICOs. Despite this success, ICOs find themselves in muddy ground with China banning ICOs in the last quarter and heavy criticism from the US regulator, Securities and Exchange Commission.

While there exist some mystifying buzz and questions surrounding the legitimacy of decentralised cryptocurrencies, the world of finance cont. overleaf

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- ADVERTORIAL -

cont. from page 39

and conglomerates remain united on the immense potential of blockchain technology. Close to $1.9 billion in venture capital (VC) has flowed into more than 185 blockchain-related startups globally, with half of that amount being invested since the beginning of 2016. Further, IT majors such as HP, Microsoft, IBM, and Intel have expressed keen interest in Blockchain while major conglomerates such as Amazon, Bank of America, IBM, and MasterCard are increasingly filing their own related patents.

The global financial services industry seem to be leading the charge in blockchain adoption and applicability, with R3, a financial technology firm, announcing that 25 banks had joined its consortium, which is attempting to develop a common crypto-technology-based platform. Participants include such influential banks as Citi, Bank of America, HSBC, Deutsche Bank, Morgan Stanley, UniCredit, Société Générale, Mitsubishi UFG Financial Group, National Australia Bank, and the Royal Bank of Canada.

Similarly, four prominent banks—namely UBS, Deutsche Bank, Santander and BNY Mellon, have joined forces to create their own cryptocurrency, USC, which they plan to launch in 2018.

Interestingly, central banks such as The Central Bank of Russia (CBR) is investigating issuing their own national blockchain cryptocurrency, which unlike bitcoin would be centralised, permissioned, licenced and operated under regulatory policy to avoid illicit activities.

Other early experimenters are Nasdaq—which introduced Nasdaq Linq, a blockchain-based digital ledger for transferring shares of privately held companies, and the Australian Securities Exchange which is developing a blockchain-

based post-trade solution to replace its current system.

Similar to the global trend, the GCC region is also embracing blockchain with a mixture of anticipation and some apprehension.

While regional central banks such as UAE Central Bank, Saudi Arabia Monetary Authority, Central Bank of Jordan, etc. have a cautious outlook on decentralised cryptocurrencies such as Bitcoin, the regional financial services industry has been more receptive towards the application of blockchain technology in modern banking particularly remittances.

For instance, National Bank of Abu Dhabi become the first bank in MENA to introduce real time, cross-border payments on blockchain through a partnership with US-based Ripple.

Following the footsteps, RAKBank too recently entered into a partnership with Ripple to leverage on its global blockchain network (RippleNet) to power cross border payments to retail customers to India. Emirates NBD, had also announced that it was working with India-based ICICI bank on a pilot project to use Blockchain technology for global remittances and trade finance.

On a more ambitious note, Dubai’s government recently announced its plans to launch a cryptocurrency called emCash following a

partnership between Emcredit, a subsidiary of Dubai’s Department for the Economy and Object Tech Grp., a UK based blockchain startup to support contactless payments and protect consumers. Similarly, the Global Blockchain Council, founded in 2016 by the Dubai Future Foundation, a government initiative, is bringing together public and private sectors to identify test cases for new blockchain business models.

Although blockchain and digital currencies still remain at a nascent stage of adoption, it would be unwise to discount its early stages of development and successes along with failures. However, it is equally important to separate the hype from the ground reality. While the technology offers immense potential in processing transactions with more efficiency, security, privacy, reliability, and speed, it is also shadowed by significant ambiguity which will remain until the central banks around the globe play the role of a convening power needed to bring together disparate players in the financial sector. Nevertheless, blockchain is a foundational technology that can create new foundations for our economic and social systems but it will take decades to seep in.

Shailesh Dash is an active Entrepreneur & Fund Manager and has promoted several Financial Services, Healthcare, Retail and Logistics companies.

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page 38-40 Advertorial.indd 40

12/12/2017 14:02

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.

IN-DEPTH INTERVIEWS

Dr. Adnan Chilwan Group CEO Dubai Islamic Bank

HE Abdul Aziz Al Ghurair CEO Mashreq

Michel Accad Group CEO Al Ahli Bank of Kuwait To learn more, contact: OMER HUSSAIN

CPI Financial FZ LLC • PO Box 502491 Al Shatha Tower, Office 1209 Dubai Media City, Dubai, U.A.E.

+971 4 391 5419

omer@cpifinancial.net

Tel: +971 (0) 4 391 4681 • Fax: +971 (0) 4 390 9576 • www.cpifinancial.net

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Not your copy?

Banker Midle East is a controlled circulation magazine delivered to specific, named individuals in board level and the very top management positions within the banking and financial services sector and to CFOs and Treasury heads in large, listed corporates in the MENA region.

Others may subscribe to receive the magazine regularly through the subscription form below.

Institutions may also arrange bulk purchase orders of the magazine and its supplements to circulate among internal and external stakeholders. If you wish to arrange regular bulk deliveries, please contact subscriptions@cpifinancial.net for terms.

Annual individual subscription (11 issues/year) US$240

To subscribe, simply fill in the order form and return it, with your cheque for US$240 to: CPI Financial, PO Box 502491, 1209 Shatha Tower, Dubai Media City, Dubai, UAE. NAME POSITION COMPANY ADDRESS LINE 1 ADDRESS LINE 2 ADDRESS LINE 3 PO BOX ZIP/POSTAL CODE COUNTRY

CPI Financial FZ LLC • PO Box 502491 Al Shatha Tower, Office 1209 Dubai Media City, Dubai, U.A.E. Tel: 4681 391 4 )0( 971+ • Fax: 9576 390 4 )0( 971+ • www.cpifinancial.net

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20/11/2017 10:29

cryptocurrencies

Bitcoin: friend or foe?

In November 2017, bitcoin reached an all-time high of over $7,500.

(PHOTO CREDIT: ROMAN BODNARCHUK/SHUTTERSTOCK).

Eversheds Sutherland’s Nasser Ali Khasawneh, Managing Partner—Middle East and Erica Crosland, Associate, address the debate over bitcoin

S

atohsi Nakamoto is synonymous with two things: 1) inventing an open source unhackable currency subject to no government or banking system, and 2) being a nom de plume for an anonymous idealistic programmer out to change the world. What started as an interesting experiment changed in 2010 when Laszlo Hanyecz made the first ever documented bitcoin purchase and, by doing so, proved that the cryptocurrency did indeed have some value (the purchase he made was two pizzas for BTC 10,000).

Fast forward and in November 2017, bitcoin reached an all-time high of over $7,500 (making the price for those two pizzas over $75 million). By the time this article is published, it is very possible that it will have soared even higher. Of course, it is equally possible that the price will have fallen drastically—such is the volatile nature of the infamous cryptocurrency.

Setting aside, for a moment, turbulent valuations, it is worthwhile considering how we got here. When and how did a new technology come to rival traditional fiat currency and what are the implications for the world of banking?

43

Much has been written about the history and early development of bitcoin and a cursory internet search should provide any interested reader with a general overview. As a thought leadership piece, the purpose of this article is therefore to consider how we got to the current state of the Bitcoin evolution and where it is likely to take us from both a legal as well as financial perspective.

From a financial perspective, an early criticism has always been that there is no inherent value in the bitcoin (or any other cryptocurrency), it therefore cannot rival traditional fiat money. However, with a current market capitalisation of over $120 billion (making bitcoin worth more than household names such as eBay and Paypal) it is hard to argue the lack of inherent worth when the market clearly disagrees. In the face of unhelpful market valuations, critics point to bubbles and investment mania (citing similarities with the tulip mania some 400 years ago when speculation drove the prices to dizzying heights before an equally spectacular fall).

In a current climate of hundreds of new cryptocurrencies being launched through initial coin offerings (ICOs), it is likely that investors in these speculative offerings will be left in a bad spot when reality fails to live up to hyped expectations but that does not detract from the innovative technology. Indeed, it is reminiscent of the evolution of the internet which, as we have seen, quickly conquered the world but not before it suffered the dot-com crash. A reminder that innovative technology can be both hype and revolution at the same time.

The similarities with the internet does not end there. Bitcoin is revolutionary because it is currency as an open network. Like the internet, where a lone blogger with a voice can rival traditional media cont. overleaf

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cont. from page 43

giants like The Times, so too a single developer can write the next breakthrough app that provides a completely new and innovative financial service. There are currently more than 10,000 bitcoin-based projects on popular developer systems such as GitHub and, with unprecedented levels of investment in fintech projects, the pace of development is only set to increase.

The result is that many of the traditional revenue sources in the financial services sector, such as fee generating transactions, remittances and exchanges, are unlikely to remain profitable for long in the face of free or near free challenger alternatives.

Although the banking industry is likely to face competition like it has never done before, innovation is equally likely to create an abundance of new opportunities in the emerging financial landscape. A more open system will lead to greater choice and by benefitting consumers directly, the hope is that it will also benefit society at large.

It is easy to forget that the conveniences that many of us take for granted such as a conventional bank account, access to loans, mortgages and international markets are not available to everyone. In fact only around one billion people globally have access to these banking facilities. There are two billion people in the world that have no bank account at all and a further four billion that have very limited access to banking, often with little or no liquidity. Proponents argue that fintech challengers with a focus on bitcoin and other cryptocurrency may provide the answer for these underserviced segments.

This of course raises a number of legal and regulatory issues where we are also set to see some rapid development.

At present, different countries around the world are taking different

Nasser Ali Khasawneh, Managing Partner—Middle East, Eversheds Sutherland

Erica Crosland, Associate, Eversheds Sutherland

approaches to dealing with the legalities around bitcoin and other cryptocurrencies. In the UAE, the federal regulatory framework for cryptocurrencies is currently under review by the UAE Central Bank.

Public sources indicate that the review is close to being completed and new regulations may be introduced that will directly address the use of bitcoin. In a statement on 23 October 2017, the Governor of the UAE Central Bank warned against bitcoin, labelling it as unofficial and lacking in supervision.

This may reignite the debate from the start of the year when the Central Bank issued the Regulatory Framework for Stored Values and Electronic Payment which appeared to ban bitcoin as a ‘virtual currency’ but later clarified through public media that the regulations do not apply to bitcoin or other cryptocurrencies (albeit without amended the underlying regulation). For now, the onshore position appears a grey area without any regulatory protection for investors rendering it a high risk asset but perhaps also provides some scope for start-up innovation.

In the DIFC, the DFSA remains supportive of fintech development and technology companies are able to test their products under a specially designed temporary licence without the need to comply with the all the DFSA rules during the testing stage. The same arrangement is also offered by the ADGM but the FSRA has gone one step further and recently issued guidance on its approach to ICOs and virtual currencies under the Financial Services and Markets Regulations.

Provided that KYC concerns can be addressed, it is anticipated that a relaxed regulatory framework would be well aligned with the UAE’s innovative public agenda but with such a huge potential impact on the national economy, some future restrictions are likely as the market matures.

Beyond the UAE, other Middle Eastern countries have taken steps to warn against the use of bitcoin and have issued their own guidance with most taking a tentative approach until more is known about the wider implications of regulated use.

The potential applications for bitcoin and other cryptocurrencies are only in their infancy and with a greater public utilisation we are also likely to see a completely new regulatory environment emerge. In the meantime, it is likely that any positive regulatory framework for bitcoin (and other cryptocurrencies) would involve regulating the companies operating in the cryptocurrency space as opposed to attempting to regulate the currencies themselves.

While the practical use of cryptocurrencies remain largely theoretical, the same cannot be said of the underlying technology.

Blockchain technology is already being tested and implemented across industries and, in particular, in finance.

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fintech

The Magnifintech Seven A fintech series brought to you by Interfima, launches for the first time on 17 January 2018

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he Magnifintech Seven is a fintech series that enjoys the strategic partnership of Fintech Hive at the DIFC and is powered by Stanton Chase (www.stantonchase.com). Seven of the worlds top 20 influencers will share their views and insights with the audience about the future of financial services. One of those experts, Matteo Rizzi of FintechStage, one of the first financial innovators speaks to Panos Manolopoulos, Global Leader, Board Services at Stanton Chase about the current and future status of fintech.

What fintech means for you, especially when you are considered one of the first financial innovators around?

MR: Now, it is all about finding patterns of disruption, innovation and collaboration for more efficient, more inclusive and trusted, and above all fairer financial system.

Do you believe that banks and fintechs share the same perspective?

MR: I do, for two reasons: one, because there are more banks trying to understand fintech and the related startup eco-system than banks still retrenched in ignoring it, and second because the 6 trillion opportunities (10 per cent of GDP in emerging economies) is a pie nobody can afford not to care for.

Currently, what are the major challenges the financial industry expects to encounter in 2018?

MR: For sure, a self-fed bubble made of unaware investors, some of the 2013 and earlier investment bodies coming to the end of the investing period, and an objective ‘me too’ culture.

Second, the lack of early stage capital, particularly in second tier developed economies.

Third, the consolidation of the new ways of funding startups, company builders and new form of corporate innovation programmes, because accelerators clearly have proven themselves wrong under the return point of view.

Do you anticipate a collaborative scheme or a challenging one between fintechs and banks for the years to come?

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Fintechs—are they really reshaping the financial services industry or just offering an alternative means of delivery?

MR: Real infrastructure disruption is yet to come, but inevitable. Current interbank rails are soon to be 20 years old. So it is starting with the faster, cheaper, better delivery but it creates a new expectation and framework for the survival of the fittest, which will reshape the industry fundamentally.

As for Matteo Rizzi, what are your future plans for the years to come?

MR: Keep helping eco-system to become more connected inward, for their different stakeholders, and between themselves. Make impactful and fair return initiatives. Stay curious.

The Magnifintech Seven appreciate the support and contributions of our supporting organisations and partners, including Blueground, Emirates, Stripe, Baton Global, all contributing Fintech ecosystem accelerators, incubators and idea generators that shape modern marketplace. Kindly visit www.magnifintech7.com for more information.

MR: The answer to this question is already widely shared by the industry. A collaborative one.

At this point, which is your favourable location around the globe for Fintech pioneering and innovation?

MR: My favourite place is emerging markets, and Africa above all, as an opportunity to learn from other eco-systems mistakes and most importantly to drive regulation in an innovation-friendly way.

Matteo Rizzi, Co-Founder, FintechStage

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in-depth

Embracing change Ayman Sejiny, Chief Executive Officer of Ibdar Bank talks to Banker Middle East about the importance of technology for the Islamic finance industry

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Ayman Sejiny

hat is your opinion of the impact of fintech on the region’s financial industry?

Fintech is fast becoming a major driver of change in the financial services space with initiatives that will substantially elevate the banking experience, and improve banks and financial institutions efficiency— which in turn will reduce costs and enhance stakeholder value.

Fintech will witness an influx of startups in the crowdfunding and payment space and drive legacy banks to transform their operations and offerings in order to compete.

Crowdfunding, P2P and payments platforms will be a major focus in the medium term. cont. overleaf

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By leveraging technologies banks can facilitate the creation of sustainable value for all stakeholders through cross industry collaboration and by being more accessible to global Muslims.

– Ayman Sejiny – How important is digitisation?

Digitisation is extremely important if investment banks want to survive and thrive in the Islamic financial services space. Our future potential investors are Gen Y or millennials. These customers have virtually grown up ‘bathed in bits’, and financial services will be driven by these expectations.

As well as catering to our new customer needs, digitisation reduces human error which increases efficiency and effectiveness, and allows for the close monitoring of exposures. Data in investment banking is not being utilised effectively. A fully digitised investment bank would ensure the better utilisation of this valuable data in order to analyse and shape strategies that meet the real needs of customers today and in the future.

What kind of hurdles should banks overcome to keep up with the current pace of change?

For banks to compete successfully with fintech start-ups—adapt and implement digital innovations—there must be culture change. We must not be held back by legacy—legacy technology, legacy processes and, most importantly, by legacy thinking. This means that culture change is a big part of the overall transformation needed to compete with fintech start-ups.

Fintech start-ups have the advantage that they have no existing structure to change—so they can

really change everything! Also, the structure of Islamic financial institutions is historically hierarchical and silo-based. Banks must flatten their organisational structures in order to be more agile, and embrace a culture of transparency, collaboration and change. It is also important to ensure a customer-centric, rather than an internal focus. This will be facilitated by flattening the structure and reducing internal politics—again it’s all part of the required culture change that will create the foundation for creativity, innovation and change.

Fintech is all about financial inclusion, eliminating friction, improving efficacy and lowering costs. By embracing fintech, financial service providers are able to offer clients the support they need to be more competitive. By leveraging technologies banks can facilitate the creation of sustainable value for all stakeholders through cross industry collaboration and by being more accessible to global Muslims.

What is your outlook on the development of financial technology for investment banks in the next three years?

The top Islamic financial markets of Malaysia, Indonesia, the UAE and Bahrain will witness a flood of startups in the crowdfunding and payment space. There will also be an increase in the use of artificial intelligence (AI) in the form of ‘robo’ advisers.

Non-core Islamic markets such as The UK and even the US will also see more investment in fintech startups to meet the demand for Shari’ah products in these markets.

In Bahrain, the CBB taken decisive steps towards a fintech supportive environment with the establishment of one of the first sandboxes in the region, allowing the financial sector to test new tools and services. Regulators are an extremely important part of the financial services eco-system and, apart from their oversight of the industries development, they have an important role in consumer protection.

The Islamic financial services industry is of systemic importance for the Kingdom of Bahrain and the leadership of the Kingdom understands this as underscored by the CBB’s continued support, and the great effort undertaken by the Economic Development Board (EDB) in order to establish Bahrain at the centre of Islamic fintech.

The more exchange and consultancy that is established between government agencies and the private sector, the better the results that will materialise will be. At this point, time-to-market is of the essence and the faster authorities react crossdivisions with approvals to support the sector the better is the chance to manifest the Kingdom of Bahrain as a centre of excellence and a reference point in the Islamic world.

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A merger of strengths Banker Middle East sits down with Nadeem Syed, Chief Executive Officer of Finastra, a newly merged entity between Misys and D+H, to discuss the developments of the merger and the technology landscape in the Middle East

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ow have things been since the merger?

What challenges have you faced going through that process?

I always look at opportunities, not challenges. It has been exciting—the company has approximately $2.1 billion in revenues and has offices in 42 countries around the world. I’ve been in the industry for more than 30 years and you very seldom see two businesses that are so complimentary to each other.

Whether it’s the markets that we play in, the customer base we have, or the product footprint we have, there is virtually no overlap. So that makes it incredibly creative from a customer value creation perspective. From a global market perspective, that makes the merger a lot easier. Particularly when you have overlapping products and markets you’ll go through and rationalise how you’re going to service customers in that region—we do not have that problem.

Between our two companies, legacy Misys averages at $1 billion in revenue, with its international business very much outside the North American continent. Legacy Misys had a big presence in Middle East, Africa, Europe as well as Asia Pacific,

with 17 per cent of the company’s revenue from North America.

If you look at D+H, again the company did have an international business footprint but this was largely North American centric, with 87 per cent of D+H’s revenue originating from North America.

So you see the compliment right there—Misys with virtually no footprint in North America and D+H with a massive footprint therein.

So that creates tremendous synergy from a global market perspective.

Zooming into the Middle East, how has the merger helped position Finastra in this market?

D+H did not really have that much of a presence in the Middle East.

It had a little bit of a presence in Africa—some of the largest banks in Africa use the D+H capability from a payments perspective. Legacy Misys has been in the region for approximately 27 years and we have customers across almost every country in the Middle East, from Jordan all the way to Oman. We cover pretty much everything including Egypt as well. In the Middle East we cover almost all aspects including retail banking, corporate banking and capital markets. cont. on page 50

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Nadeem Syed, Chief Executive Officer, Finastra, speaking at the Dubai chapter of Finastra Universe.

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cont. from page 49

Based on your conversations with your clients, what are their priorities and their concerns going into next year?

It is an incredibly challenging market for our customers as they are faced with multi-faceted obstacles. Banks, no matter where they are in the world, be it the Middle East, Europe, or Asia, the challenge to comply with regulations is something that cannot be avoided. For example, when you have new regulation for capital markets and the IFRS 9 for accounting, all these are causing banks to change how they operate.

The second element is digitalisation. The expectations their customers have of them continue to rise. They are looking for more streamlined capability, easy access to information, more transparency, etc.

That is the second vector; the third vector is you have costs. IT budgets are not growing—so you either have the same or a slightly larger IT budget where within that budget you have to deal with regulation and digitalisation requirements.

The fourth challenge is something you see more in Europe, but you also see this in parts of the Middle East where you have new non-banking providers who challenge the status quo. These are institutions who are coming in with a differentiated way of doing business.

Banks therefore see challenges from these four different facets—that is what a typical bank currently deals with.

How do you help manage the struggle between innovation and regulation?

You have to absolutely meet regulatory requirements. However, the worst thing you can do to meet these requirements is essentially the approaches below: One is to say, “You know what I’m going to deploy a brand new

One of the reasons why I think the Middle East might be further ahead or capable of adapting is because the region can drive change more aggressively.

– Nadeem Syed – risk system that is going to replace everything I have”—in my view, that would be a suicidal approach because: a) it’s going to take too long; and b) the risk associated with that is too high.

The second approach is to build it yourself—it may help you in that particular moment but it is something that is not sustainable over the long term because it takes you a little bit further into the past instead of taking you into the future.

So our view is that a bank should adopt an incremental approach to transformation. This is something that is adaptable and should be done in phases.

For example the Fundamental Review of the Trading Book (FRTB) is a new regulation that is coming out in Europe and North America, and any bank that does business in these two continents is affected. So if you’re a bank in the Middle East and you’re interacting with a counterparty or doing business in Europe or North America you will have to comply with this regulation and that requires a complete change in the fundamental valuation of your entire trading book.

Thus, if you have multiple systems for different asset classes, it’s virtually impossible for you to do that.

You can either replace all those systems with a new system or better yet, you can build a new capability on top of your current systems.

How do you view the development of technology in the banking sector in this region and how do you compare it on a global scale?

The Middle East and Africa has interesting opportunities. In some ways—especially in markets in Africa and some of the less developed areas— because you’re so behind the technology curve, you can actually leapfrog.

M-Pesa (in Africa) was revolutionary in terms of what it enabled and there were developed markets that had not even tapped into it. Because you have not invested in technology, when you invest, you can actually leapfrog ahead of everyone else. Thus, the digital platform you build can be the best digital platform and you know that it would be better than what you get from established banks in Europe and North America. This is the opportunity I see in this region.

Additionally, embracing the trends and shifts, and leaping into them, truly doing something transformational is feasible because banks here do not have as much legacy to deal with.

This gives them an opportunity to do something so differentiated without anything holding them back.

One of the reasons why I think the Middle East may be further ahead is because it is highly capable of adaptation and can drive change more aggressively. This is a similar situation to China—when China picks a standard, they pick a standard, and it gets done. You have the same opportunity in parts of the Middle East just because the governments can drive the adoption of the standard much more strongly than the rest of the markets.

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in-depth

Recovering circumstances In an exclusive interview, HE Khalid Al Rumaihi, Chief Executive of Bahrain Economic Development Board, addresses the realities of the Kingdom’s economic progress since the fall in oil prices

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escribe the development of the Bahraini economy from 2016 to the first half of 2017.

We have seen a consistent pattern of resilience in the non-oil economy in the last two years, with growth remaining above regional averages and being driven by the non-oil private sector. The growth in the non-oil sector of Bahrain’s economy expanded from 3.7 per cent during 2016 to 4.4 per cent in the first three months of 2017.

We have also seen the build-up of major infrastructure projects, which have become increasingly important as a driver of economic growth in the short term as well as enhancing the economy’s longer term fundamentals.

Alongside the investment in ‘hard’ infrastructure, we have also seen a number of reforms to our ‘soft’ infrastructure that have enhanced competitiveness across the economy—for example, in making it easier and cheaper to start a business, easier to export goods across the King Fahd Causeway to Saudi Arabia, and supporting innovation in fintech and manufacturing.

What were the challenges faced by the economy in 2017 and how has this changed this year?

HE Khalid Al Rumaihi

Clearly the adjustments that the region needs to make to the ‘new normal’ oil price remain a challenge—and are likely to remain a challenge in the near term. However, the transformation and restructuring that are coming alongside are also creating many opportunities.

We are excited about the opportunities that are opening up in the region and the reforms we are putting in place to make it easier for businesses to access them. This plays into the longer term story in the region which we think is very exciting, as governments progressively move towards empowering the private sector as the driver for economic growth and moving away from a state-led development model.

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How has the non-oil sector performed thus far? Which segments are the main driver of the Bahraini economy?

Bahrain’s economic growth was driven by robust performance across the non-oil private sector. The first three months of 2017 saw strong growth in the hotels and restaurants sector, growing by 12.3 per cent. The financial services sector continued along its strong growth with an expansion of 8.3 per cent, and the transportation and communications sector also performed strongly, with an annual real growth rate of 8.2 per cent.

Bahrain has the region’s most diversified economy, with the oil sector now accounting for less than 20 per cent of real GDP. The financial services sector is the second largest, contributing 16 per cent to GDP, while Bahrain’s manufacturing sector contributes 15 per cent of real GDP. There are seven further different nonoil sectors contributing five per cent or more to Bahrain’s economy.

In your opinion, what is Bahrain’s unrealised potential?

Our potential is tied to the region’s overall potential. As the region’s economy changes we believe that Bahrain has an excellent chance to capitalise on our strengths to help businesses access the opportunities that are created.

We believe Bahrain is particularly well placed to be a regional hub for fintech, for example, and we have established a strong supportive environment for technology-focused entrepreneurship.

We offer a sandbox for the testing and development of new technologies and products, with the possibility to expand regionally from Bahrain.

Just last month, Amazon Web Services (AWS) announced its plans to open an infrastructure region in the Middle East, which will be an enabler for technology and datadriven businesses across the GCC.

Growth in the nonoil sector of Bahrain’s economy expanded from

3.7% during 2016 to 4.4%

in the first three months of 2017 In light of the tough operating conditions both regionally and globally, do you expect heightened M&A activity in Bahrain?

It is possible that we will see more merger and acquisition (M&A) activity in the financial sector— though there are a number of factors driving that trend. For example, the Central Bank of Bahrain has long encouraged consolidation in certain areas of the financial sector—such as Islamic finance and insurance—with a view to helping the sector continue its development to the next stage.

In some areas, increased scale may enable institutions to have the scope for investments in the coming years that will enable businesses to access the opportunities being created in the region.

Going into 2018, what initiatives are in the pipeline for the Bahrain EDB? Bahrain recently introduced a series of regulatory reforms such as the introduction of a regulation on crowd funding and the issuance of investment limited partnership which will make it easier to start venture capital funds.

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Currently, we are working on several initiatives to boost further growth in Bahrain’s economy, such as looking at the possibility of introducing a fund of funds to support entrepreneurs in Bahrain.

We also recognise the importance of supporting entrepreneurs through mentorship where we have already seen the development of several accelerators and we are working to introduce further accelerators in the near future.

The regulatory sandbox will help entrepreneurs and fintech companies to reinvent the financial services sector, and Fintech Bay—a physical incubator that has been announced—will further boost the spreading of fintech products and services, and related growth in the financial sector.

What are your projections for the GCC next year?

Economic growth in the GCC and the move towards diversification of the region’s economies are creating exciting opportunities for international investors. The future of GCC growth will look different to the past as there are openings for the private sector as a result of diversification, economic reforms and a more prominent role to lead the economy.

We are confident in the outlook for Bahrain for the second half of this year and next year. We expect the non-oil sector in Bahrain to continue to grow just over three per cent in 2017 and around four per cent in 2018. We are also confident that the recent regulatory reforms such as the launch of the fintech regulatory sandbox and the progress in the development of the $32 billion infrastructure projects will support further growth and increase Bahrain’s attraction as a destination for investors.

www.bankerme.com

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technology

The test phase-out Yogeshwar Shivshankar, Associate Vice President— Consulting Group at Maveric Systems talks about how software development is phasing out of the test phase Maveric Systems suggests that organisations who have, in reality, tasted significant success are those who have adopted a ‘phasing-in’ approach to quality assurance (QA) as a whole. (BEST-BACKGROUNDS/SHUTTERSTOCK)

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he consistent thrust in organisations to move into agile practises, DevOps and continuous delivery methods raises a fundamental question on the very existence of the test phase as a discrete entity.

Many have misinterpreted velocity and agility as tantamount to lesser and quicker testing, and there have been quite a few organisations who have already burnt their fingers approaching velocity at the expense of this approach to testing.

Organisations who have, in reality, tasted significant success are those who have adopted a ‘phasing-in’

approach to quality assurance (QA) as a whole. What that essentially means is, how QA as a process is embedding itself into the left side of the software development life cycle (SDLC), be it requirements or development, and in many cases, even becoming a tangible part of earlier phases.

A BRIEF HISTORY OF TIME Traditionally in the early 2000s, in the waterfall model, QA was always seen as a subsequent phase to development, often referred to playfully, as the dishwashing stage of the SDLC. By 2005-2010, while QA still sat to the right of development, testing itself

was seen as the singular method of quality for a release, and very often, organisations relied on this phase to sort out every single gap or error that existed in its previous stages.

This gave rise to the independent testing organisations that specialised in validating products post their development from both a technical and a functional perspective.

Post 2010, there was a growing voice on how QA could not start at the completion of product development, and how assurance needed to shift-left in the SDLC. This gave rise to many discrete service lines, catering to

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requirements validation, unit and code level development validation, and subsequently validation of the product in the testing phase. Release and maintenance, continued to stay independent of any of these phases and was treated as a function of IT Ops alone.

BLURRING THE LINES BETWEEN DEVELOPMENT AND QA In the recent past, more significantly in the last couple of years with the advent of agile and DevOps practises, many of the rigid lines between the SDLC phases have been blurring, with many discrete QA functions starting to merge within the lifecycle phases themselves.

However, there is one such blurring of lines that is significantly producing results in both quality and velocity, and this is the integration of the development and QA phases in the SDLC. Dev-QA integration is fast becoming the inevitable by-product of continuous delivery in most organisations that are bi-modal in their infrastructure, meaning, they have both legacy (mainframe and client server) infrastructure integrating with the new digital organisations.

Inconsistent velocity and methods between legacy and digital releases, seems to be the singular problem in most organisations and the need to address this growing issue has resulted in innovative methods of integration of the QA phases early in the development cycles, and more recently, before development has even started.

A couple of the significant changes to synchronise this disproportion through Dev-QA integration are highlighted below: The new role of the tester in development: as QA is being integrated with development, the immediate

questions are what and how is this being achieved. One of the first steps in this process is the integration of the tester into development to perform QA functions that are normally not carried out during the phase.

Typically, the development phase endures a set of unit level tests that are carried out by the developer himself, usually only at a code level with a very small data set, before passing the code onto test.

However, with the embedded tester in the development phase, who recently is being coined as a Software Development Engineer in Test (SDET), there is a broad basing of many other elements of QA that are now being integrated and validated at the development stage itself. These include: Unit and service level automated functional tests which will subsequently integrate with the entire solution during system integration testing (SIT) and user acceptance testing (UAT) Stubs and early service virtualisation around the application-in-dev Methods for more comprehensive synthetic data generation through services/backend automation

If there is to be a discrete QA phase left in the near future, it would be only for user acceptance and exploratory tests and operational acceptance. – Yogeshwar Shivshankar –

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Early performance scripting and metrics definition and benchmarking Definition of testing toolsets/ environments early in the lifecycle Structured definition approaches to development While user stories, epics and features, brought structure to requirements definition, the advent of behaviour and test-driven definitions have resulted in extremely structured and unambiguous expectations at the development stage.

With behaviour-driven development (BDD) and test-driven development (TDD), developers have started to inherit structured and automatable test script definitions for application development. This, inherently, boxes their code to testable definitions even before the start of actual development.

This has in turn, resulted in 100 per cent traceability for development, as well as, early defect detection at even a requirement-toimplementation stage.

IN CONCLUSION While a couple of significant changes were highlighted, the entire DevQA integration and the blurring of lines is fast becoming inevitable, the surface is just being scratched at this point. Many more integration elements will fast become de-facto, and with robotic process automation (RPA) and artificial intelligence (AI) looming in the horizon, we can expect the integration to become far more intuitive and automated as well.

If there is to be a discrete QA phase left in the near future, it would be only for user acceptance and exploratory tests and operational acceptance, to satisfy the business and the IT Ops organisation that the product is fit for purpose, both from the business side and the infrastructure side.

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technology

Reaching new frontiers Banker Middle East takes a closer look at Emirates NBD’s new CRM system and the potential advancements in customer relationship management

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mirates NBD (ENBD) began its digital transformation programme in 2012. Customer relationship management (CRM) and mobile banking were the first initiatives that the bank started off with at that time because these were thought to be the two main drivers to succeed in their digital transformation agenda. ENBD wanted something to empower the customers and this is was why it invested in a strong mobile banking proposition since the beginning.

Emirates NBD’s head office in Deira, Dubai.

THE JOURNEY The bank invested heavily in its CRM foundation and replaced the old legacy CRM with a new system (all carried out in 2012). ENBD’s vision at that point in time was wanting the digital and physical experience to be seamless. Thus it was not just about developing cool apps for customers but also to empower bank staff with the right kind of tools, platforms and technology to serve customers in an effective way. cont. on page 58

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cont. from page 56

The bigger vision for this was to create a digital banking powerhouse in the region and the globally—this was the main goal of the bank’s digital transformation programme.

Every market is different, and this market in particular was very different five years ago. Now digital is becoming mainstream and the government is pushing the digital agenda in a big way. There are things that are happening now that weren’t there five years ago. Therefore, the bank had to do trail our own path in terms of digital transformation. ENBD had to do things on their own, to design the strategy and the programme to address many issues at this point of time.

During this period, the bank continued to improve and leverage on initiatives that were launched by the government.

ENBD’S NEW CRM SYSTEM The bank recently implemented the Oracle Siebel CRM Technology.

ENBD believed it to be one of the most powerful CRM systems around the world when it decided to implement Siebel back in 2012 with an aim of empowering its frontline staff with the latest technology. This followed with the development of two main approaches for its CRM. First, for the sales and marketing space, the bank automated a lot of its processes in terms of campaign management automation. The bank’s campaigns were launched through Siebel and customer responses were captured on this platform as well.

Therefore, every time a campaign was launched, the bank managed to learn new things about what customers want.

If this process is done repetitively, the system finally learns through customer feedback and responses about what customers want and what they do not.

ENBD has used CRM to automate most of these processes when it comes to campaign management.

The second aspect is on service and sales automation. ENBD has progressed significantly automating all processes in the bank. Today, two thirds of its processes are fully automated and fully straight through processing (STP)—which means that they are instant. There is no back office supporting these processes. For example, if one needs to update any personal details or apply for a credit card, what usually happens is, the front office at branches will capture this request and send it through to the back office and someone in the back office will process the transaction.

But now, in these cases, the bank has automated the process end-to-end. So there is no human intervention except for the ones at the front end as the CRM system enables you to automate almost 95 per cent of your processes.

ENBD has been investing in this technology every year to automate its processes. This is why when a customer visits the bank now, he or she can apply for a loan with just their Emirates ID and receive the disbursement within six hours. This is the power that this CRM brings—it transforms banking to become instantaneous.

TOWARDS A SMART FUTURE ENBD has developed a CRM cockpit application which contains all relevant information about a customer.

This application is provided to all relationship managers whether at the branches, the call centre or when they visit a customer, they are equipped (via iPads, etc) with a 360 view of the customer—from information about the customer profile to any complaints he or she has lodged to the bank.

This application has three key aspects: it is smart as it has data driven insights; it is instant; and it is paperless.

To achieve the status of paperless transactions, ENBD used a combination of CRM and digital forms.

This is why when a customer goes to a branch or meets one of the bank’s sales force personnel, they will have tablets where the customer signs on to, or when you visit the branch, a special tablet that captures biometric signatures is provided to authenticate the transaction.

There are six parameters that this special tablet captures to authenticate the customer. The biometric signature is unique as it captures the way a customer writes via six parameters including the pressure being put on the tablet, the speed of writing as well as the inclination of the pen. This tablet is provided in all ENBD branches.

The bank is currently adding new transaction to this biometric capability.

THE WAY FORWARD CRM is evolving. The next frontier is going to be about automating customer interactions through artificial intelligence. AI is a new technology that will allow many industries to automate day-to-day interactions with their customers.

For example, ENBD already has something like this—the bank has Eva—a virtual assistant. Eva is the first step into the AI space. The next frontier for CRM could be the integration of AI and CRM to offer the customer an even better experience.

These experiences should be: 1) contextual (tailoring to the customer’s preferences/situation); 2) real time (conducting transactions/providing advice almost immediately); 3) and proactive instead of reactive (the bank offering customers what they possibly need before a customer request them).

AI can automate a lot of these interactions and can play a role in running the algorithms to trigger these interactions. With the three aspects of an advanced experience mentioned above, AI can play a role in executing these transactions.

www.bankerme.com

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Bank with knowledge,

bank with al khaliji

As a leading Qatari bank, we offer our clients long lasting relationships, dynamic partnerships and award winning services.

Additionally, through our subsidiary Al Khaliji France, we are closer and more accessible than ever.

With total assets standing at QAR 58 billion as of 30th September 2017, Capital Adequacy Ratio of 16.4% according to Basel III, coupled with strength and resilience, al khaliji has ‘A’ Rating in the banking sector from Fitch and a credit rating of A3 by Moody’s.

We pride ourselves in our relationships with our customers as we recognize their role in the growth of the State of Qatar – when they grow, the nation grows.

After all, next generation banking is our vision.

For more information, call +974 4494 0000 or visit www.alkhaliji.com

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