#206 May 2018

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MAY 2018 | ISSUE 206 MIDDLE EAST

MAY 2018 | ISSUE 206

THE SAUDI INFLUENCE SAMER ABU AKER, Acting CEO of SEDCO Capital

EMBRACING THE NEW NORMAL Middle Eastern markets are adjusting well to current realities

RIPE FOR THE PICKING

Global macroeconomic climate bodes well for investment

THE HOLISTIC APPROACH Tackling the changing trend in private banking

A CPI Financial Publication

THE SAUDI INFLUENCE SAMER ABU AKER, Acting CEO of SEDCO Capital

Dubai Technology and Media Free Zone Authority




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5/27/18 7:02 PM


EDITOR’S NOTE

D

espite the tumultuous geopolitical backdrop, sentiments have begun to improve across the region. Perhaps buoyed by the slight improvement in oil prices since the beginning of the year, news headlines have signalled positive developments. Granted, setbacks such as the delay of VAT in Kuwait and Saudi Aramco’s IPO still exist, nevertheless reform and transformation agendas across key economies are well underway. Constructive legislative amendments, such as the allowance of 100 per cent foreign ownership of companies, 10-year residency visas for investors in the UAE, the double taxation agreement between Saudi Arabia and the UAE, and the law allowing women to drive in Saudi Arabia, are all signs of progress and bode well for foreign investment. Additionally, several other indications that market activity is picking up include developments such as the merger between Alawwal Bank and Saudi British Bank, the potential merger between Oman Arab Bank and Alizz Islamic Bank, Virgin Mobile Middle East’s upcoming $30 billion Sukuk issuance, and the recent launch of a Tadawul-investing fund by Dalma Capital. Supporting these advancements, our May edition covers a plethora of issues including analysis on economic trends and deals across the region, a thorough discussion of Bahrain’s triumphs and woes, an insight into public and private equity in Saudi Arabia and the rest of MENA, ways to tackle private banking in the region, technology, and much more.

One thing that should be underlined is complacency—GCC governments and industry players should not be complacent in carrying out prudent reorganisation initiatives. Yes, oil prices have slightly recovered this year, but this should not be taken as an indication of long-term economic improvement and allow delays in planned reforms. Governments, government-related entities, financial institutions and family offices, should remain steadfast in their respective efforts to ensure a sustainable future for the businesses. With that in mind, have a productive read; I hope it has been a blessed Ramadhan and wishing you Eid Mubarak in advance.

Nabilah Annuar EDITOR, BANKER MIDDLE EAST

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CONTENTS

MAY 2018 | ISSUE 206

32

76

RETAIL BANKING 62 Retail banking automation: delivering superior customer experience

ISLAMIC FINANCE 68 Consolidation key to unlocking the potential in Takaful

47

COUNTRY FOCUS 40 Bahrain means business 47 Bright prospects

INVESTMENTS 52 Ripe for the picking

EQUITY MARKET 58 MENA equities finally come of age

NEWS 12 Embracing the new normal 16 News Highlights

THE MARKETS 20 More to be done 24 Driving change

LEGAL PERSPECTIVE 28 Strength in soft infrastructure

COVER INTERVIEW 32 The Saudi influence

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OFFSHORE CENTRES 72 Demystifying the world of offshore finance

TECHNOLOGY 76 Five tech trends dominating financial services


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CONTENTS

MAY 2018 | ISSUE 206

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THE SAUDI INFLUENCE SAMER ABU AKER, Acting CEO of SEDCO Capital

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EMBRACING THE NEW NORMAL Middle Eastern markets are adjusting well to current realities

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RIPE FOR THE PICKING

Global macroeconomic climate bodes well for investment

THE HOLISTIC APPROACH Tackling the changing trend in private banking

A CPI Financial Publication

80

THE SAUDI INFLUENCE SAMER ABU AKER, Acting CEO of SEDCO Capital

Dubai Technology and Media Free Zone Authority

APRIL 2018 | ISSUE 205 MIDDLE EAST

APRIL 2018 | ISSUE 205

THE KINGDOM’S FIRST SOREN KRING NIKOLAJSEN, Managing Director, Alawwal Bank

DARKEST BEFORE DAWN?

For many years, Iraqi citizens have felt that the only way is up—and analysts are finally starting to agree

MAINTAINING BALANCE

Where can asset allocators find ballast when both volatility and correlations are rising?

LIMITLESS POTENTIAL

AI is the key to the future of banks and to banks of the future

A CPI Financial Publication

SOREN KRING NIKOLAJSEN, Managing Director, Alawwal Bank

Dubai Technology and Media Free Zone Authority

HR & OFFICE MANAGER RIZZA INFANTE rizza@cpifinancial.net Tel: +971 4 391 4682

MIDDLE EAST

MARCH 2018 | ISSUE 204

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THE KINGDOM’S FIRST

FINANCE & DATA EXECUTIVE KHALED TAHA khaled.taha@cpifinancial.net Tel: +971 4 433 5322 ADMINISTRATION & SUBSCRIPTIONS CAROL BASA carol@cpifinancial.net Tel: +971 4 391 3709

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TOKENOMICS: MEET THE NEW FACE OF VALUE INNOVATION REZA DARI, CEO, Global Investment Bank

enquiries@cpifinancial.net OMAN: NEW BEGINNINGS

The world’s oldest independent Arab state must adapt to a new world

RIDING THE WAVE

The private equity and venture capital landscape is largely dependent on diversification agendas and international events across the region

GREEN DEVELOPMENTS IN ISLAMIC FINANCE

The global increase in environmental awareness has led to a rise in appetite for green bonds and Sukuk

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TOKENOMICS: MEET THE NEW FACE OF VALUE INNOVATION REZA DARI, CEO, Global Investment Bank Dubai Technology and Media Free Zone Authority

PUBLISHED BY CPI FINANCIAL FZ LLC REGISTERED AT DUBAI MEDIA CITY, DUBAI, U.A.E.

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ANALYSIS

EMBRACING THE NEW NORMAL Middle East markets are adjusting well to the new realities of oil prices, local investment valuations, and international sentiments

D

eal volumes across the region have decreased over the last couple of years. However, as economies begin to embrace the new normal, positive signs of a pick up in activity are evident and this is a momentum that is expected to continue this year and going into 2019. An impetus that is largely driven by government initiatives, investor challenges such as organic growth and a mismatch in valuation remain, suggests a recent report by PwC. Commenting on the trend, Ovais Chhotani, Transaction Services Director at PwC Middle East said, “We are currently seeing an interesting shift taking place in the regional M&A landscape with newer sectors emerging focused on technology and digitisation, corporates pursuing M&A more aggressively to drive growth and the ongoing privatisation agenda of regional governments opening up interesting new opportunities for both regional and international investors.”

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KEY MARKETS It is an undeniable fact that Saudi Arabia is undergoing bold reforms. Vision 2030 has created excitement and big expectations in the region. The agenda involves an overhaul and diversification of its economy to create an investor-friendly climate for privatisation, including a listing for Saudi Aramco. On the legislative side, Saudi has witnessed the introduction of new bankruptcy regulations and impending updates in existing laws. Strengthining its capital markets 2017 also saw the launch of Nomu—a new market for small caps which triggered a record number of listings in the Kingdom last year. New rules allowing foreigners to trade shares directly is also aimed to deepen market liquidity in the years ahead. Opportunities are also opening up in the hospitality and leisure sectors as the Kingdom seeks to become a destination for religious tourism. As Vision 2030 advances with the modernisation of society, the government has granted women the right to drive (an estimated three million new

women drivers are expected to enter the market by 2020) which bode well for the insurance and automotive sector as well as leisure and retail. The UAE market on the other hand continues to be the principal destination of interest for investors and transactions. The M&A environment therein has remained resilient despite the relatively difficult economic climate with an estimate of 89 deals closed in 2017, including notable deals such as the merger between First Gulf Bank and the National Bank of Abu Dhabi, Amazon’s takeover of Souq.com, Engie’s $775 million investment in Tabreed and Abu Dhabi National Oil Company’s partnership with China National Petroleum Corporation. According to PwC, the UAE government’s digitisation agenda for 2021 is likely to create M&A opportunities across a range of sectors including financial services, transportation and logistics, and retail, among others, since existing players will seek to acquire these capabilities and integrate technology and innovation within their growth plans.


ACTIVITIES MIDDLE EAST CEOs ARE PLANNING IN THE NEXT 12 MONTHS IN ORDER TO DRIVE CORPORATE GROWTH OR PROFITABILITY As 2018 progresses an Activities Middle East CEOs are planning in the next 12 months

The most interesting development is the increasing stability of the Egyptian market. Investors are looking at Egypt with renewed interest now that currency issues have subsided. While deal activity in 2017 was at its lowest level in five years, Egypt’s favourable demographics, coupled with new, greenfield investments in energy and infrastructure, have heightened the country’s potential and appeal. High inflation and elections later this year, however, mean that deal flow is more likely to grow over the medium term rather than in 2018.

likely remain below th in 2013 – 15, but a com measures, return of GD of dry powder with cer is likely to lead to an in activity. The enabling will continue to impro including the regulato implemented and shou direct investment, par

21%% 21

37% 37 %

56 56%%

65 65%%

67%% 67

in order to drive corporate growth or profitability

BANK AND FINTECH PHENOMENON 2017 was a landmark year for M&A in the financial sector, with the $14.8 billion merger that created First Abu Dhabi Bank, the largest bank in the UAE and one of the largest in the region. In KSA, investment firm Kingdom Holding Company, acquired a $1.5 billion stake in Banque Saudi Fransi, while a group of MENA investors acquired a 20 per cent stake in Amman-based Arab Bank for $1.1 billion.

Organic Organic growth growth

Cost Cost reduction reduction

Strategic Strategic alliance or JV

M&A M&A

When we look at the g Middle East CEOs are takes the lead followed not surprising given th of the economy in KSA regional commodities; trading partner and re and labour to the Midd

Collaborative with with Collaborate entrepreneurs entrepreneurs of start-ups of start-ups

alliance or JV

Source: PwC Middle East CEO Survey 2018 – Adjusting to the new normal Source: PwC Middle East CEO Survey 2018 – Adjusting to the new normal

Secular shift in investment

SECULAR SHIFT IN INVESTMENT

Secular shift in investment 80

Number of deals completed 20 40 60

M&A includes technology

Greater interest ininterest digitising Greater interest Greater in digitising processesinin in digitising processes traditional sectors processes in traditional sectors

60

40

20

0

0

0

traditional sectors

Numberof of deals deals completed Number completed 20 40 60

80

Deals (completed) industry Deals (completed) by by keykey industry Up-and-coming new sector for 80 Deals (completed) by key industry Up-and-coming new M&A includes Up-and-coming sector for M&A includes new sector for technology technology

Industrial && Industrial

Financial Financial

Ecommerce && 'Ecommerce

Retail and Retail and

Industrialmanufacturing & Financial services 'Ecommerce & Retail and Real Estate & technological products consumer Manufacturing Services technological products Constuction consumer Manufacturing Services technological products consumer

FY13

FY13 FY13

FY14

FY14 FY14

FY15

FY15 FY15

FY16

Real estate Energy & Real Estate && Energy & Energy & Healthcare construction mining Constuction mining mining and education FY16 FY17 FY16

Healthcare Healthcare and education education and

FY17 FY17

Every retailer is Everyretailer retailer is Every is considering (Deal total: 184) (Deal total: 243)243) (Deal total: 171) (Deal total: 163)163) (Deal184) total: 184)(Deal (Deal total: 184) total: (Deal total: 229) (Deal total: (Deal total: 171)163) (Deal total: 229) (Deal total: 243) (Deal total: 171) (Deal total: its online strategy considering its (Deal total: considering its online strategy Thomson Capital IQ andCapital PwC Middle East analysis online strategySource: Merger Source:Market, Merger Market,Reuters, Thomson Reuters, IQ and PwC Middle East analysis – almost The secular shift towards new Souq.com inevery 2017player – almost every player The investment secular investment shift towards newof Souq.com inof2017

considering online strategy the strategy and the sectors evident in evident 2017 andinis2017 likelyandisis Source: Merger Market, Thomsoneconomic Reuters,economic Capital IQ was and PwC Middle East analysis considering their and online sectors was likely istheir

to continue in the years ahead. Old stalwarts, such distribution logistics that go with it. to continue in the years ahead. Old stalwarts, such distribution logistics that go with it. as retail, real estate, construction and energy have as retail, real estate, construction and energy have Deals in sectors such as technology however have seen a decline in deals completed. Interestingly, Deals in sectors such technology however have seenhave a decline deals completed. Interestingly, bankerme.net tended to be of a smaller size and the as number where deals taken in place in traditional sectors tended to region be of amay smaller sizeto and the number where have takenthese place in traditional sectors of assets available in the continue (e.g. energy anddeals infrastructure), have been of assets available in the region (e.g. energy and infrastructure), beena challenge. present Overseas opportunities may may continue to of a larger size – the appetite is there but we these have be a good waypresent of bringing in technology that has expect investors to continue be more selective a challenge. Overseas opportunities may of a larger size – thetoappetite is there but we been tested orbe developed in other markets. in technology that has in theseexpect sectors.investors to continue to be more selective a good way of bringing

in these sectors.

been tested or developed in other markets.

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Investors are looking at Egypt with renewed interest

ANALYSIS

DEALS (COMPLETED) BY KEY GEOGRAPHY

of a majority stake in The Entertainer is a good example of how investors in the region are exploring newer sectors. Meanwhile, education and healthcare, continue to provide opportunities for longterm investors, particularly in KSA, as the market remains largely untapped.

Deals (completed) by key geography

00

FY13 FY13

96 51

58

64

49

44

71

89

UAE UAE

35

44

20 20

51

63

89

83

86

40 40

39

60 60

79

80 80

82

100 100

96

110

120 120

KSA FY14 FY14

Egypt Egypt FY15 FY15

Others* Others* FY16 FY16

FY17 FY17

Source: Mergermarket, Thomson Reuters and PwC Middle East analysis *Others include – Bahrain, Oman, Jordan, Lebanon and Kuwait

5

Source: Mergermarket, Thomson Reuters and PwC Middle East analysis *Others include – Bahrain, Oman, Jordan, Lebanon and Kuwait

This year we have recently seen the merger of Saudi British Bank (SABB) and Alawwal Bank coming together to create KSA’s third-biggest lender in a reported $5 billion deal. PwC suggests that the region will likely see further consolidation opportunities in the next few years across various financial services subsectors, but perhaps not in the magnitude of 2017’s deals. Given the number of players in each of the financial services subsectors, consolidation opportunities will continue to be a feature in the region. The financial services sector also bear opportunities for private equity investment and M&A, particularly in the digitisation of banking processes such as payments processing, in technology-enabled regulation and compliance functions, and in asset management, reports PwC. The consultancy firm also believes that regional telcos will be acquisitive in data heavy, customer-centric fin-tech opportunities. A CHANGE IN APPETITE There is a notable investment shift towards new economic sectors in 2017, and PwC sees this trend continuing in the years ahead.

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Traditional favourites such as retail, real estate, construction and energy have seen a decline in deals completed. Interestingly, where deals have taken place in these sectors, these have been of a larger size— investor appetite still exist, but it is more selective in nature. Up-and-coming sectors for M&A include newer ones, such as technology, and not-sonew ones, such as industrial manufacturing, where opportunities, perhaps overlooked in the past, are being re-evaluated. There is a strong interest in companies with expertise in the digitisation of business processes, from banking and telecommunications to automotive and retail, where—following Amazon’s acquisition of Souq.com—almost every player is considering their online strategy and the distribution logistics that go with it. Deals in sectors such as technology however have tended to be of a smaller size and the number of assets available in the region may continue to present a challenge. Overseas opportunities may be a good way of bringing in technology that has been tested or developed in other markets. Gulf Finance House’s acquisition

PROJECTIONS According to PwC’s Middle East 2018 CEO survey, more than half of those surveyed are considering a strategic alliance or joint venture in order to drive corporate growth and profitability as organic growth proves more challenging. Organisations that are exploring this, are urged to have a clear understanding of how the potential partners fit with their long term strategic objectives and the value they are looking to achieve through any acquisition or alliance. “Investors and companies should be looking at deals with a real ‘value creation’ lens and take a more holistic view of how value can be created across the business. This can include factors other than cost management such as capital optimisation, use of technology and innovation. Organisations looking to divest need to start early and carefully plan to ensure that the business is well prepared for the demands of an exit process, the growth story can be properly articulated and any potential deal breakers are identified and addressed early on in the process,” explained, Romil Radia, Deals Market Leader and Regional Valuations Leader at PwC Middle East. Although an immediate increase in deal volumes is not expected, activity will likely pick up towards the end of 2018 as governments progress with their privatisation agendas, particularly in energy and infrastructure. Between late 2018 and early 2019, deal flow should improve as restrictions on foreign ownership are eased further, and regional governments advance with their transformation agendas. Across the region the regulatory framework for M&A is expected to be more supportive and should therefore contribute to an improvement in deal activity.



NEWS HIGHLIGHTS

Turkish lira reaches new lows, losing over 15 per cent against the US dollar Rising treasury yields and a stronger US dollar have caused most emerging market currencies to lose ground in Q2 2018, especially those of countries with external vulnerability such as Turkey. The Turkish lira (TRY) has repeatedly reached new lows in the recent weeks, having accumulated a loss of more than 15 per cent against the US dollar year-to-date. The Turkish lira has been suffering even more on the back of growing concerns over an overheating economy, too high inflation and the independence of its central bank. While the Turkish economy is already overheating, a new fiscal stimulus was announced at the end of April, ahead of the early presidential and parliamentary elections on 24 June. Moreover, yearly inflation has reached 10.85 per cent in April, more than twice the Central Bank of the Republic of Turkey’s (CBRT) target. The CBRT hiked its rate more than expected last month, and this temporarily supported the lira. It did not last on the back of growing concerns on the CBRT’s ability to curb inflation, said Annabelle Rey, Economist at Julius Baer.

SABB and Alawwal Bank proceeds with merger Saudi British Bank (SABB) and Alawwal Bank have agreed to a merger that would create Saudi Arabia’s third-largest bank with approximately SAR 271 billion ($72 billion) in total assets and a market share of 12 to 13 per cent in terms of assets, loans and deposits as of March 2018, according to Moody’s. HSBC is expected to be the largest shareholder of the combined entity, with 29 per cent of the share capital down from 40 per cent in SABB. The consortium, led by The Royal Bank of Scotland Group, Alawwal’s largest shareholder with a 40 per cent stake, would own 11 per cent in the combined entity. Saudi Arabia’s Olayan Group and the Saudi government, two large common shareholders in SABB and Alawwal, would retain ownership of around 18 per cent and 10 per cent, respectively. The boards of the two banks have reached a non-binding agreement on the share exchange ratio, subject to several conditions, according to statements to the Saudi Arabian bourse. On this preliminary agreement, Alawwal shareholders would receive 0.485 SABB shares for each Alawwal share. The banks said that the completion of confirmatory due diligence, finalisation of the merger deal and agreement on a number of other commercial issues are yet to be agreed upon. Both banks have also said that layoffs as a result of the merger are unlikely. This the first major banking tie-up in the Kingdom for around 20 years. The banks first started discussing the merger in April last year.

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Emirates NBD agrees to acquire Denizbank for $3.2 billion Emirates NBD has finalised an agreement to purchase Denizbank from Sberbank of Russia for $3.2 billion. Sberbank has agreed to sell its entire 99.85 per cent stake in the bank, ceasing to be a shareholder in Denizbank upon completion of the transaction. “The decision to sell Denizbank is prompted by a change in Sberbank Group’s international strategy and will allow us to focus further on development of ecosystem of Sberbank,” said Herman Gref, CEO of Sberbank. Denizbank, which is headquartered in Turkey, is the fifth largest bank in the country with assets of TRY 169.5 billion and presence in 43 in territories including Austria, Germany, Bahrain, Moscow, and Cyprus. The bank serves nearly 12 million customers, has 14,000 employees. Shayne Nelson, Group CEO, Emirates NBD said that the transaction is expected to be accretive to shareholders in the first year. Hesham Abdulla Al Qassim, Vice Chairman and Managing Director, Emirates NBD added that the move will help establish the bank in Turkey, cementing its place in the region.


Bahrain distressed bonds targeted by US hedge fund Greylock Capital Management, a hedge fund that holds the distressed bonds of Mozambique and Venezuela, has said that Bahrain is its next potential target. Speaking to a local daily, Hans Humes, the CEO of the New York-based hedge fund said that this comes as the cash-strapped Gulf nation has been slow to implement reforms compared with its richer neighbours following the slump in oil prices in 2014. The Bahrain central bank’s foreign assets dropped to their lowest levels in seven months last March, with the International monetary Fund (IMF) forecasting the Kingdom’s debt to exceed 100 per cent of its economic output in 2019. Bahrain’s net foreign assets have been estimated to last up to three years and this has sparked concerns over whether it will be able to maintain its currency peg to the dollar. However, last week Central Bank Governor Rasheed Al-Maraj said that the country has enough foreign reserves to maintain the currency’s peg, as a recovery in oil prices help ease pressure on its public finances.

UAE to allow 100 per cent foreign ownership of businesses by year-end UAE passes legislation on commercial arbitration following an 11-year wait HH Sheikh Khalifa bin Zayed Al Nahyan, President of the UAE, recently issued Federal Law No. 6 of 2018 on Arbitration in Commercial Disputes, which repeals and replaces the law which has governed arbitration in the UAE since 1992. Thought to be imminent since the UAE acceded to the 1958 New York Convention in 2006, the new arbitration law is based on the internationally accepted UNCITRAL Model Law, which has been adopted in 111 jurisdictions across 80 states which are commonly perceived to be arbitrationfriendly jurisdictions. This new law will have a positive impact on both domestic and foreign businesses, while encouraging even more foreign direct investment into the UAE. Businesses already operating in the region will benefit from further reassurance should any disputes arise, as the new law provides greater certainty of outcome, within a recognised international framework for conflict resolution. The new law will come into effect one month after it is published in the Official Gazette, which is expected to materialise shortly.

The UAE cabinet has approved steps allowing foreigners 100 per cent ownership of UAE-based businesses by yearend. In a statement on social media, the office of Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates, and Ruler of the Emirate of Dubai said, “At today’s Cabinet meeting, we decided to allow 100 per cent foreign ownership of companies in UAE, with a 10-year visa for investors, scientists, doctors, engineers, entrepreneurs and innovators. The UAE has always welcomed, and always will, innovators and business leaders. This decision will be enforced by third quarter this year. Our open society, tolerant values, excellent infrastructure and flexible legislation offer the best environment for international investment and exceptional talent.” Currently foreigners can exercise 100 per cent ownership of businesses in designated free zones, though they require a local partner for onshore businesses and can only hold up to 49 per cent stake. The announcement has been generally well-received thus far, though questions have been raised regarding the costs for setting up these fully-owned businesses as well as fees for their renewal.

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NEWS HIGHLIGHTS

Lower interest and credit costs bode well for Saudi banks Following Riyad Bank’s submission of its preliminary firstquarter 2018 financial results, Moody’s have indicated that the results are credit positive for Saudi banks as the improvement occurred amid subdued economic activity that negatively affected credit demand (lending contracted by one per cent year-on-year as of March 2018) and bank revenues. Saudi banks’ interest expenses declined 12.5 per cent year on year and two per cent quarter on quarter, reflecting improving funding conditions in Saudi Arabia after significant tightening in 2016, when falling oil prices and large sovereign debt domestic issuance reduced funding available to Saudi banks and negatively affected their funding costs. Saudi Arabia’s improving liquidity and funding conditions since 2017 have narrowed the Saudi Arabian Interbank Offered Rate’s (SAIBOR) spread against US dollar-denominated London Interbank Offered Rate, even reaching negative spreads in March 2018, despite several rate hikes by the US Federal Reserve. Since April 2018, the SAIBOR rose to around 2.4 per cent, its highest level since 2009, following a decision by the Saudi Arabian Monetary Authority, the central bank, to increase its repo rate in response to a decline of Saudi money rates below US rates. However, Moody’s does not expect that this increase will create immediate upward pressure on interest expenses, given limited credit growth and Saudi banks’ favourable funding profile—banks have an average net-loans-to-deposits ratio of 83 per cent and more than 60 per cent of their liabilities were in non- interest-bearing deposits as of March 2018.

Dana Gas comes to agreement with its Sukukholders Dana Gas, the Sharjah-based natural gas company, in a bourse filing has announced that it came to an agreement with it Sukukholders, represented by an ad-hoc committee, on terms and conditions to restructure and refinance its Mudarabah Sukuk valued at $700 million. According to Dana Gas, the group of Sukukholders represent more than 52 per cent of the aggregate amount of the existing exchangeable certificates, as well as more than 30 per cent of existing ordinary certificates. The agreement between the Sukukholders is binding, and the members of the committee who are involved in litigation have moved to terminate all pending litigation and release the claims therein. The company also noted that the transaction is consensual, amicable, and covers all the current issues between the parties. The transaction should be completed in the first half of July 2018.

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Dutch ABN Amro to close Dubai office The Dutch bank ABN Amro is winding down its operations in Dubai owing to limited scale and will transfer some of its existing clients in international commodities business to Amsterdam, according to a brief statement in the bank’s first quarter report. ABN Amro reportedly plans to close down their Dubai office over the course of this year, pending regulatory approval; the amount of business for the bank in Dubai did not justify the overheads of having a branch in the emirate.

Jordanian cabinet finalises income tax bill The Jordanian cabinet has endorsed the income tax draft law and will refer it to the Lower House to get it through constitutional channels towards enactment. The Government reasserted that it was earnestly carrying on with economic reforms according to schedule, announcing the development on the eve of an expected visit by the International Monetary Fund (IMF) to review progress made under an economic correction plan. The proposed law is expected to be debated by the House after Ramadan during an extraordinary session, pending a decree by the King. The Government has already made adjustments to the sales tax and subsidy system—an unpopular move as officials have stressed that it is vital to salvage an economy that has been struggling amid regional instability, a huge refugee influx and dwindling international support. As quoted in the Jordan Times, Finance Minister Omar Malhas said that the bill mainly focuses on three aspects: improving tax collection, curbing tax evasion and boosting tax revenues, which are expected to increase by JOD 300 million annually. The bill subjects capital profits to 15 per cent tax for every sector. The draft law also exempts venture capital funds (as defined under the Companies Law) from taxes so as to encourage the establishment of such funds to contribute to rescuing stumbling businesses. Amendments to the law make the Jordan Integrity and Anti-Corruption Commission as one of the institutions that can look at data gathered by the tax investigation unit created under the bill. The bill also distinguishes between intentional tax evasion and unintentional mistakes, stipulating that only the judiciary can indict suspects of tax evasion. It re-labels tax evasion from a misdemeanour to a felony with harshened penalties of imprisonment and financial fines.


Goldman Sachs plans multibillion-dollar deal to fuel Saudi growth Goldman Sachs Group Inc. has approached a Saudi stateowned entity about a multibillion-dollar deal. As the US lender prepares to use its own money in the Kingdom for the first time, Wassim Younan, the bank’s CEO for the Middle East and North Africa said, “We’re very keen on deploying our principal capital in the region in both forms: credit and equity capital. We continue to prospect for opportunities to do so, and we’ve put forward at least one meaningful, multibillion-dollar proposal to a state-owned enterprise.” Younan declined to name the company or to give more details about the type of deal the bank is looking at, though Goldman has traditionally advised companies and governments on takeovers and fundraising efforts in the region and is looking for opportunities in the Kingdom to invest the firm’s own capital alongside its clients, According to Bloomberg. Goldman has taken a number of important steps to build its presence in the Kingdom, which included acquiring a stock-trading licence, becoming involved in deals which included the Kingdom’s dollar bond sale, and increasing its headcount, all of which have ensured the company is wellpositioned to take advantage as the nation diversifies its economy away from oil and opens up to foreign investment.

KFH sets up $3 billion Sukuk programme Kuwait Finance House (KFH) has established its largest foray into the Sukuk market with a $3 billion programme. KFH will issue the certificates via a special purpose vehicle incorporated in the Dubai International Financial Centre (DIFC), according to Reuters. The Sukuk prospectus has been assigned a provisional (P)A1 senior unsecured long-term rating by Moody’s. The programme allows for issuance in multiple currencies, including China’s renminbi, and uses a hybrid structure that combines Shari’ah-compliant contracts known as Wakalah and Murabahah. The transaction is to be arranged by KFH Capital Investment Company and Standard Chartered Bank, although neither the date nor initial size for an issuance was specified.

Japan’s SoftBank to open Saudi Arabian office SoftBank has announced plans to open a Saudi Arabian office. The expansion will further strengthen the Japanese technology investor’s ties with the Kingdom, though it already has close links with Riyadh after Saudi Arabia’s Public Investment Fund contributed to SoftBank’s $93 billion Vision Fund, the world’s largest private equity fund. SoftBank and PIF, Saudi Arabia’s sovereign wealth fund, are also in early talks with banks about potential funding for the world’s biggest solar power project, which is being built in the kingdom, reported Reuters.

MENA ISSUERS CREDIT RATING UPDATE AS OF 1 MAY 2018 Issuer

Foreign Currency Rating

Last CreditWatch/Outlook Update

1 Bahrain

B+/Stable/B

1-Dec-2017

2 Central Bank of Bahrain

B+/Stable/B

2-Dec-2017

3 Egypt

B-/Positive/B

10-Nov-2017

4 Iraq

B-/Stable/B

03-Sep-2015

5 Jordan

B+/Stable/B

20-Oct-17

6 Kuwait

AA/Stable/A-1+

20-Jul-2011

7 Lebanon

B-/Stable/B

2-Sep-16

8 Morocco

BBB-/Stable/A-3

16-May-2014

9 Oman

BB/Stable/B

11-Oct-2017

10 Qatar

AA-/Negative/A-1+

25-Aug-2017

11 Saudi Arabia

A-/Stable/A-2

17-Feb-2016

12 Abu Dhabi

AA/Stable/A-1+

02-Jul-2007

13 Ras Al Khaimah

A/Stable/A-1

31-Oct-2014

14 Sharjah

BBB+/Stable/A-2

27-Jan-2017

Copyright © 2017 S&P Global Ratings. All rights reserved.

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THE MARKETS

MORE TO BE DONE

Speaking exclusively to Banker Middle East, Seltem Iyigun, Economist for Middle East & Turkey at Coface, provides an overview of where GCC sovereigns stand economically

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PHOTO CREDIT: Shutterstock/capitanoproductions

The UAE services sector is expected to grow at

5%

in 2018

Contributing to the GDP as it accounts for around

50%

of the country’s GDP.

Source: Coface

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ow do you view the economic growth of the GCC region over the last 18 months? Helped by the recovery in oil prices and political stability across the region, the GCC show signs of a better growth dynamics. But there are some differences amongst the countries. Those having a higher degree of economic diversification such as the UAE enjoy more this recovery in oil prices as their economies are already supported by the strengthening of the non-oil sector. On the other hand, Saudi Arabia, the biggest economy of the region is expected to get out of the economic recession it had in 2017 because of lower energy prices and the introduction of fiscal austerity measures.

INDEED, THE RECOVERY IN PRICES MAY NOT BE SUSTAINABLE IF AN INCREASING NUMBER OF US SHALE GAS PRODUCERS DECIDE TO GET IN THE MARKET. THIS WOULD DRAG DOWN PRICES AGAIN. Selten Iyigun

How have the non-oil sectors helped in the recovery of the UAE economy? The activity in the construction sector is an important pillar of the economic diversification of the UAE as well as the service sector. The construction activities led by the investments ahead of the Expo 2020 supports the non-oil activity through the infrastructure investments as well as new construction projects. The commercial building segment particularly seems to be stimulated by these investment inflows. With the economic diversification accelerating and the country moving into higher-value service industries, construction sector growth will remain and in turn will increase domestic

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21



demand for petrochemical products. But, with tighter and more expensive liquidity conditions which increase borrowing costs for companies, payment terms may get longer both in construction and petrochemical sectors. The introduction of the VAT will also add to the non-hydrocarbon revenues for the government and the latter will use it to finance infrastructure projects. Services sector is expected to continue a growth performance of around five per cent in 2018 which will contribute to the country’s GDP as this sector accounts for around 50 per cent of GDP. What effects do you think UAE’s diversification triumphs have on neighbouring countries and how has this impacted MENA as a whole? All oil exporters in the MENA region try to implement economic diversification programmes. It helped them to reduce their dependence on oil compared with their levels in 1990s and early 2000s. But there is still some way to go as countries like Saudi Arabia and Kuwait can be considered as dependent on oil in terms of budget and export revenues. What kind of challenges do you foresee for the region going forward? The geopolitical dynamics in the region have wavered. How do you see this affecting the investment climate in key regional markets such as UAE and KSA? The most important challenges would be about the payment terms and liquidity conditions. Although we are optimistic about growth perspectives in the upcoming period, these risks require the adoption of a cautious behaviour. The volatility in the oil prices are one of those risks. Indeed, the recovery in prices may not be sustainable if an increasing number of US shale gas producers decide to get in the market. This would drag down prices again. On the other hand, the rate hikes from the US federal

THERE ARE STILL SOME WAY TO GO AS COUNTRIES LIKE SAUDI ARABIA AND KUWAIT CAN BE CONSIDERED AS DEPENDENT ON OIL IN TERMS OF BUDGET AND EXPORT REVENUES.

reserve would be followed by the GCC central banks due to the currency peg regimes in the GCC region. Therefore, interest rates on loans would go up, which would increase borrowing costs for companies as well. In addition, global liquidity becomes less abundant and more expensive with the rate hike from the US Fed. This situation may push GCC banks to become more selective while providing loans to the private sector. This may also tighten financial resources available for companies. The current economic and business landscape in the region calls for better risk management by companies to

ensure business continuity against a backdrop of longer payment terms and tightened liquidity conditions. The focus should be on prudent cost and financial risk management. It is imperative for companies to prepare themselves during uncertain times and manage cash flows to run the business smoothly. During such period, companies are advised to remain cautious in protecting their receivables and their open credit trade. Coface recommends companies to outsource due diligence processes to expert agencies that could support businesses in making informed decisions. It is also crucial for companies to mitigate risks in doing business by seeking companies that could provide them with precise information, access to funding as well as property protection for their receivables and payment defaults. What sectors should GCC countries focus on to improve their economic standing? We do not suggest economic policies. The non-oil sector remains an important pillar for the economic growth in the region as it represents a buffer during the periods when oil prices become volatile. On the other hand, oil sector will continue to remain the key sector of activity together with the petrochemicals and construction sectors.

GDP GROWTH (YEAR-ON-YEAR)

2017

2018

Bahrain

2.5 per cent

2 per cent

Oman

-0.3 per cent

3.8 per cent

Kuwait

-1.1 per cent

3.1 per cent

UAE

2 per cent

3.8 per cent

Saudi Arabia

-0.5 per cent

1.1 per cent

Source: Coface

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THE MARKETS

DRIVING CHANGE

Rivaan Roopnarain Senior Manager and Costa Natsas, Leader: Africa, both at PwC Banking & Capital Markets, discuss current and emerging banking industry trends across Middle East and Africa

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t the dawn of 2017, expectations for markets, global trade, geopolitical stability and the political climate across many territories on the continent, and beyond, were concerning. The US had just sworn in a new administration, with an agenda that many saw as idiosyncratic and with concerns about a slide towards protectionism. Across the Atlantic, the UK had caused a collective holding of breath as the vote to leave the EU continued (and continues) to fuel uncertainty. In South Africa, markets awaited the ANC’s December elective conference—which at the time seemed a distant prospect— before contemplating the idea of muchneeded policy certainty. Fast forward to present day, and things look different.

24

As we note in our recent publication, PwC South Africa’s Major Banks Analysis: “A positive path”—which analyses the aggregated financial results of South Africa’s major banks and identifies common trends facing the industry—the performance of the banking industry is, as always, often tied to the broader macroeconomic context and operating environment in which banking is conducted. ECONOMIC CONTEXT When all the data is in, 2017 will almost certainly turn out to be the best year the global economy has seen since 2010. This rising tide is not just an overall macroeconomic phenomenon; it is balanced across regions. Most of the world’s major economies are experiencing positive growth in contrast to their experiences of a few years ago.

Global commodity prices appear to have stabilised at a moderate level. Russia and Brazil have returned to modest growth following recent recessions brought on by plummeting commodity prices and political unrest; China is doing well, and the Euro zone has mounted a steady recovery that looks set to continue in 2018. Even the UK economy, while slowing over 2017, has not yet been severely impacted by Brexit—or at least not at the levels foreseen at the time of the vote in 2016. As for the United States, the domestic economy is chugging along at around three per cent growth. After recovering from technical recession in early 2017, South Africa’s economic growth remained slow for a fifth consecutive year. Supported by firmer global commodity prices and a recovery in agricultural production following protracted


drought periods, economic growth in the country rose from a revised 0.6 per cent in 2016 to 1.3 per cent in 2017. In various markets on the continent, economic growth improved somewhat, supported by global commodity price recoveries, improved rainfall and continued infrastructure investments. However, key fiscal issues remain a challenge to growth in several African markets, notably Mozambique, Ghana and Zambia, while interest rates cuts were broad-based across several of these territories. Following a sharp decline in economic growth during 2016 due to weak commodity prices, growth in Sub Saharan Africa (SSA) recovered to an estimated 2.4 per cent in 2017. This was driven by an improvement in metal prices and agricultural production supported commodity exporters, while economic growth was relatively stable in non-resource-intensive countries as infrastructure investment continued. On balance, the recovery in regional economic growth last year was slightly weaker than initially projected due to a softer than expected recovery in Nigeria (the region’s second-largest economy after South Africa) during 2H17. International Monetary Fund (IMF) research indicates Sub Saharan Africa GDP growth expectations of 3.4 per cent for 2018. WHAT’S KEEPING BANKING AND CAPITAL MARKETS CEOS UP AT NIGHT? Against this economic context and an ever-evolving technological landscape, key findings from our 21st Global Annual CEO Survey note that Banking and Capital Markets (B&CM) CEOs find themselves in a “good but not great” mood this year. More than half report being bullish about economic growth—57 per cent believe the global economy will improve over the next 12 months, compared to 30 per cent the year earlier. Yet that economic optimism hasn’t necessarily translated into increasing confidence in their own prospects. Our global survey shows that B&CM CEOs view their industry as one of the

most disrupted in the global economy and that technology is the main gamechanger—not surprising as this has been the reality for some years now. Globally, some B&CM organisations are, of course, faring better than others. As our survey findings underline, the big differentiator is digital transformation, and the breakthrough innovation and growth that stem from it. Those that get this right will find opportunities to positively transform the customer experience and put space between themselves and competitors. While accelerating digital transformation holds the key to boosting innovation, differentiation and growth, many banks are finding it difficult to get up to speed. In some ways, this challenge is acute on the African continent—where many banks are constrained by legacy systems and infrastructure, mixed economic contexts, and an operating environment fraught with change. What is clear is that the pace of technological change is now up there with over-regulation on banking CEOs’ list of concerns. As the banking regulatory overhaul over the past decade has shown, there are no quick solutions to implementing complex and far-reaching changes. It’s generally not the technology itself that creates difficulties—systems are becoming

more powerful, more intuitive and easier to implement and use. Rather, most of the problems stem from the familiar snags of process fragmentation and IT incompatibility. Unless these deficiencies are sorted as part of a digital transformation, no amount of investment can deliver real benefits. Not surprisingly, our survey reveals that overregulation is the threat most commonly identified by B&CM CEOs as making them “extremely concerned”. This trend of “over-regulation” is particularly relatable in an African context. For some time—and what appears to now be increasing urgency – many territories on the continent have been abuzz with speculation of proposed increases in regulatory capital requirements, possible moves to risk-based capital frameworks (Basel II/III) and evolutions in supervisory practises to more risk-based regimes. While these developments bode well for increased safety and soundness of financial systems both in these territories and regionally—and with it potentially greater levels of investor confidence—such changes present significant implications for banks. As these developments play out, banks on the continent and their regulators will need to reflect deeply on a range of questions, including: Is the industry in these territories ready and capable of implementing complex,

WHAT'S KEEPING BANKING AND CAPITAL MARKETS CEOs UP AT NIGHT? Q. How concerned are you about the following threats to your organisation's growth prospects? Chart shows percentage of banking and capital markets CEOs stating 'extremely' or 'somewhat concerned'

89%

Cyberthreats

86%

85%

85%

Cyberthreats

Speed of technological change

Geopolitical uncertainty

ceosurvey.pwc Source: PwC's 21st CEO Survey, Banking and capital markets

© 2018 PricewaterhouseCoopers LLP. All rights reserved.

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THE MARKETS

globally-aligned approaches to capital management? Have supervisors equipped themselves to ensure effective supervision, based on sound risk-based approaches aligned to international best practices? How will the implementation of these capital management regimes impact on the real economy of the countries? What impact on economic growth will the implementation of these regulatory frameworks have, in particular on small to medium enterprises? Alongside regulatory developments, on 1 January 2018 the much discussed IFRS 9 Financial Instruments accounting standard went live, following intense implementation programmes by many banks to ensure that data, controls, models and systems are properly in place to produce IFRS 9-compliant measures of expected credit loss (ECL). WHERE ARE BANKS FOCUSING? In many ways, banks on the continent are broadly aligned with the longer-term, strategic focus areas of banks globally. We see continued focus on a set of strategic themes consistent with our observations and trend lines over recent years—including digitising legacy processes through robotic process automation efforts, replacing and upgrading legacy system architecture, and channel and product innovation with a view to enhancing customer experiences. Meanwhile, a number of evolving global industry trends are underway: Trust in the machines – Globally, there is a fundamental behavioural shift underway toward digital channels. A case in point: our 2017 Digital Banking survey in the US found that 46 per cent of customers skipped bank branches altogether, relying instead on smartphones, tablets and other online applications. The need to balance openness and protection in a connected world will likely be a major theme in 2018. By opening platforms to third parties through application programming interfaces (APIs), leading banks may unlock newfound value from data, create

26

BANKING AND CAPITAL MARKETS CEOs REPORT EXISTING IN ONE OF THE MOST DISRUPTED SECTORS Q. How disruptive do you think the following trends will be for your business over the next five years? Chart shows percentage of banking and capital markets CEOs stating 'very disruptive' 36%

37%

22%

23%

33%

30%

28%

24%

39%

33%

29%

27%

48%

40%

37%

20%

28%

30%

29%

Entertainment and media

Communications

Insurance

Banking and capital markets

26% 13% 22%

43%

Increase in number of sinificant direct and indirect competitors (traditional and new) Changes in distribution channels Changing customer behaviour

55%

Changes in core technologies of production or service (e.g. AI, robotics, blockchain)

9% Technology

Changes in industry regulation

ceosurvey.pwc Source: PwC's 21st CEO Survey, Banking and capital markets

synergies with partners, and develop new cloud-based services more quickly. Plug and play – Many global banks now find they can replace entire functions with fully digital cores that supply standard offerings such as transactional accounts in ways that weren’t possible a few years ago. This can be more efficient than endlessly patching legacy infrastructure and often lead to surprise at how much ‘buy’ can now edge out ‘build’ in banks’ investment decisions. Beyond buzzwords – In 2017, global financial institutions were busy finding productive ways to harness the mountains of data they collect. For example, many global banks already use heuristics to analyse marketing campaign results, improving the return on marketing spend. Ultimately, the devil is in the detail, or perhaps ‘in the data’: For organisations with varying account structures and naming conventions, finding the right data is rarely simple. In 2018, many leading global banks will prepare data for machine learning, making it a priority to label a lot of data. This means sourcing, organising, and curating unstructured data, while they may even make more—creating ‘synthetic data’ that mimics real client profiles to help train systems.

© 2018 PricewaterhouseCoopers LLP. All rights reserved.

RPA 2.0 – After gaining maturity in operations and finance, areas such as risk, compliance and human resources are next on the list of robotic process automation (RPA) opportunities. Our 2017 RPA survey found that 30 per cent of respondents are at least on the way to enterprise adoption. But the path hasn’t always been smooth. Some banks uncovered risk, control and people issues they hadn’t expected. As we enter 2018, financial institutions face some tricky questions and are asking themselves: What controls should we apply to AI systems that decide and act in nanoseconds? How much authority should AI have? How do we make sure machines uphold their fiduciary duty? What about regulators? What if things do not go as planned? We expect leading banks to place more emphasis on these issues in 2018. Blockchain: are we there yet? – We’ve been reading about the promise of blockchain technology for several years now. Many sceptics are beginning to wonder if the ‘year of blockchain’ will ever really arrive. As has been well documented, blockchain isn’t a cure-all, but there are clearly many problems for which this technology is, or can be, the ideal solution.


C

M

Y

CM

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CMY

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LEGAL PERSPECTIVE

STRENGTH IN SOFT INFRASTRUCTURE Brian Howard, Partner at Trowers & Hamlins, highlights Bahrain’s progress on the legislative front and explains how it bodes well for foreign investment

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ONE OF THE ISSUES THAT BAHRAIN HAS FACED FOLLOWING THE GLOBAL CREDIT CRUNCH AND RECESSION WAS THE ABILITY OF BAHRAIN’S BANKRUPTCY AND COMPOSITION LAW TO MEET MODERN REQUIREMENTS IN RELATION TO FINANCIAL RESTRUCTURING BY COMPANIES AND INSTITUTIONS FACING SOLVENCY ISSUES. Brian Howard

C

ountries such as Saudi and the United Arab Emirates have both come up with new regulations to drive economic activity and support foreign investment. How has this developed in Bahrain? Bahrain has long been the easiest jurisdiction in the GCC in which to do business. Many international foreign investors have historically chosen, with good reason, to establish their GCC hubs in the Kingdom of Bahrain. Bahrain has long offered a corporate tax-free environment with free repatriation of funds and very limited restrictions on areas in which a 100 per cent foreign ownership is allowed. It has one of the most developed regional electronic commercial registration systems and very low minimum capital requirements.

While Saudi Arabia and the United Arab Emirates have taken various measures to free up certain restrictions in these areas and established—in the case of the United Arab Emirates, a number of free zones where their restrictions on activities are freer—Bahrain offers within its onshore regime a fully competitive and advantageous regulatory environment, provides full onshore GCC access and a suitable hub for expansions across the GCC. Even with this advantageous starting point, Bahrain has, in the last three years, focused on securing its place as a destination of choice for international foreign investors, particularly within the GCC. Bahrain has improved a raft of legal and infrastructure measures aimed at improving systems and processes for

incorporating companies, clarifying and updating regulatory frameworks, and allowing companies to do business more effectively within its borders. One of the first significant changes came in 2015, when the capital requirements for establishing new businesses were lowered, immediately resulting in the number of commercial registrations in the kingdom to increase threefold. It is now permissible to establish a single shareholder company with a capital of $135 or a two shareholder with limited liability company with a capital of $265. This coupled with the extensive range of sectors which permit 100 per cent foreign ownership has made Bahrain an attractive destination for establishing corporate entities.

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LEGAL PERSPECTIVE

In addition, Bahrain introduced a new commercial registration portal, called Sijilat, shortly after the capital changes to speed up the process of company incorporation such that it is now possible to achieve a commercial registration number in a matter of hours from an application being made. There have also been clarifications of Bahrain’s labour laws, providing more certainty on employee costs and the process for obtaining visas has significantly improved with prices coming down and the process for obtaining work permits eased. Bahrain has also introduced the first regional trusts law in 2006. This was given a complete overhaul in 2016 to make the Trusts Law comparable with the trust legislation of key trust centres such as the Channel Islands. The new Trusts Law maximises flexibility and has similarities with Jersey’s trust law but with the advantages of a fully codified system. Utilisation of the new Trust Law is increasing rapidly and it is being used for international investment structuring, asset protection, estate planning, alleviating forced inheritance rules for future generations, ownerships of assets where there would otherwise be foreign ownership restrictions, charities and purpose trusts, employee incentive schemes, real estate investment trusts and to replace less robust nominee ownership structures widely utilised across the GCC. The Trusts Law provides clear guidance on confidentiality and allows settlors to reserve powers and interests/controls for themselves. Further, transfers of assets into trusts in Bahrain are exempt from any fees and the law expressly states that inheritance rights under foreign laws will not be recognised in Bahrain in relation to assets under a trust. In addition, beneficial interests under trusts are freely transferrable. Bahrain has also introduced the first onshore protected cell company and limited partnership laws suitable for financial investment structuring and funds in the GCC.

30

Brian Howard, Partner, Trowers & Hamlins

Even more recently, Bahrain approved regulatory changes in relation to financial services and financial technology as well as opening up further avenues for debt and equity funding arrangements. These measures include a regulatory sandbox to allow start-up fintech companies to operate in an incubator-friendly environment with limited regulatory requirements for an initial start-up period. Furthermore, Bahrain has also introduced legislation enabling crowdfunding platforms to be developed for equity and debt arrangements. Bahrain has recently set its sights on financial technology given this is a natural fit with Bahrain. Bahrain has one of the most developed IT and telecommunications infrastructures in the region and has established a hub of financial technology firms who are aiming to service asset managers, banks and financial institutions across the globe. These developments and the previously existing legal infrastructure in Bahrain allow Bahrain to assert itself as the continued hub of choice for foreign direct investment in the region.

In your opinion, what can be done to boost the country’s appeal? One of the issues that Bahrain has faced following the global credit crunch and recession was the ability of Bahrain’s bankruptcy and composition law to meet modern requirements in relation to financial restructuring by companies and institutions facing solvency issues. To this end, Bahrain has been developing new modern legislation in relation to bankruptcy which has recently cleared Bahrain’s parliament and which we are hopeful will be brought into law in the coming months. It is anticipated that the new bankruptcy law will include a robust workout arrangement and moratorium process, similar to the Chapter 11 processes in the United States, which will allow entrepreneurs to fail but regroup, reorganise and then be successful. This will be a useful addition to the legislative changes which have been developed to enhance Bahrain’s position as being a jurisdiction of choice for SME owners and entrepreneurial companies. What opportunities do you see for Bahrain in terms of foreign investments? The legal and economic infrastructure in Bahrain is without doubt highly competitive for foreign investment. The empirical evidence for this is there with the large increase in commercial registrations in Bahrain. Notable recent examples include Amazon Web Services’ plans for launching its first data centre in the region in Bahrain and the production of Oreo cookies in Bahrain by Mondelez which has taken advantage of the incentives of Bahrain International Investment Park. The choice of these major international businesses shows the trust which is being placed in the Bahrain regulatory framework and provides an excellent endorsement of Bahrain’s competitive advantages in relation to foreign investment. We fully expect other major investors and international entrepreneurs will continue to establish themselves in Bahrain as a jurisdiction of choice for the Middle East.


New NewBanker BankeradadEng.pdf Eng.pdf

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22/05/2018 22/05/2018

12:33 12:33PMPM

NCB NCB Banking Banking Awards Awards

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CMCM

MYMY

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Best BestDigital Digital Bank Bankin inKSA KSA

Best BestCorporate Corporate Digital DigitalBank Bankin inKSA KSA

Best BestBank Bank in inKSA KSA

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COVER INTERVIEW

THE SAUDI INFLUENCE Speaking exclusively to Banker Middle East, Samer Abu Aker, Acting CEO of SEDCO Capital, provides thorough insight into the financial and economic developments in Saudi Arabia and the spillover effect on its GCC neighbours

D

escribe the investment landscape in KSA and the investor appetite for the market. The Saudi economy has always been segregated between oil and non-oil. With oil prices coming under pressure, the need to increase the non-oil segment has heightened significantly. Non-oil revenues mainly comprise of those from petrochemicals, real estate and banking. Real estate/construction derives strength from government spending and a reduction thereof has created challenges for the sector. The services industry has a minimal contribution to the economy, but with a population more than 32 million bears significant potential. Services also include the entertainment sector—which kicked-off its activities recently—can eventually add $50-75 billion to the GDP. In addition, tourismrelated services are also the focus for investment as Kingdom opens up. Currently, the appetite for intake in these sectors is huge and can push the lagging construction/real estate sector due to the basic infrastructure creation for these services.

32

Another area where large ticket investments can be absorbed is downstream petrochemicals. However, patents, technological challenges and oligarchies within this segment make it challenging. Certainly, the current and planned reforms add to the perception that a radical, strategic shift is underway— which is encouraging—and foreign investors are noticing that stability and transparency really are the name of the game. On another front, the inclusion criteria for FTSE and MSCI in their emerging market equity indices are similar, therefore inclusion in FTSE significantly increases the probability of inclusion in MSCI. At the time of the UAE inclusion in MSCI EM Index, the individual constituents were priced at 80bps dividend yield spread over the MSCI dividend yield. Applying the same, the large caps in Saudi market reflect further 15-20 per cent price appreciation potential. Such inclusion would encourage global indexing managers to allocate to Saudi equity market given that it is going to be part of global indices.


A DISPUTE RESOLUTION MECHANISM THAT HASN’T BEEN TESTED TO ITS FULL EXTENT; PROCESS INFANCY; LACK OF PRECEDENCE; UNDER PROCESS POLICY FRAMEWORKS AND FAST REFORM PROCESS ARE THE KEY CHALLENGES FOR INVESTORS.

Samer Abu Aker

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COVER INTERVIEW

Additionally, we started to have dialogues with international investors about real estate opportunities in the Saudi market. After launching real estate investment trusts (REITs) in the Saudi public equity market recently, expected returns from the real estate sector started to be clearer as REIT prices are benchmarked to the real estate sector. This development by itself better positions Saudi real estate opportunities in the market place. How have things evolved since the introduction of the Saudi Vision 2030 and most recently KSA’s inclusion into FTSE’s emerging market indices? The investment landscape has become increasingly diversified, primarily due to Vision 2030 as it envisages the opening up of the economy mainly through entertainment and tourism. The inclusion in FTSE emerging market indices is a door-opener for foreigners to peak into the local economy. As soon as the focus from large cap blue chips wears off, the valuehunting in mid cap, small cap and PIPE transactions will pick up, broadening the investment landscape. The services sector in general has been either non-documented or nonexistent. Separately, the Vision 2030 brought the focus on VAT and legalisation/ regularisation of many key economic agendas that have been ignored in the past. As a result, as the short-term pain of reforms wear off, the long-term benefits will become visible and inflow investment would pick up further. Lastly, the current expat outflow will likely give way to skilled and technical expat inflow 18 months down the road. This would further boost the investment landscape in breadth and depth. Additionally, the culture of settling families in other parts of the region and commuting therefrom will diminish, and this would in turn boost the aggregate economy.

34

THE INCLUSION CRITERIA FOR FTSE AND MSCI IN THEIR EMERGING MARKET EQUITY INDICES ARE SIMILAR, THEREFORE INCLUSION IN FTSE SIGNIFICANTLY INCREASES THE PROBABILITY OF INCLUSION IN MSCI.

Many are speculating that MSCI would upgrade Saudi to emerging markets status in June following FTSE’s move. What are your thoughts on this? The inclusion criteria for MSCI and FTSE are not that different. Hence, if FTSE’s inclusion happens, then MSCI’s inclusion is more likely than otherwise. In addition, independent clearing house, T+2 settlement, independent depository, foreign ownership limits and settlement financing are all matters that have been taken care off. Therefore, we strongly believe that MSCI inclusion is more than likely. How would you describe the appetite for Shari’ah compliant investments in the Kingdom? Investors in the kingdom have preferred Shari’ah compliant investments. When we look at the number of funds that are domiciled in Saudi we see that more than two thirds of all Saudi domiciled funds are Shari’ah compliant and the percentage is even much higher once you compare those funds based on their size.

This can be further asserted once we compare the liquidity of equity market with bond market in the kingdom. Average daily traded value in Saudi stock market was north of SAR4 billion over the last three months while total traded value in the Saudi bond and Sukuk market over the same period was less than SAR100 million. The fact that many of the local debt issuances are considered Shari’ah compliant Sukuk but have yet to entice retail investors is due to perception and other factors such as Shari’ah concerns and tradability. However, the fact that the Shari’ah criteria limits the excessive leverage, excessive unproductive cash and avoids unethical sectors, come very close to the natural human characteristics and therefore are gaining more traction not just in Saudi Arabia but across the world. What are the untapped income generating investments available for investors in KSA? Income generation is key for investors who want to benefit from exposure to assets yielding more than inflation over the medium to long term. In this respect, the real estate market has historically provided a source of income for those who can afford to invest in size. However, retail investors with smaller tickets still need to familiarize with the nascent REIT market, which has long been a pillar of more developed, mature markets like the US and UK. The most attractive feature of such instruments (although relatively new to the Saudi market) is their direct exposure to physical real estate. An attractive income in real terms (i.e. net of inflation) can be gained through a small and affordable investment in the Tadawul (stock exchange), where they are listed and can be traded (even in small quantities) on a daily basis. Another untapped source of incomegenerating investment is, the still ‘unheard-of’ category of multi-asset



COVER INTERVIEW

class income mutual funds, which in other countries can be very accessible to anyone, but are largely unknown in KSA. We anticipate a sizeable future growth of such products, whose attractiveness can be greater if aligned with the global mega-trend of socially responsible investment, as a testimony of the winning combination between global diversification, higher income, steady returns and social commitment. How has the IFRS 9 impacted financial institutions in KSA? And looking forward, how do you see IFRS 16 affecting the market segment? The implementation of (IFRS 9) from January 2018 will strongly affect the way of recognising the credit losses in the profit and loss statement. IFRS 9 introduces an approach based on future expectations, namely expected losses. While impairments are currently recognised based on incurred losses. The main impact on financial institutions is the need to recognise expected losses for all financial products, and at individual and grouped-asset levels. Financial institutions will have to update their calculation at each reporting date to reflect changes in the credit quality of their assets. This will increase the number and frequency of impairment in the profit and loss statement. Under IFRS 9, when a loan is acquired, it is assessed for expected losses over an initial 12-month period and an upfront provision is booked automatically, triggering an immediate capital hit. However, for most GCC financial institutions, the impact to write provisions upfront will not be asaud significant because they are already used to book general reserves when they extend new loans. Moreover, the IFRS 16 Leases will be effective from 1 January 2019. Leasing is a financing solution. It is a flexible solution that allows companies to access and use property and equipment without needing to incur large cash outflows.

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Abu Aker reveals that the firm is in the final stages of

launching its second built-to-suit fund, which is focused on developing specialised properties within the requirements of secured long-term and institutional tenets.


Under the new leases standard, lessees are required to recognise nearly all leases on the balance sheet which will reflect their right to use an asset for a period of time and the associated liability for payments. It is anticipated that lessees will be greatly affected by the new standard, particularly on their financial reporting, asset financing, as well as contact and data management. Whereas the accounting for lessors largely remains unchanged. Entities will also see an increase in their debt and leverage ratio due to the new leases standard. Industries that will see the largest impact on reported financial ratios and performance measures are the retail and wholesale sector, the airline industry, professional services and the healthcare sector. In your opinion, what are the major concerns for potential investors that are looking to tap into the Saudi market? A dispute resolution mechanism that hasn’t been tested to its full extent; process infancy; lack of precedence; under process policy frameworks and fast reform process are the key challenges for investors. As the head of a financial institution yourself, what are the challenges and opportunities you see navigating through an interesting time in this market? In the past, Saudi Arabia stimulated the economy through wages and subsidies. This is now changing. In the 2018 budget, wage-heavy spending areas such as education and security have been reduced, as have subsidies. Meanwhile, capital investment has increased greatly, which is a pre-requisite for boosting potential growth. However, governmentled activity still remains at elevated levels, suggesting that investing into Saudi growth will only occur gradually as government ownership shrinks.

THE PROVISIONING LEVELS FOR BANKS ARE BETTER THAN THE GLOBAL AVERAGE AND PACED REFORM-RELATED EFFECTS ARE LIKELY TO WEAR OFF IN THE COMING MONTHS. THE LONGTERM POSITIVES WILL THEN COME INTO PLAY INCREASING THE LOAN-TO-DEPOSIT (LTD) RATIO FURTHER AND PUSHING THE NIMS HIGHER.

More importantly, the improving conditions for Saudi women will have a profound beneficial effect on the economy. Even though apparently limited for now, this social change cannot be ignored. Banks and consumer goods firms are the kind of companies that stand to benefit most from this shift. However, with a change this significant, the companies that may benefit most will not necessarily be the ones listed on the stock exchange (i.e. family-owned and unlisted businesses). As Saudi Arabia’s breakeven oil price increases, privatisations of at least parts of Aramco, the Tadawul, Saudia, SABIC and several other governmentowned companies will have to be carried out eventually; though this would not necessarily entail a full privatisation scheme similar to the UK under Margaret Thatcher in the 1980s.

Within this blended public-private model, the opening up of society is going to drive rapid growth in the real economy: the emancipation of women; the easing of restrictions on public entertainment; and the opening of the Kingdom to foreign visitors. These are challenging though necessary reforms which will structurally benefit the economy. Saudi Arabia should return to modest growth this year, with more rapid growth in the non-oil sectors (of three to five per cent), even if oil prices revert back to the $40/bbl level. What is SEDCO Capital’s practises in diversifying investments and assets allocation? Having managed assets at a global level for several decades now, SEDCO Capital’s approach is very much aligned to the highest international standards. A 35-strong team of highly skilled professionals into both liquid and illiquid asset classes, such as global listed equities, Sukuk, money market instruments, private equity, as well as local and international real estate. Our investment process is driven by a critical examination of macroeconomic and financial markets fundamentals, as well as benefits from the highly valuable insights that we gain from our parallel exposure to both public and private markets both from a top-down and a bottom-up perspective. Each member of the investment committee provides their independent view on different asset classes and markets, and the combination of each assessment translates into a shared, quali-quantitative, team-based outcome which has to be fully scrutinised and validated by our internal risk management function before being implemented. This ensures that all investment decisions comply with the strictest principles of diversification based on the most efficient risk/return trade-off. At SEDCO Capital we pride ourselves to be the pioneers of a very innovative approach, the ‘Prudent Ethical Investing’ (PEI) philosophy, where the principles of

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COVER INTERVIEW

Islamic investments combine with those of social responsibility. Our own research has long demonstrated that such an approach generates higher returns than conventional investments in the medium term on a risk-adjusted basis. How does your pipeline look like for 2018? We have been exploring several important initiatives. For instance, for the leasing/ income generating asset class, building on our past success in Shari’ah-compliant leasing, we will be launching a subsequent US-based equipment leasing fund later this year. The fund focuses on leasing mission-critical equipment to Fortune 1000 companies in the US especially the ones with investment-grade credit profile. Moreover, we are in advanced stages in considering investments in infrastructure assets globally. These investments are designed to provide annual income to investors while providing downside protection to preserve initial capital, all while being Shari’ah-compliant. In addition to that, we have a healthy private equity pipeline of co-investment opportunities under review across Europe, US and Asia with our GPs across healthcare, tech-enabled consumer and logistics sectors. We are also working on several other projects and initiatives across the board for other asset classes. Lastly, we are in the final stages to launch our second built-to-suit fund, which is focused on developing specialised properties within the requirements of secured long-term and institutional tenets. What is your outlook on the financial sector this year and over the short-term? We are optimistic on the financial sector. This is because the cost of deposit is lower than the global average and the pace of growth in this cost is slower than the repricing of loans. Therefore, it is highly likely for NIMs to continually expand on the back of rising US rates and the fact that the Saudi riyal is pegged to the US dollar.

38

AS SAUDI ARABIA’S BREAKEVEN OIL PRICE INCREASES, PRIVATISATIONS OF AT LEAST PARTS OF ARAMCO, THE TADAWUL, SAUDIA, SABIC AND SEVERAL OTHER GOVERNMENT-OWNED COMPANIES WILL HAVE TO BE CARRIED OUT EVENTUALLY.

In addition, the provisioning levels for banks are better than the global average and paced reform-related effects are likely to wear off in the coming months. The long-term positives will then come into play increasing the loan-to-deposit (LTD) ratio further and pushing the NIMs higher. The potential for rapid deposit growth is limited but the profitability is likely to keep up the pace. The fact that local banks are trading below their peers in terms of relative company valuation furthers the positive case.

Saudi banks (and banks in the GCC region to a lower extent) enjoy a high level of demand-to-total deposits. This ratio averaged 62 per cent as of the end of February this year for Saudi banks, which means that rising interest rates is a net positive to banks’ profitability as their interest yield will increase more than their cost of funding. However, economic activity in the kingdom is growing at a slower pace on rising operating costs for corporates and declining purchasing power for consumers on the back of the implementation of economic reforms. This in turn could lead to a subdued loan growth and potentially weaker asset quality as some corporates would find it challenging to service higher borrowing costs during the current economic environment. What is your personal management style? Empowering people in the organisation through a results-oriented management mind set and style is a key element in our organisational culture and behaviour; this was easily achieved as we continue to invest in human resources and attracting the best calibres in the industry. I delegate to my team while holding them responsible to allow them to manage their task creatively. I put more focus on coaching my team and invest more time and resources in learning and development practices. We are happy to say that this unique organisational culture, along with investment in human capital, has secured us the 4th best working place in the Kingdom of Saudi Arabia (as part of our parent company— SEDCO Holding Group). I am also pleased to say that our organisational culture and management practises alongside this achievement are in line with the Saudi Vision 2030, the National Transformation programme (NTP) 2020, and the Kingdom’s future ambitions of developing and empowering the human resources.



COUNTRY FOCUS

BAHRAIN MEANS BUSINESS Bahrain’s economy may seem like the ugly duckling next to its GCC neighbours, but the Kingdom determined to spread its wings

40

PHOTO CREDIT: Shutterstock/PREJU SURESH


B

ahrain hasn’t taken too kindly to recent criticism. International agencies may unanimously agree that Bahrain’s economy is the one of the most vulnerable in the GCC, but a new oil discovery and a budding ICT industry have armed the Kingdom with more economic power to hit back with. Bahrain needs all the fighting power it can muster. Despite being the GCC’s oldest oil producer, it has only modest reserves. And yet, the Kingdom is dangerously reliant on the income it generates. With an output of less than 200 thousand barrels per day, of which around 150,000 barrels per day comes from an offshore field that it shares with Saudi Arabia, oil revenues still accounted for 75 per cent of government revenue in 2017 – down from a high of 87 per cent in 2013. Oil exports accounted for 55 per cent of total exports in 2017, according to Moody’s Investor Services. When oil prices declined after mid-2014, the dollar value of Bahrain’s oil exports fell hard and the country’s current account swung from surpluses averaging eight per cent of GDP in 2012-13 to deficits averaging 3.7 per cent of GDP in 2015-17. DEBT LOCK With sky-high government debt and political tensions continuing to bubble below the surface, observers have not been kind about Bahrain’s outlook. The IMF has slashed Bahrain’s GDP growth forecast to just 1.6 per cent for 2018, citing ongoing fiscal consolidation and weaker investor sentiment. In December 2017, S&P delivered a harsh verdict on the Kingdom’s economic prospects as it cut Bahrain’s sovereign credit ratings to ‘B+’ from ‘BB-’. A few months earlier, Moody’s had sent the country deeper into junk territory by lowering its long-term issuer rating by two notches, and confirming its ‘negative’ outlook.

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COUNTRY FOCUS

Fitch took action in March, downgrading Bahrain’s long-term foreign-currency issuer default rating to ‘BB-’ from ‘BB+’. S&P noted that Bahrain’s external and fiscal metrics remain weak, with gross international reserves covering less than one month’s current account payments and about 50 per cent of the monetary base at the end of 2017. Bahrain’s debts leave it with little financial wiggle room, and its government has yet to identify a clear strategy to tackle its high deficits. “We expect the consolidated gross general government debt ratio to surpass 90 per cent of GDP in 2019 and to keep rising in the following years, albeit with a shallower upward trajectory, breaking 100 per cent of GDP in 2023,” said Fitch. “Debt as a percentage of government revenue is expected to rise to 540 per cent in 2019, one of the highest among Fitch-rated sovereigns.” Bahrain’s current account deterioration has driven the large erosion of foreign exchange reserves from a peak of $5.8 billion at the end of 2014 to a low of $1.3 billion in July 2017, according to Moody’s. The reserves have since recovered somewhat on the back of large sovereign external bond issuances, including $3 billion in international bonds in September 2017 and $1 billion in international Sukuk in April 2018. However, Moody’s said that with foreign reserves of $2.8 billion at the end of November covering only 1.4 months of imports of goods and services and less than 10 per cent of Bahrain’s shortterm external debt, pressure on Bahrain’s pegged exchange rate regime is now at its highest since the formal peg of the riyal to the dollar was introduced in 2001. The government has continued to implement a number of measures to raise revenue and trim spending, including excise taxes at end-2017 and fuel price increases in January 2018. However, the consolidation effort is not even close to stabilising the government debt/GDP ratio.

42

Asset growth in Bahrain’s banking sector to remain “subdued” at

3.7% for 2018

Source: BMI Research

“The political environment, embedded social expectations and a lack of experience with taxation severely constrain the government from enacting a sharper fiscal adjustment and create uncertainty around the fiscal outlook,” said Fitch. Reining in the deficit more sharply could call for deeper reforms to Bahrain’s social and economic model, traditionally characterised by low taxation and generous benefits. In Fitch’s view, the country’s leadership is generally committed to reform, but this commitment is not yet shared by other key stakeholders, and the government remains wary of social pressures. BANKING BLUES Naturally, Bahrain’s banks have felt the brunt of this. Despite Bahrain’s large financial sector, with gross assets estimated at 248 per cent of GDP and a large number of majority-government-owned companies, S&P considers the Government’s contingent liabilities to be limited. Bahrain’s retail banks, the main domestic intermediators, remain healthy in terms of liquidity, capitalisation, and leverage, with a loan-to-deposit ratio of 65 per cent, according to Banking Industry Country Risk Assessment: Bahrain. Asset quality is on an improving trend, but the system-wide nonperforming loan ratio is still in the high single digits, according to S&P’s estimation, and some large banks carry high amounts of restructured exposures.

BMI Research has forecast asset growth in Bahrain’s banking sector to remain “subdued” at 3.7 per cent for 2018. BAHRAIN BOUNCES BACK Bahrain, however, has hit back at its critics. A statement from its Economic Development Board (EDB) said that, despite Bahrain’s low level of reserves


COUNTRY FOCUS

2017, increasing by almost 4.5 per cent compared to the same period in 2016. During 2017 as a whole, non-oil growth is expected to exceed the four per cent pace recorded in 2016, according to the latest Bahrain Economic Quarterly published by the EDB. The performance of the non-oil private sector also meant that overall economic growth in the Kingdom reached an annual pace of 3.6 per cent for the first three quarters of the year—improving on the 3.2 per cent pace of growth posted during 2016 as a whole and making Bahrain the fastest growing economy in the GCC. “Bahrain’s economy continues to deliver at the upper end of growth expectations thanks to a combination of robust structural and countercyclical drivers,” said said Dr Jarmo Kotilaine, Chief Economic Advisor of the EDB. “We expect this positive dynamic to continue into 2018 as the regional environment becomes more supportive of growth and as the diversified economy continues to expand, supported by an unprecedented investment pipeline.”

BAHRAIN’S NEW OIL FIND COULD EVENTUALLY YIELD UP TO 2.4 BILLION BARRELS OF RECOVERABLE OIL RESERVES— A LITTLE LESS THAN HALF OF OMAN’S PROVED RESERVES. Moody’s

PHOTO CREDIT: Shutterstock/Philip Lange

The IMF slashed Bahrain’s GDP growth forecast to

1.6 %

for 2018 citing ongoing fiscal consolidation and weaker investor sentiment Source: IMF

at the central bank, its economy and financial system continue to perform relatively strongly. The Central Bank of Bahrain pointed out that the capital adequacy ratio of the banking sector reached 19.8 per cent as of September 2017, well above the regulatory requirement. Retail deposits continued to grow reaching $45.1 billion in October

WELL OF HOPE For anyone who isn’t convinced, a headline discovery in April may give them more confidence in Bahrain’s economy. On 4 April, Bahrain’s oil minister Sheikh Mohammed bin Khalifa Al Khalifa announced the discovery of hydrocarbon deposits containing at least 80 billion barrels of tight oil and 10-20 trillion cubic feet of deep natural gas in a new offshore field off the west coast of Bahrain. “Over time, if production from the new oil field were to substantially increase Bahrain’s oil production and exports, Bahrain’s external vulnerability—and with it, pressure on the currency peg—would decrease, supported by improvements in the current account and rebuilding of foreign exchange buffers,” Moody’s said.

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COUNTRY FOCUS

Nevertheless, at this stage we do not know how much of the discovered oil and gas resource is technically recoverable and at what cost. Based on EIA research, the average recovery factor for tight oil deposits ranges between three per cent and six per cent of the initial oil in place. Using a recovery factor of three per cent as a plausible assumption, Bahrain’s new oil find could eventually yield up to 2.4 billion barrels of recoverable oil reserves—a little less than half of Oman’s proved reserves, according to Moody’s. While this is significantly less than the headline number of oil in place, it is nearly 20 times more than Bahrain’s current onshore proved reserves and would allow Bahrain to double its current total crude oil production for the next 33 years However, it may be years before Bahrain’s new asset yields any profits. Moody’s said that it doesn’t expect new oil reserves to have any positive impact on Bahrain’s economy for at least another five years. “In the meantime, the Kingdom’s credit profile will remain the weakest among GCC peers and the most vulnerable, fiscally and externally, to potential declines in oil prices,” the rating agency said. “This vulnerability is captured by the highest combination of fiscal and external breakeven oil prices in the region.” IT SUPPORT Bahrain already knows it cannot rely on oil, and has been turning its attention to diversifying its fragile economy. The EDB claims that hotels and restaurants, social and personal services, transportation and communications and financial services all expanded more than six per cent year-onyear during the first three quarters of 2017. However, Bahrain’s real strength is being forged in its ICT sector. In February, it launched the first dedicated FinTech hub and corporate incubator in the Middle East and Africa region, Bahrain FinTech Bay (BFB). Bahrain is leading the MENA region in the ICT Development Index,

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THE TOURISM SECTOR IS ONE OF THE KEY INVESTMENT SECTORS WE RECOGNISE AS HAVING A STRONG COMPETITIVE ADVANTAGE FOR BAHRAIN. IT CONTRIBUTES 6.3 PER CENT TO THE COUNTRY’S GDP, AND IS SET TO GROW SIGNIFICANTLY, AS THE NUMBER OF VISITORS AND LEISURE ACTIVITIES INCREASE. Simon Galpin, Managing Director of Bahrain EDB

ranking 33 out of a total of 188 countries worldwide. “With Bahrain’s very high level of internet usage, we are capitalising on the development of the ICT sector,” said John Kilmartin, Executive Director of ICT at the EDB. “Amazon Web Services (AWS) recently announced the launch of its first region in the Middle East based in Bahrain. This is an indicator of the sentiment around investment in ICT here. We are in a unique position to foster the growth of disruptive technologies and promote innovation in traditional industries.” Bahrain also ranked second globally and first in the MENA region in the fifth edition of the Islamic Finance Development Report and Indicator (IFDI). With 24 Islamic banks holding assets valued at over $25.7 billion, this is the fifth consecutive year that Bahrain has come second to Malaysia. “As our region undergoes a dramatic economic transformation, the GCC presents exciting opportunities for international investors,” said Khalid Hamad, Executive Director of Banking Supervision at the Central Bank of Bahrain. “Islamic finance is a core pillar of our region’s offering. We also continue to see investments

made in technology and these are making a tangible impact, unlocking innovation and entrepreneurship. “We see huge potential in the connection between technology and Islamic finance; with technology being a disruptive force across so many industries, Bahrain is continually in a strong position to leverage the opportunities available.” BUSINESS-FRIENDLY BAHRAIN The EDB also announced a record year for inward investment in 2017, having attracted 71 new companies to Bahrain with investments amounting to $733 million. This is expected to increase job creation by those companies by up to 72 per cent, generating more than 2,800 local jobs over the next three years. The EDB’s record number of investments in 2017 represents a significant increase of 161 per cent compared to 2016, which saw $281 million in investments from 40 companies. Predictably, the ICT sector was the Kingdom’s highest attractor of inward investment in 2017, comprising a significant 54 per cent of the total investment in the sector – led by AWS. The tourism sector also witnessed rapid growth last year, with the number of tourists visiting the Kingdom increasing by 12.8 per cent in the first nine months of 2017. “The tourism sector is one of the key investment sectors we recognise as having a strong competitive advantage for Bahrain,” said Simon Galpin, Managing Director of Bahrain EDB. “It contributes 6.3 per cent to the country’s GDP, and is set to grow significantly, as the number of visitors and leisure activities increase.” Bahrain’s new oil discovery and diversification efforts make worthy headlines; however, they will not soothe political tensions or dent its debts in the near future. Bahrain remains the poor relation in the GCC, but with better prospects than anyone could have foreseen at the end of 2017.


COUNTRY FOCUS

BAHRAIN in numbers POPULATION

1.5

MEDIAN AGE

31.4

million 1m

5m

Source: Worldometers; United Nations estimates (April 2018)

GDP

$33.87

billion (2017 est.)

Source: International Monetary Fund

$13.8 $13.1 $33.3

billion (2016 est.) billion (2015 est.) billion (2014 est.)

Source: World Bank

Source: Worldometers (April 2018)

NON-OIL REAL GDP (PERCENTAGE CHANGE)

4.7% 3.6% 3.7 % 2.9 %

(2014)

(2015)

(2016) (2017)

Source: International Monetary Fund

GDP REAL GROWTH RATE

2.5% 3% 2.9%

years

(2017 est.)

(2016 est.) (2015 est.)

Source: CIA World Factbook

GDP PER CAPITA

$51,800 $51,600 $51,100

(2017 est.) (2016 est.) (2015 est.)

Source: CIA World Factbook

GDP GROWTH

BUDGET

Revenues:

1.8% Source: IMF

Saudi Arabia’s GDP is expected to grow 1.8% in 2018

$5.463

billion

Expenditures:

$9.281

billion (2017 est.)

Source: CIA World Factbook

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COUNTRY FOCUS

BRIGHT PROSPECTS Dr Jarmo Kotilaine, Chief Economist at the Bahrain Economic Development Board, tells Banker Middle East that its not all doom and gloom as it may be perceived in Bahrain

H

ow do you view the performance of the Bahraini economy in 2017? The Bahraini economy posted impressive growth results throughout 2017, despite some challenging regional circumstances. Following the release of the preliminary Q4 national accounts, we estimate that Bahrain’s real GDP grew by 3.9 per cent in 2017, which marked a clear acceleration on the 3.2 per cent pace recorded in 2016. Non-oil growth in 2017 reached a remarkable five per cent, and similarly reflected a clear improvement on 2016 (four per cent). Bahrain’s growth rate in 2017 has placed it ahead of its Gulf peers. The strong economic performance in 2017 reflect the strength of structural drivers across Bahrain’s highly diversified non-oil private sector. The economy is also receiving a potent countercyclical stimulus from the largest project pipeline in its history. But 2017 was also a record year for foreign direct investment, with investors benefiting important regulatory initiatives and innovations in areas such as fintech.

Dr Jarmo Kotilaine

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The fastest growing sector of the economy in 2017 was hotels and restaurants which expanded by 9.5 per cent in 2017. This partly reflected an 11.9 per cent year-on-year increase in inbound tourists to a total of 11.4 million. Their aggregate expenditure in Bahrain was 8.9 per cent higher than 2016. This positive momentum benefited from the government’s strategy to boost the profile of Bahrain’s international tourism offerings and encourage longer stays from existing visitors. Other high performing sectors in 2017 included social and personal services (9.4 per cent), led by private education and healthcare, trade (8.5 per cent), real estate and professional services (5.5 per cent) and financial services (five per cent). The EDB attracted $733 million of foreign direct investment into Bahrain in 2017, a record year for the organisation. This represents an increase of 161 per cent from 2016. The new investment projects are expected to generate over 2,800 jobs over the next three years.

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What risks face the Kingdom’s economy this year? Regionally, our data predicts a significantly brighter outlook for the GCC in 2018, with a pronounced pick-up expected as economic diversification and fiscal consolidation efforts transition to their next phase and create a broad revenue base across the non-oil economy. The GCC presents a number of excellent opportunities for investment, growth, and collaboration and Bahrain is ideally positioned as a gateway for international businesses to access these opportunities. In particular, the liberalisation of Saudi Arabia’s economy is a real opportunity for businesses in Bahrain, it is our biggest export market, so what is good for the Saudi economy is good for Bahrain’s economy. Bahrain’s strengths complement the development projects that underpin Saudi Arabia’s economic transformation, from manufacturing to financial services. We strongly believe that Bahrain can play an important role in supporting Saudi’s Vision 2030 programme, and that this programme represents an excellent economic opportunity.

Unlocking these opportunities across the Gulf region were at the heart of the recent investor forum, Gateway Gulf, which brought together investors and business leaders from around the world in Bahrain on 8-10 May. The exclusive invitation-only forum discussed growth opportunities across the GCC and showcased new investment-ready project across diverse industries including tourism, manufacturing, real estate, transport, energy, and water. It also discussed the challenges the region faces, and collaborative solutions to these issues. On the challenges front, we are probably looking at renewed oil market volatility in view of the recent rally in prices. However, the market fundamentals now look much healthier. We are looking at a higher cost of capital because of the ongoing US Fed tightening. However, the liquidity situation in Bahrain is benign and bank lending has actually been accelerating quite consistently over the past year.

PHOTO CREDIT: Shutterstock/Leonid Andronov


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How do you expect the recent oil discovery to impact Bahrain’s economy should it be recoverable? Bahrain has been committed to economic diversification for over forty years now and has established itself as a regional pioneer thanks to its innovative business and regulatory environment. The successes are clear to see, in 2000 the oil and gas sector accounted for 43.6 per cent of the Kingdom’s GDP, compared to only 18.4 per cent in 2017. Despite these successes, and our long-term commitment to economic diversification, oil and gas remain an important source of revenue for the country, and the recent discovery has the potential to provide considerable additional fiscal flexibility in the future. It is naturally no less significant from the energy security perspective. We also anticipate a range of long-term economic benefits, both directly and indirectly through downstream activities and related manufacturing. Since the visionary establishment of Bapco already in the 1930s, Bahrain has established a strong track record creating value from across the hydrocarbons value chain and important initiatives in this regard are under consideration also now. Manufacturing remains the second largest non-oil sector of the economy and has an impressive history of creating quality employment. What sovereign-led strategies currently bolster the country’s fiscal position? As we’ve highlighted, Bahrain has a very strong growth outlook as economic diversification continues to drive growth. Alongside this, the government has a clear strategy to ensure long-term fiscal stability based on a balanced, equitable, and sustainable plan for deficit reduction. This includes diversifying government income by increasing non-oil revenue, whilst also consolidating expenditure in a manner that enhances broader economic competitiveness and efficiency of public spending.

REGIONALLY, OUR DATA PREDICTS A SIGNIFICANTLY BRIGHTER OUTLOOK DR JARMO KOTILAINE, CHIEF ECONOMIST AT THE BAHRAIN ECONOMIC DEVELOPMENT BOARD THE GCC IN 2018, WITH A PRONOUNCED PICK-UP EXPECTED AS ECONOMIC DIVERSIFICATION AND FISCAL CONSOLIDATION EFFORTS TRANSITION TO THEIR NEXT PHASE AND CREATE A BROAD REVENUE BASE ACROSS THE NON-OIL ECONOMY.

It is important to note that key planks of the consolidation strategy are already in the law books and are being implemented through multi-year programmes. This goes for the scaling back of various subsidies, notably in energy and utilities. The excise duty was introduced based on a GCC-wide inter-government framework agreement and the same is true for VAT which will create a broad revenue base across Bahrain’s large non-oil economy. But the Kingdom is also determined to maximise value for money across Government spending by creating an efficient, modern public sector. Examples of measures to this end include reducing the number of ministries from 18 to 16 and merging others, which will yield an annual saving of around $1.5 billion. Further efficiency and productivity led initiatives include Bahrain’s Cloud First policy, which requires government organisations to migrate data to the cloud. This has already led to 90 per cent savings for some government entities. What is your outlook on a progressively stable economy on Bahrain? The future for Bahrain is very bright, with our robust economic growth forecast for 2018 supported by the IMF’s World

Economic Outlook which recently forecast that Bahrain’s economy would continue as the fastest growing in the GCC in 2018. This growth is evidence that Bahrain’s commitment to creating a pro-business regulatory environment, whilst also investing in sustainable longterm growth strategies and ongoing economic diversification efforts, is paying dividends. The key growth drivers that delivered strong numbers in 2017 will remain in place for years and new ones are emerging. For instance, Alba Line 6 will start production in 2019 and will enable a further expansion in the downstream sector. We are seeing important new initiatives in sectors such as ICT and technology-based financial sectors. These factors, along with many others, are helping to put productivity at the forefront of driving growth. We believe that Bahrain offers a compelling and essentially complementary value proposition in the GCC region, built on human capital, regulation, and connectivity. While we fully recognise the importance of nimbleness in an area of continuous change, we see these fundamentals as a solid foundation for growth in the years and decades ahead.

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INVESTMENTS

RIPE FOR THE PICKING

Emmanuel Laurina, Managing Director, Head of Middle East & North Africa and Ana Harris, Head of Equity Portfolio Strategists for EMEA, both from State Street Global Advisors, explain why the global climate bodes well for investment in the region

PHOTO CREDIT: Shutterstock/katjen

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H

ow does the investment landscape in the Middle East this fit into the global picture? Emmanuel Laurina (EL): The big focus in the region right now is on diversifying government revenue from oil and fostering sustainable economic growth. Reductions in subsidies and the introduction of VAT have perhaps been the most visible changes at the consumers’ level but they are part of a much broader economic and fiscal reform agenda which, if successful, could be game-changing. Efforts are being made to increase foreign direct investments and to open up financial markets to foreign capital and Saudi Arabia in particular is going through a drastic transformation which is necessary for Vision 2030 to be a success. More and more foreign companies are establishing a presence in the Kingdom because there are genuinely attractive business, investment and partnership opportunities for those who are prepared to commit on a long-term basis. Describe the appetite for ESG investments in this region. EL: Much like smart beta, the term ESG can have many forms and the criteria used for screening portfolios will tend vary from one region to another. Certainly, first-generation ESG filters in the form of negative screens on portfolios have been in high demand for several years in the Middle East.

More recently, we have seen investors adopt more sophisticated approaches to screening out companies that are not in line with Islamic principles, and index providers are also developing customised indices reflecting those restrictions. We are also seeing growing interest for low carbon investing, SRI and sustainable energy as themes, and more and more Middle East investors are now asking about the potential for ESG factors to serve as a source of alpha. In terms of where we are in the cycle, the current landscape in the Middle East is comparable to smart beta three years ago, in that the concepts have been understood and integrated and key stakeholders are now figuring out how more advanced forms of ESG investing can be implemented and how these can benefit their portfolios and their societal objectives overall. What are your views on the current market cycle and which factors do you think are successful at the moment? Ana Harris (AH): Entering the second quarter of 2018, investors face a considerably more uncertain investment landscape in global capital markets than the anomalously benign outlook priced just three short months ago at the close of 2017. Since that time, a bevy of new concerns have been added to the proverbial wall of worry that will need to be overcome if equity markets are to erase year to date losses and advance in 2018.

WHAT IS FOR SURE IS THAT INDEXED MANAGERS WILL BE LEADING THE WAY, SINCE THEY WILL BE ADDING SAUDI ARABIA STOCKS TO THEIR INDEXED EMERGING MARKET PRODUCTS AT THE SAME TIME AS BENCHMARK PROVIDERS. Emmanuel Laurina

Despite the first quarter loss for global equities, however, the positive economic growth and earnings trends that provided foundation for fifteen consecutive monthly gains in global equities through January so far appear to remain firmly intact. Though off the highest readings reported at the start of 2018, global PMIs closed March consistent with global industry growing at an annualised rate of 3.5 per cent according to J.P. Morgan. Expectations for 2018 corporate earnings growth actually accelerated during the first quarter with US earnings expected to advance 18.3 per cent against an estimate of 10 per cent at the end of 2017 while developed market earnings as a whole are now expected to advance 10 per cent for the year against a 7.5 per cent expectation last December.

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INVESTMENTS

Emmanuel Laurina, Managing Director, Head of Middle East & North Africa, State Street Global Advisors

Expectations that US growth and inflation would continue to advance at a pace consistent with at least three Federal Reserve (Fed) rate increases in 2018 were also bolstered during the first quarter with the market pricing 84bps of total tightening for the year at the end of March against a forecast for just 62bps to start the year. Looking at factor performances, momentum remains the standout factor this year to date, continuing its strong performance from 2017, but has given up some of its gains in a turbulent March. The recent market volatility has seen the low volatility factor outperform the most, with another defensive factor quality also holding up well. On the other hand, value and high dividend yield have continued their run of poor performance from the end of 2017. In terms of factor valuations, stocks sorted on low volatility appear somewhat expensive versus their median levels over the last 10 years, whereas quality appears neutral, while value and size appear to be slightly expensive.

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Ana Harris, Head of Equity Portfolio Strategists for EMEA, State Street Global Advisors

How have smart beta strategies grown in the institutional market and what value do they hold compared to traditional asset classes? AH: Smart Beta are a set of strategies that look to capture well-known and wellresearched factors. These factors have shown to deliver a premium above a market capitalisation weighted portfolio and it is possible to capture them through systematic processes that follow a well-defined set of rules and will do consistently over time. We believe that there are five factors that drive stock returns over time: value, low volatility, momentum, size (or small cap) and quality.

These strategies allow investors gain more control of their portfolio risk and return drivers while aiming for specific outcomes. We have seen investors use these as a complement to both their active and passive allocations. Their use has definitely grown over the last few years, especially when it comes to combining several factors within a single portfolio and create multi-factor approaches. This help investors benefit from diversification and potentially remove some of the performance cyclicality associated with single factor investments. How would you describe the institutional investor appetite in this region? EL: We continue to see sustained appetite for private and real assets as a longterm portfolio allocation, as well as money being deployed in listed asset classes, with a renewed interest in emerging markets in recent months. Much of the activity we have seen has resulted from asset allocation reviews causing investors to question their mix of strategies and managers. The advent of smart beta and factor investing has certainly helped investors rationalise their cost base by eliminating poor-performing active managers and replacing them with lower cost factorbased portfolios. In a number of cases, we have seen investors adopt a ‘barbell’ portfolio allocation with a large portion of their assets in indexed mandates at the core, a layer of smart beta portfolios and a greater focus on high-conviction active managers, which we believe is a sensible approach.

DESPITE THE FIRST QUARTER LOSS FOR GLOBAL EQUITIES, HOWEVER, THE POSITIVE ECONOMIC GROWTH AND EARNINGS TRENDS THAT PROVIDED FOUNDATION FOR FIFTEEN CONSECUTIVE MONTHLY GAINS IN GLOBAL EQUITIES THROUGH JANUARY SO FAR APPEAR TO REMAIN FIRMLY INTACT.. Ana Harris



INVESTMENTS

Even those investors who are not taking such radical steps are keen to understand which factor exposures drive their risk and returns at the total portfolio levels and today’s technology allows to do that across asset classes and make better informed decisions as a result. In your opinion, what are the opportunities in this market? EL: There have been interesting developments in terms of increased bond issuance in the GCC, improvements in market access and liquidity and, more recently, FTSE’s decision to include Saudi Arabia in its emerging market index in a few months’ time. The hope is that international investors will see this as an opportunity to access attractive yields and to tap into the region’s growth story. What is for sure is that indexed managers will be leading the way, since they will be adding Saudi Arabia stocks to their indexed emerging market products at the same time as benchmark providers. On the fixed income side, the high demand for individual bonds on the primary market is a sign that investors are still yield-hungry and the hope is that markets and liquidity

continue to broaden and deepen enough to launch credible institutional products. What is your outlook for the next 18 months? AH: Looking ahead in our tactical positioning, our view of global equity markets continues to be broadly optimistic on the continuing positive trends in corporate earnings across regions. For the US we recognise the new uncertainties raised by a more aggressive trade stance by the Trump administration and possibility of foreign retaliation but expect the actual economic impact to be contained. Our allocations include overweight positions to international developed markets in Asia-Pacific, and overweight allocations to US and emerging market equities. We hold a neutral allocation to European equities, US growth and value equities and US small cap equities. Across broad asset classes, our portfolios continue to hold an overweight position in growth assets—primarily equities over fixed income. In fixed income, we are anticipating global government interest rates to continue

to gradually rise as policy is normalised across regions. We hold an underweight position in US intermediate investment grade bonds and a smaller underweight position in global government bonds outside the US, where long-term rates relative to fundamentals appear even less aligned. We expect some continued modest flattening in the US yield curve as near-term policy tightening will have a greater impact on short-term rates, while longer-term inflation and growth expectations that determine longer-term rates are more firmly anchored. In credit, we have become more measured on investment grade and in particular on high yield bonds, as spread compression to new cycle lows may limit further gains in these sectors as the cycle matures. Across real assets, our portfolios hold an underweight position to REITs which we expect to be challenged in the anticipated continuing rising rate environment. We have also added an overweight position to broad commodities which we expect to provide a measure of diversification in an environment where real assets should benefit as inflation expectations are rising.

GLOBAL FACTOR PERFORMANCES Annualised Returns (%) Global Factors

Volatility (%)

1 Mo

3 Mo

YTD

1 Yr

3 Yr

5 Yr

10 Yr

1 Yr

3 Yr

5 Yr

10 Yr

World

-0.9

-1.3

-1.3

13.6

8.0

9.7

5.8

8.3

10.6

10.2

16.2

Dividend

-0.6

-3.1

-3.1

8.0

6.5

6.9

4.6

8.0

9.9

10.0

16.7

Minimum Volatility

0.7

-1.2

-1.2

9.7

8.0

8.9

7.0

6.8

8.5

8.3

11.7

Momentum

-1.7

2.8

2.8

25.4

12.3

13.1

7.7

10.3

10.8

10.3

15.2

Quality

-0.4

0.1

0.1

16.8

10.3

11.8

8.8

8.1

10.4

9.9

14.0

Size

0.3

-0.6

-0.6

15.9

9.5

10.9

8.4

7.1

11.0

11.0

18.4

Value Weighted

-1.0

-2.2

-2.2

12.9

7.6

9.2

5.0

8.7

11.6

11.0

17.9

Source Bloomberg Finance L.P. as of 30 March 2018. Indices used: MSCI World NTR Index, MSCI World High Dividend Yield NTR Index, MSCI World Minimum Volatiltiy NTR Index, MSCI World Value Weighted NTR Index, MSCI World Value NTR Index,MSCI World Quality NTR Index, MSCI World Momentum NTR Index, MSCI World Small Cap NTR Index.

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A remarkable track record of long-term growth. An award-winning reputation.

Since launching in 2006, Gulf Capital has become one of the region’s most successful alternative investment firms. We have built a track record of delivering long-term returns and industry-leading results that has made us the firm of choice for regional and global investors. www.gulfcapital.com

Firm of the Year MENA 2014

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Best Private Equity Firm in the Middle East, 2011, 2012, 2013, 2014 and 2015 Best Alternative Investment Firm, 2016

16/03/2017 13:03 17:32 15/10/2017


EQUITY MARKET

MENA EQUITIES FINALLY COME OF AGE

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Hasnain Malik, Head of Equity Research, Exotix Capital, illustrates the new appeal of the region's equity market

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he equity markets of the Middle East and North Africa have been derailed many times over the last fifteen years. The bursting of the 2006 bubble, the lagged impact of the global financial crisis, the Arab Spring protests, regime changes and the GCC split have all brought an end to periods of optimism on the investment merits of the region. Some fear that the potential abandonment of the Iran nuclear deal by the US, and the resulting increase in regional geopolitical risk, may prove the next stumbling block. But a confluence of factors is more likely to bring the region, for all its imperfections, back to the fore of international investors in the coming year.

PHOTO CREDIT: Shutterstock/Fahkamram

WELL-POSITIONED FOR THE NEW GLOBAL NORMS Relative to emerging and frontier market peers, the GCC is well positioned for the change in US interest rate expectations (faster, larger hikes) and the significant rise in oil prices (a near doubling in the last year). Despite a ramp up in government bond issuance, the GCC still has relatively low external, US dollar-denominated debt as a percentage of GDP. This will matter as peers are squeezed on servicing their proportionately higher external debt. In the GCC, higher oil prices obviously mean higher growth, in the form of public sector spending on projects and welfare benefits. For oil importing peers they portend higher inflation and current account pressure. If the turn in the US interest rate cycle also prompts strengthening of the US dollar then, again, the GCC is relatively well-

WITH FIVE OF THE REGION’S LARGEST MARKETS CURRENTLY OR LIKELY TO BE INCLUDED IN MAINSTREAM EMERGING MARKET INDICES, MENA IS CERTAINLY NO LONGER A REGION THAT INTERNATIONAL INVESTORS CAN IGNORE.

positioned, from the perspective of foreign investors, because of its pegged currencies. The likes of Morocco and Egypt do not share these characteristics, but they have at least already put in place reforms on currency flexibility which should allow them to adjust more easily in the event of a rally on the US dollar. HEDGED IF IRAN DEAL ENDS If the Iran nuclear deal is effectively scuppered by US President Donald Trump then the view of many is that this will create a riskier environment for regional geopolitics. Equally important for investors is that any ultimate restrictions on the supply of Iranian oil would occur at a time when global oil supply and demand is the tightest it has been in years. In other words, the oil price would likely increase, and this arguably hedges the GCC investment case.

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EQUITY MARKET

Geopolitically, if a more virulent Iran emerged from the end of the nuclear deal, the likelihood of closer relations, including financial support, between the GCC and traditional regional allies, such as Egypt, Jordan, Morocco, likely increases: a partial hedge. REFORMS REGARDLESS OF THE OUTSIDE WORLD Away from the global factors of US interest rates, oil prices and Trump’s foreign policy, there are on-going reforms within the GCC and wider region that make many of the individual countries in the region, on their own merits, more interesting investment destinations compared to five or ten years ago. For some, austerity actions have addressed some of the immediate fiscal stresses. Economic transformation agendas, in terms of non-oil diversification

Hasnain Malik, Head of Equity Research, Exotix Capital, Dubai

EQUALLY IMPORTANT FOR INVESTORS IS THAT ANY ULTIMATE RESTRICTIONS ON THE SUPPLY OF IRANIAN OIL WOULD OCCUR AT A TIME WHEN GLOBAL OIL SUPPLY AND DEMAND IS THE TIGHTEST IT HAS BEEN IN YEARS. IN OTHER WORDS, THE OIL PRICE WOULD LIKELY INCREASE, AND THIS ARGUABLY HEDGES THE GCC INVESTMENT CASE. and localisation, while still very early and fraught with implementation risk, at least provide a more coherent strategy to address the long-standing demographic and economic challenges facing the GCC when compared against the traditional default position of simply ramping up fiscal spend in the face of any challenge. Succession risk has, in part at least, been resolved more quickly than had been feared. This description of the GCC could not have been applied the last time the oil price was above $70 in late 2014. Outside the GCC, there have been significant structural reform actions in Egypt and Morocco, which has potentially put these economies on a surer fiscal footing and on a path to strengthening manufacturing, job-creation and current

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account-reducing exports. Both countries have taken action on fuel subsidies and civil service wages. Morocco has even addressed pension reform. Few countries in the smaller frontier and emerging markets world have seen their top export item change from a commodity (fertiliser) to a manufactured good (automobiles) in the last few years in the way that Morocco has. Economic free-zones, cheap labour and low tariff access to the EU have enabled this. In Egypt, the combination of abundant cheap labour, the Suez Canal transit hub, the bankruptcy, industrial licencing and investment laws, as well as the country’s own low tariff agreement with the EU may replicate this export success in the coming years.

In advance of this manufacturing export growth, Egypt’s development of new gas reserves and the recovery in tourist numbers should kick in. In Jordan and Lebanon, while there is a less clear path to manufacturing exports and both have suffered a burden on security and public infrastructure from the influx of Syrian refugees, there has at least been belated fiscal reform and the mobilisation of external credit from geopolitically aligned countries. Insulated from pressing global risks, and while imperfect, now too big to ignore The MENA opportunity for foreign investors remains imperfect: excessive fragmentation which restricts the creation of scale economies; too much control by state owned enterprises, which inhibits innovation; and a level of geopolitical unrest that will always be too high for some. But the region may cope with an era of higher US interest rates, higher oil prices and, potentially, a return of US dollar strength significantly better than its peers. In isolation from global context, the reform actions undertaken in many of the region’s individual countries make for more compelling investment cases compared with the recent past. And with five of the region’s largest markets currently, or likely to be, included in mainstream emerging market indices, MENA is certainly no longer a region that international investors can ignore. OUR FAVOURITE POCKETS Our favourite pockets in the regional public equity universe are determined on the basis of attractive valuation versus history, positive exposure to the fundamentals of rising US rates, higher oil prices or domestic transformative reform, or potential benefits from index related fund inflows: Egyptian construction, real estate and investment banks; GCC banks (particularly the Islamic ones); GCC chemicals; Lebanon banks; and Saudi healthcare.



PHOTO CREDIT: Shutterstock/PopTika

RETAIL BANKING

RETAIL BANKING AUTOMATION: DELIVERING SUPERIOR CUSTOMER EXPERIENCE By Dr. Dimitrios Vasileios Kokkinos, Chairman & Managing Director and Spyros Gousetis, Vice Chairman, DVK Consultants 62


I

n this period of very low interest rates, the fact that retail customers are a very good source of low cost capital tends to be overlooked. Banks focus more on the asset side of retail banking. Low interest rates will not last forever. They have already, timidly, started to pick up. The importance of retail customers’ deposits, although individually small, will become, in their entirety, important again. The depositor is the foundation of banking. Retail customers were neglected by the banking system, mainly due to the high cost of servicing them. That can now be corrected with the proper use of a number of new technologies, such as AI, Big Data, Fintech and Blockchain, often collectively called, Automation. Attention must be paid to the fact that while wholesale or private banking customers are vocal and feedback on mistakes or inadequate services is received fast, the majority of the retail customers are silent, while their problems reach with difficulty the upper echelons of retail bank management. The recent advances in automation can facilitate the personalisation of retail banking without the many problems that exist to date. They can also increase connectivity and on demand service. Automation in the processing of retail customers’ needs, was wrongly

understood by many banks, as the chosen way to reduce retail customer servicing costs. That pleased the banks but displeased the retail customers. The principal reason was and is that the service level of automated customer service was lower vs. that of human service. In addition, customers needed to learn new ways to operate their accounts, most of them selftaught. A wave of customer displeasure extended from Sweden to South Africa. The problem, in general, lies not in digitalisation or automation, but rather in the way it has been applied by many financial organisations. The principal source of problems is excessive reliance to external providers and outsourcing of the automation tasks. This is often done without adequate internal know-how to monitor the providers work; particularly from the retail service quality angle. This undertaking must be handled and supervised by a very senior retail banker with adequate digital literacy and his/ her internal team of digital retail banking experts, from start to finish. The inadequacy of the systems offered by the automation providers, forced the banks to request that their customers undertake the extra effort, to fill the gap created by the hasty removal of humans and their inadequate replacement by unperfected automation systems.

IN THE 21ST CENTURY A RETAIL BANK SHOULD VIEW ITSELF A TECHNOLOGICAL COMPANY WITH A BANKING LICENCE. Dr. Dimitrios Vasileios Kokkinos

Unfortunate choices of various banks worldwide, have already undermined the quality of their respective retail service. Even big international banks became victims of the digitalisation of their internal bureaucracy, particularly in procedural and compliance issues. Accounts were blocked because the automated system erroneously judged non-compliance on an issue etc. That service degradation was rarely communicated to the upper retail banking management, but increased customer’s displeasure. Taking humans out of the loop prematurely results to the detriment of the quality of customer service. The banks which carefully structure, customer-oriented automation, for instance BBVA, are winning. Moreover, the status of banks, per se, is in danger as it is now open to any other entity that could also provide retail banking services

To supersede the human customer service two principal points, need to be addressed—service design and customer analytics.

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RETAIL BANKING

and those entities are already emerging. Those entities perfected their trade at the expense of the banks that invited them as providers of automation services to undertake the automation of the banking operations. Amazon is a case in point but Apple, Google and many other, platform, business model companies, can do it as well. Those entities are now ready to provide internet-based banking services. They have learned the trade at the expense of the banks that outsourced to them the automation of their retail banking. Now they are in a position to offer superior service to retail customers having perfected their products, while providing this service to the banks and being paid for doing so. BANKING IS A SERVICE PLATFORM, NOT A PIPELINE BUSINESS MODEL INDUSTRY That requires absolute trust in the platform. Technical ability of the platform, whether human or digital, is defined by its competence to perform, accurately and swiftly, all banking functions and transactions, as well as, to successfully manage multiple entries and exits.

By assigning, hastily, serious decisionmaking to machines, they are in danger of developing employees with Pavlov-like reactions to machine instructions. This is a strategic mistake. If customers feel that their respective banks do not really care about their quality of service, the subsequent corollary is, that banks only care about their self-serving interest, rendering them untrustworthy. This leads to loyalty disruption, easily to be addressed by the emerging competition. To supersede the human customer service two principal points, need to be addressed—service design and customer analytics. Service design is the instrument with which a successful automated handling of a massive customer base is prepared. It defines the relationship amongst all systems, processes and people involved in the delivery of a service. In complex databased, multi-channelled environments and information systems, service design enables the banks to connect meaningfully with their retail customers in spite of their big numbers and do so at a competitive cost. Central to a successful service design is attention to the entire customer journey. Banking automation should be preceded

THE GRAPH EXHIBITS THE SEVERITY OF CUSTOMER SATISFACTION IN SWEDEN, A DIGITALLY ADVANCED COUNTRY. Swedish have already seen their customer satisfaction scores drop to a 20-year low after shutting branches and pushing people onto online services.

Index 0-100

Satisfaction Slump Swedish bank's customer satisfaction score dropped to a 20-year low last year 72 71 70 69 68 67 66 65 64 63 1995

1998

2001

2004

2007

Source: Svenskt Kvalitetsindex 2016 survey of private, corporate banking customers

64

2010

2013

2016

by re-examining at the customer journey, in order to re-engineer the processes (e.g. reduce customer touch points), looking at interdependencies amongst different bank departments (e.g. avoid different compliance rules in different departments), as well as channels of communication (harmonious and consistent service being physically delivered) in a branch or virtually. It is evident, that the retail customer journey, is not a linear process. Effort should be made to be without gaps and frictionless. To accomplish this, the banks need to change at both the structural and cultural level. If this is not observed, then automation will include inefficiencies of the previous system. Tandem Bank in UK has created a candid video to show how corporate customer service structures, like those of banks, rarely benefit customers. To exhibit this, instead of a bank, the grievances were recreated in a normal pub, in North London, contextualising how customer service should be uniform and respect the customer regardless of the industry it is being delivered. In doing so they replaced pub employees with retail bank ones. The pioneering institutions are aware of the importance of the experiences that their services deliver. “If they generate customer value, this will positively impact business results”, said Rob Brown, BBVA’s head of Marketing, Design & Responsible Business. “BBVA is a clear example of the integration of design at a strategic level within the organisation, where its role has evolved quickly and has resulted in the creation of the first global and multidisciplinary team,” said Brown. Service design must always strive to satisfy customer convenience. Thus, in retail banking they encompass three key themes: Easy and secure customer identification—easiness is the best service to a retail customer. Banks and particularly software developers, in order to secure the identity of the user, make difficult checks. Modern technology can be extremely helpful on that.



RETAIL BANKING

AI provides now plenty of other easy and secure solutions. Simplicity of operations—the software development must be done for the convenience of the customer, not the software developer. Only experienced retail bankers can understand that. The way to address this issue is to choose a provider that has done this before and test it not with bank employees, but with randomly selected customers of below average digital literacy. Avoidance of promotional clutter—A customer performing a financial operation, even simply checking his available cash, is focused on this. An ad promoting anything at that time, works to the detriment of the relationship with the bank. Promoters do not ‘own’ the retail customers. Modern technology can guide efficient promotion with customer analytics. We need not so much superior software developers, there are enough of them. What we need more is knowledgeable and talented digital retail bankers monitoring the automation. The digital knowledge clusters that are developed within the bank is the best hope for the future of retail Banking. CUSTOMER ANALYTICS In all industries, understanding customers is the foundation to a sustainable competitive advantage. The best way for a Retail Bank to increase and maintain loyalty is to gain a deeper knowledge of the retail customer—their interests, behaviour, preferences and predispositions--and in turn, they can create better, personalised and consistent user experiences that enhance brand loyalty & value vs. dysfunctional collection of experiences. Analytics refers to the analysis & insights extracted from Big Data that are available. Retail banks are awash with data. The idea is to shift through data to arrive at meaningful insights that can help one to make more accurate predictions and

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THE PROBLEM, IN GENERAL, LIES NOT IN DIGITALISATION OR AUTOMATION, BUT RATHER IN THE WAY IT HAS BEEN APPLIED BY MANY FINANCIAL ORGANISATIONS. Dr. Dimitrios Vasileios Kokkinos, Chairman & Managing Director, DVK Consultants

more informed decisions. There needs to be a strategy i.e. a data strategy. A solid framework to support decision making. Data comes in two forms structured and unstructured. In retail banking internal data is both structured data e.g. demographic profiles, product ownership, balances, and unstructured e.g. call centre logs, channel interactions, correspondence etc. Even though internal data provides a wealth of information that can be mined for insights, it is rather inward looking. Modern decision making shifts our attention to external data. External data is comprised of unstructured data sets and associated with a bank’s customers, competitors and other players within the ecosystem the bank operates and outside of it as well. For instance, by listening to retail customers in social media, one can get a more holistic understanding of a customer’s needs profile (e.g. travelling, entertainment etc.). Moreover, social media can also be used for risk management and fraud detection. Decision making based on external data, is both proactive and predictive. Retail banks should apply analytics to convert their data into insights, delivering superior customer experiences. In doing so, they need to contextualise data and

get personal. Understand their customer at the individual level, their lifestyle, delivering products, services and content that are relevant to them (in their life stage & financial cycle), through the right channel, at the right time. In a word, retail banks should develop and use their digital minds to win analogue hearts. A STRONG INTERNAL, CUSTOMER ORIENTED, DIGITAL CULTURE In the ‘70s when computers were massively introduced in banking, there was a lot of pain during the adjustments necessary in the back office, until the banks abandoned outsourcing as their principal computation method and developed their own internal computing competence. Those banks that adopted software without adequately developing an internal IT team paid the price. However, since computerization affected initially only the back office, there was always a human to correct glitches and bridge the service gap with the customer. In contrast, automation, as often applied these days, it does not. Banks do not lose as of yet many customers simply because the competing banks are in a similar way, as well as, there exists certain inertia of the retail customer to change bank. This has started to change. Some banks have started developing a well performing automated system. These well-performing systems attract customers from other banks, initially by word of mouth. When this becomes general knowledge, the less performing banks will feel the pinch. The movement has already been observed internationally. In the 21st century a retail bank should view itself a technological company with a banking licence. Re-imagining the retail banking service becomes a necessity for traditional, mainstream banks if they wish to hold on to their customer base and continue to grow. A strong, internal, customer-oriented digital team, led by top retail executives is not just ‘good to have’, it’s a must.


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ISLAMIC FINANCE

CONSOLIDATION K THE POTENTIAL IN A.M. Best suggests the right ingredients for the success of Takaful companies in the MENA region

T

PHOTO CREDIT: Shutterstock/oneinchpunch

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akaful companies have gained momentum significantly in the last 15 years. Except for Saudi Arabia (where all insurers operate under the unified co-operative insurance model, which is distinctly different from the traditional Takaful model), A.M. Best believes that most of the remaining Takaful operators in MENA have struggled to establish competitive positions in their respective markets. A recent report by the ratings agency highlighted that despite some market consolidation, the business profiles of most Takaful companies remain limited. A.M. Best considers the Middle East


N KEY TO UNLOCKING L IN TAKAFUL

insurance markets to be concentrated with a few large players dominate their respective markets, and others competing for the remaining premium. For example, the UAE insurance market has over 60 insurers with the five biggest companies accounting for more than one third of gross premium written. Most Takaful operators generally fall into the latter group, where emphasis is placed on growth over profitability. This often leads to intense levels of competition, with Takaful companies competing directly with conventional insurers. Given their relatively new

status and position in these markets, Takaful operators often lack sufficient size to achieve economies of scale. Their weaker cost efficiencies and start-up nature translates into high cost bases and higher expense ratios which dampen operating performance. It has been noted that the Shari'ahcompliant nature of Takaful companies is not a specific draw for Muslim consumers. This extends further into the Shari’ah-compliant insurance eco-system, with Shari’ah boards of Takaful companies being reluctant to obligate their companies to seek Retakaful capacity for their reinsurance programmes.

This has been one of the drivers for Retakaful operators failing to establish strong business profile. Takaful companies generally compete on pricing and servicing, and not through offering a separate unique value proposition (UVP). One of the biggest areas of contention is the return of surpluses to policyholders. Apart from a few companies, Takaful operators have generally not made any distributions to policyholders, mostly because they have been unable to build up sufficient surpluses. Nevertheless, this has impaired what should have been one of the Takaful market’s key UVPs.

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ISLAMIC FINANCE

MARKET SHARE – SHARI'AH FOOTPRINT IN FINANCIAL SERVICES (MENA) (2016) 40 35 30 25 (%)

Additionally, for many years, MENA Takaful companies have hoped the family/life Takaful market will gain traction and have developed products designed to meet this expected demand. This follows the Malaysian and Indonesian experience, where family Takaful is well established and remains profitable for operators.

20 15

70

10 5 0

Takaful

Isamic Banking

Note: Takaful fottprint based on share of total gross written premiums. Source: Swiss Re sigma No. 3/2017; Word Bank; EY World Islamic Banking Competitiveness Report 2016; A.M. Best data and research.

RETURN ON EQUITY FOR MENA TAKAFUL AND CONVENTIONAL INSURERS (2012-2016) 25 19%

20 15 (%)

OPPORTUNITIES AND CHALLENGES The past few years have seen an uptick in merger and acquisition (M&A) activity in the MENA region, and a large part of this has been in the Takaful space. The industry has seen a couple of mergers in Bahrain (Takaful International and Solidary Group), Jordan (Yarmook Insurance) and in the UAE (Takaful Emaraat). A.M. Best’s believes that the lack of scale and size for Takaful companies should encourage more acquisitions to allow operators greater market presence. With the increase of new players in countries such as Egypt and the UAE, the research and ratings agency also noted that the trend of conventional companies operating or acquiring Takaful branches or subsidiaries is not new and is driven by the attractiveness of an additional distribution platform, rather than for the purpose of achieving scale or gaining market share. In terms of financial performance, MENA Takaful companies have underperformed compared to their conventional counterparts. According to A.M. Best, return on Equity (ROE) metrics over the fiveyear period between 2012 and 2016 show Takaful operators struggled to match returns achieved by their conventional peers. The underlying reason for poorer ROE metrics is the underwriting profitability, which Takaful operations have found challenging. Combined ratios for the Takaful market remained above 100 per cent between 2012 and 2016, whilst conventional insurers demonstrated profitable sub-100 per cent combined ratios over the same period. The key driver of the higher combined ratios for Takaful operators is the expense ratio.

10 5 0 -5

11%

10% 3%

7%

2013

2014

9%

8%

2%

2%

2015

2016

-4% 2012

Conventional

Takaful

Source: A.M. Best data and research

This is further exacerbated by the high level of Wakalah fees charged by most Middle Eastern companies. Over the five-year period between 2012 and 2016, A.M. Best notes that the spread of Wakalah fee against shareholder expenses (including net incurred commissions) has consistently remained excessive, peaking at 46 per cent in 2015. The margin reduced significantly in 2016,

due to changes in the UAE market, after the regulator imposed a cap on the level of Wakalah fees that can be charged. Additionally, accounting changes in the UAE meant that all acquisition expenses have to be incurred in the shareholder account, reducing the differentials earned. As a result, Wakalah margins in the UAE reduced to a more reasonable four per cent in 2016, the lowest in the region.


COMBINED RATIOS FOR MENA TAKAFUL AND CONVENTIONAL INSURERS (2012-2016) 120

120

106

(%) (%)

110

106

105

110

100 97 90

80

92

93

2012

2013

96 90 2015

2014

Conventional

2016

Takaful

Source: A.M. Best data and research

(%)

MARGIN OF WAKALAH FEES OVER SHAREHOLDER EXPENSES (2012-2016) 50 45 40 35 30 25 20 15 10 5 0

46% 38% 33% 22%

18%

2012

2013

2014

2015

2016

Note: Includes net incurred commissions. Based on a sample of 23 MENA primary takaful companies. Source: A.M. Best data and research

Additionally, the balance sheet of Takaful companies remain unbalanced. Continued annual deficits in policyholders’ funds, reflective of poor underwriting and excessive Wakalah fees mentioned above, are increasing the level of accumulated deficit and therefore weakening the financial strength of the policyholders’ funds. Uneven distribution of profit between policyholders and shareholders could

be attributed to inadequate incentive structures and governance. Wakalah fees are charged as a percentage of gross contributions, incentivising shareholders and operators of companies to concentrate on top-line growth to maximise fee income, rather than profitability which can improve policyholder surplus generation. Unlike other mutual companies, Takaful companies do not

have policyholder representation on their boards of directors. Instead, these are made of shareholders and independent professionals. Therefore, there is less pressure on management to act in the interest of participants. MOVING FORWARD Due to a lack of sufficient differentiation, Takaful providers remain subject to fierce price competition with larger, more established insurers that already benefit from greater brand awareness and established distribution networks. Furthermore, additional support from Shari’ah scholars in promoting Islamic financial products is essential for the growth of the Takaful sector. When an improved level of profitability is achieved, it is important that companies achieve a balance of earnings between policyholders and shareholders. Shareholders require dividends to justify their capital investment, but policyholders also have the right to a share of the surplus accruing from the good management of the Takaful fund. Retention of surpluses in policyholders’ funds will improve mutuality in line with the Takaful model, as well as the level of policyholder protection. This alignment of policyholder and shareholder interests will also help operators differentiate themselves from conventional insurers. Developments in regulation are also key for policyholder protection. Takaful companies will do well to lobby for more robust, comprehensive and consistent rules to improve confidence in the industry and create the right environment for growth. This is particularly important in countries where the regulatory code does not yet deal specifically with Takaful. A.M. Best believes that once the industry tackles these challenges, it will be better placed to serve the needs of the enormous potential market for Shari’ahcompliant insurance, to the benefit of all stakeholders.

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OFFSHORE CENTRES

DEMYSTIFYING THE WORLD OF OFFSHORE FINANCE

PHOTO CREDIT: Shutterstock/Kisov Boris

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Philip Cernik, Chief Marketing Officer at Friends Provident International, highlight the plusses of offshore banking for consumers

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nvesting offshore is one of the best things that an expatriate can do. Yet in recent years, offshore banking and investing has earned itself a mixed reputation. We’ve seen numerous articles reporting on scandals such as the ‘Panama Papers’ or the ‘Paradise Papers’. This has called into question the suitability and legality of offshore jurisdictions when it comes to international finance.

The spotlight is trained on several offshore centres and understandably so. The industry seems to have been portrayed as the sole preserve of investors whose focus is to hide wealth and evade taxes. However, there are many legitimate reasons that people and businesses may wish to invest at least some of their wealth offshore. Unfortunately, these legitimate reasons are often overshadowed by negative attention which is, for the most part, undeserved. The UK government, for example, has successfully blurred the lines between tax avoidance, which is legitimate, and tax evasion, which is illegal. The view of some commentators is that this is motivated purely by the opportunity to generate more revenue for the UK’s own domestic coffers and to offset a large budget deficit. It is perfectly legal to invest offshore as a UK resident, and as a resident of many other countries, but investors must remember that not declaring their gains on their tax returns could be an offence. Most established offshore jurisdictions are subject to some of the most rigorous financial regulatory regimes in the world and offer many advantages for international investors. For small countries, offering incentives to foreign investors is a good way of boosting the local economy. It creates jobs in the financial services and associated sectors and encourages inward investment for the country. From an international banking and life insurance perspective, several companies operate from the Isle of Man (IoM), and fall under the regulatory auspices of the IoM Financial Services Authority (FSA). The IoM FSA maintains keen oversight on the banking and finance industry that operates from the very small island in the middle of the Irish Sea. Understandably, they are keen to protect the island’s reputation as a well-established international financial centre, known for its high standards of regulation.

ONE UNDER-UTILISED FISCAL TOOL IS THE PORTFOLIO BOND, WHERE BANKERS WRAP EXISTING AND NEW INVESTMENT PORTFOLIOS IN A LIFE INSURANCE POLICY IN ORDER TO IMPROVE THE CUSTOMER’S TAX OUTCOME IN THEIR HOME COUNTRY. Philip Cernik There are several reasons customers and corporations should consider using an international bank, in a jurisdiction which offers similar protection to banks based in the IoM. Offshore investing and banking offers both life company investors and bank investors many key benefits. ENHANCED INVESTMENT OPPORTUNITIES Offshore investing means customers can access an almost unlimited range of investment opportunities. These opportunities may not necessarily be available in the market in which the customer resides. This is due to the different regulatory approach taken by offshore investment providers. TAX ADVANTAGES Whether investing in a bank deposit account, an investment platform or an international life insurance product, investors also benefit from the jurisdiction’s beneficial tax status. This means their investment returns are not necessarily encumbered by the tax regime of either their home country or the country where they are ‘tax resident’. One under-utilised fiscal tool is the portfolio bond, where bankers wrap existing and new investment portfolios in a life insurance policy in order to improve the customer’s tax outcome in their home country.

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OFFSHORE CENTRES

And of course, for internationally mobile expatriates, being able to maintain an account in a single offshore jurisdiction, regardless of how many times they relocate, can prove very beneficial.

DIVERSIFIED CURRENCY OPTIONS Offshore banking and investing offers access to a wide range of currencies in which accounts can be denominated. This makes it easier to move money within and between accounts, and to invest in securities denominated in other currencies, with minimal administration and at low cost. This can also be beneficial for those with financial commitments in more than one country or currency. MORE SECURITY As an investor, if you decide to keep your money in an offshore bank based in a well-regulated jurisdiction—such as the IoM—you will enjoy a level of investor protection which means you can rest assured that your capital is secure to a certain extent. As mentioned previously, financial services companies based in offshore jurisdictions like the IoM are

ASSET PROTECTION Offshore centres are ideal locations for restructuring ownership of assets. Individual wealth can be transferred to trusts or to an existing offshore company. This is particularly useful for individuals who can transfer some or all of their assets from their personal estates to an entity that holds it outside of their home country, meaning their assets are ring-fenced.

Philip Cernik, Chief Marketing Officer at Friends Provident International

DESPITE THE MYSTIQUE SURROUNDING OFFSHORE BANKING AND INVESTMENT IT DOES FULFIL A USEFUL PURPOSE AND IT ISN’T DESERVING OF THE POOR REPUTATION IT HAS SUFFERED IN RECENT YEARS. highly regulated and transparent, adding an extra level of security and peace of mind for customers’ accounts. You only have to think about what has happened in Greece in recent years, with people unable to withdraw even small amounts of cash from their own accounts, to see the benefits to customers of keeping at least some of their wealth offshore. Isle of Man life insurers offer a greater level of protection to investors, in the event a life company is unable to meet its liabilities. A total of 90 per cent of any investment is protected and will be paid to investors in the event a life company fails. The scheme operates globally, providing protection to policyholders no matter where they reside.

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EXCELLENT SERVICE Offshore banks are aware of the importance of offering an around-theclock service to clients in various time zones around the world. With this in mind, they invest heavily in technology to provide their customers with 24/7 access to their accounts, 365 days a year through online banking platforms. These services are also highly personalised, which results in an outstanding level of customer service. The superior level of service offered by these banks is especially important for expatriates with international financial obligations, and their automated systems mean customers can take advantage of investment opportunities as and when they arise.

CONFIDENTIALITY Many offshore jurisdictions have the complementary benefit of privacy legislation and have enacted laws for strict corporate and banking confidentiality. There are serious consequences if these laws are breached, for example if a bank were to disclose a customer’s identity. This confidentiality could be vital for big name investors, if they are buying a large number of shares in a listed company for example. Having their identity protected can offer them a significant financial advantage. They can keep the public at large in the dark about what they are investing in, rather than have the stock price increase due to lots of people jumping on their bandwagon. Despite the mystique surrounding offshore banking and investment it does fulfil a useful purpose and it isn’t deserving of the poor reputation it has suffered in recent years. Do not overlook the suitability of an offshore account for yourself or your customers. In addition to the better-known tax advantages of offshore accounts, there are many other tangible benefits to investing and banking offshore, especially for the expatriate market.


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TECHNOLOGY

FIVE TECH TRENDS DOMINATING FINANCIAL SERVICES By Wissam Khoury, Managing Director, MEA, Finastra

T

here is no doubt that technology underpins the transformation and growth of the financial services industry. In the past, financial services organisations tended to rely heavily on legacy systems and were relatively reluctant to embrace new technology. Today, they recognise that fintech is no longer just disruptive but an imperative for success. A bank or financial institution that is not investing in fintech and building collaboration into its DNA is at risk of losing out to the competition in the long run. Many fintech trends regularly hit the headlines, from blockchain and cryptocurrencies to Regtech. So which trends are looming large for 2018 and beyond in the Middle East and Africa? PUSH FOR GREATER AUTOMATION The concept of digital transformation has been on the agenda for a while, but now market pressures—including the emergence of slick new challenger brands

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PHOTO CREDIT: Shutterstock/spainter_vfx

THE FOCUS IS ON DRIVING OPERATIONAL EXCELLENCE ACROSS THE WHOLE VALUE CHAIN, AND PROCESS AUTOMATION WILL HELP DELIVER IT. ALTHOUGH BANKS ACROSS THE GLOBE HAVE AUTOMATED A FEW BACK-END PROCESSES, INCLUDING PAYMENTS, TRUE END-TO-END AUTOMATION IS STILL TO BE ACHIEVED. bankerme.net

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TECHNOLOGY

Similarly, the second-tier organisations who buy loans and mortgages from banks are starting to depend more on data to make strategic decisions. This increased dependency on data will impact bottom lines in the industry by making it easier and quicker to connect customers with the products they want and need.

—are forcing banks to make the leap sooner rather than later. Process automation enabled by artificial intelligence (AI) plays a significant role here. The focus is on driving operational excellence across the whole value chain, and process automation will help deliver it. Although banks across the globe have automated a few back-end processes, including payments, true end-to-end automation is still to be achieved. We will continue to see investments in driving the greater automation of front-end and back-end processes. There will be a great deal of process re-engineering required to automate and reduce the time and quality of service delivery. RISE OF THE BOTS Globally, bots are making waves in the financial services industry. For example, banks have started deploying chatbots to conduct the first level of interaction with customers via contact centres. Bots are also being used to automate and reduce processing time in the back-end. So far, bots have been useful when operating in a predefined manner with set rules to follow. But with AI and machine learning taking centre stage this year, self-learning algorithms will drive even more ‘intelligent’ and streamlined services. MOVING FROM DATA TO BIG DATA We all agree that the financial services industry is sitting on a tremendous amount of valuable data about customers and their behaviour. The industry has made great strides in its ability to use this data to make intelligent decisions about which products should be provided and to whom, for example. However, usage has more often than not been limited to the data owned by an organisation. Now, within the open banking concept, financial institutions will have access to data held by other organisations as well. This data transparency is going to drive unprecedented changes to the way in which the industry harnesses and utilises data.

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Wissam Khoury, Managing Director, MEA, Finastra

WITHIN THE OPEN BANKING CONCEPT, FINANCIAL INSTITUTIONS WILL HAVE ACCESS TO DATA HELD BY OTHER ORGANISATIONS AS WELL. THIS DATA TRANSPARENCY IS GOING TO DRIVE UNPRECEDENTED CHANGES TO THE WAY IN WHICH THE INDUSTRY HARNESSES AND UTILISES DATA.S SERVICES HAVE BEEN BUILT.

DIVERSIFICATION OF BLOCKCHAIN Over the past year, we’ve seen exponential growth in the number of cryptocurrencies at a global level, as well as wider adoption by investors. Blockchain or distributed ledger technology (DLT)—the architecture that makes cryptocurrencies possible—has captured the imagination of the financial sector. DLT is now more than just a concept: solid use cases have started to emerge and it will really thrive where inefficient processes still exist in the financial services industry, such as lending. FOCUS ON CUSTOMER EXPERIENCE As new entrants hit the market with slick customer experience at the heart of their proposition—think Alipay—banks must up their game to compete and deliver on today’s customer expectations. Banks are already implementing technologies and solutions that help to create a single view of the customer, addressing business fragmentation and shattering departmental silos. As customers navigate between walk-in branches, banking apps, website chats, social channels, and customer care centres, their every touchpoint will be recorded and consolidated to understand them better. This single view will help banks to deliver a consistent brand experience that improves customer loyalty and reduces churn. With so much change underway, it is safe to say that the industry is closing in on major disruption. However, it is not just technical superiority that will dominate 2018. The winning combination will be a mix of business pragmatism, innovation, transparency and collaboration.



IN DEPTH

THE HOLISTIC APPROACH An exclusive dialogue with Naushid Mithani, MD, Market Head, GSAC EMEA & PvB Head, UAE at Standard Chartered on the private banking landscape across the Middle East

D

escribe the development of the private banking landscape in this market. In what ways have you seen progress? The private banking landscape in the region is definitely growing. We’re seeing growth rates of above eight per cent in the Middle East and Africa and this is our projection for the next few years— which is above the average GDP globally. Thus, there is wealth creation in the region, and we see this growing through a combination of both personal and incorporated wealth.

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Many of our clients believe that their personal and business wealth are interchangeable. Therefore, what we need for this market is a holistic approach. Many of our clients believe that their personal and business wealth are interchangeable. With Standard Chartered, they have it all under one roof. Nevertheless, there is definitely sufficient room to scale for everyone--pureplay private banking, the traditional Swiss banks, universal banks as well as local banks and wealth managers in the market. In light of this, we must understand that

competition is here to stay, therefore we need to be nimble and client-centric. According to the Boston Consulting Group’s, Global Wealth 2017: Transforming the Client Experience, wealth in the Middle East and Africa (MEA) is projected to soar up to $12 trillion by 2021, of which 21 per cent will be contributed by the UAE, Oman and Saudi Arabia. Thus, in order to keep numbers of UHNWIs in the UAE and wider region strong and rising in the years to come, financial service professionals and wealth managers in the region need to continuously enhance their offerings, with a wider range of strategic investments, deeper fintech integration, and digital advancement through expert channels. How has Standard Chartered’s private banking business grown in the last 18 months? We have been committed to investing and innovating in our private banking business over the past two years, to position it for further growth through a range of initiatives designed to enhance our client experience. We have strengthened our relationship management teams, having hired 60 new frontline team members globally in 2017. At the same time, we launched our first Private Banking Academy in partnership with INSEAD and Fitch, to deliver an industry-leading frontline training programme across key markets. We view our open architecture platform as a competitive differentiator, allowing our clients to access a wide range of nonproprietary solutions. We are enhancing it through digitisation, enabling real-time price discovery across equity derivatives and fixed income, and halving preparation time for investment proposals. These improvements are also helping to drive our financial performance. In 2017, our global private banking assets under management increased by 18 per cent (since 31 December 2016), driven by positive market movements and $2.2 billion of net new money.


Naushid Mithani, MD, Market Head, GSAC EMEA & PvB Head, UAE, Standard Chartered PHOTO CREDIT: CPI FinancialSiyamudheen Painayil

Measuring this to other emerging markets, how do we compare and where do you see opportunities? According to Standard Chartered Global Research, economic growth in the Middle East is expected to continue picking up through 2018, although underlying sentiment is likely to remain subdued due to the region’s growing geopolitical uncertainty. As markets focus on pricing these risks, linear ways of looking at the region may no longer

apply. For example, despite slower growth in both the number and financial wealth of high net worth individuals in the Middle East relative to other regions, there are still bright spots and opportunities in markets like the UAE and Saudi Arabia where we are likely to see continued wealth expansion—the former driven by the forecasted growth in non-oil GDP and the latter due to the expected emergence from recession in the year ahead.

A report released by Dubai International Financial Centre outlines how the Middle East investment market is expected to more than double between 2012 and 2020, with assets rising to $1.5 trillion by 2020 from $600 billion in 2012—a 12 per cent annualised rate. This growth is, in part, driven by the rise in affluent and high net worth individuals, who will increasingly seek the support of professional fund managers to protect and grow their personal wealth.

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We see this as a natural progression as these wealthy investors—many of whom are business owners juggling multiple demands—increasingly appreciate the value of expert advice delivered on a timely basis in reaction to the latest market movements, with minimal judgement biases. In today’s environment, investors are looking for timely and actionable market insights that are relevant to their goals. Our Investment Philosophy recognises that markets are not always efficient: individuals have cognitive biases that influence investment decisions and eventually financial markets. Since 2011, we have been refining a process that helps clients overcome these informational and cognitive biases to provide them with distilled information that helps them to make decisions that meet their needs. Comparing to other parts of the world, how do you view family offices in this region? Having a holistic approach is quite critical in both the Middle East and South Asia. A lot of our clients in the Middle East are looking for a long-term investment-driven approach, with London as one of their booking centres, and relevant financing solutions for them. We also see a new trend emerging as they increasingly start to consider Singapore and Hong Kong as their booking centres. This is primarily driven by the trade relations with China and South Asia. In Asia, clients are more inclined to have Singapore and Hong Kong as their booking centres. The demand and growth of these two markets as global financial centres alongside London, New York and the like has given rise to an affinity to explore opportunities across the rest of Asia. We understand that clients who are based in markets across our footprint hold relationships with a number of private banks. These clients also tend

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Mithani highlighted that the present challenges in private banking are threefold: competition, regulation and strategic direction.


HAVING THE HOLISTIC APPROACH IS QUITE CRITICAL IN BOTH THE MIDDLE EAST AND SOUTH ASIA. A LOT OF OUR CLIENTS IN THE MIDDLE EAST ARE LOOKING FOR A HOLISTIC LONG TERM INVESTMENTDRIVEN APPROACH. Naushid Mithani

have limited time and look to their relationship manager to provide them with investment ideas suited to their needs and objectives. While they have a good grasp of market trends, many are interested in thematic ideas and want to rely on a trusted advisor. We have a team of investment advisors and relationship managers across our private banking offices in Dubai, Singapore, Hong Kong, India, the UK and Jersey to help clients find the most relevant wealth management solutions to meet their financial goals. Given that most of them are first or second-generation business owners, succession planning is also top-ofmind and they prioritise the transfer of wealth and their businesses to the next generation.

PHOTO CREDIT: CPI FinancialSiyamudheen Painayil

How has 2018 been so far? What challenges do you project lie ahead for the rest of the year? 2018 started well for us—engagement level with our clients has been very good and with the initial rally in January there is definitely growth coming across the board. In our Interim Management Statement for the first quarter of 2018, we reported that good momentum in wealth management drove private banking income 23 per cent higher.

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SUMMIT

29.11.18 JW MARRIOTT MARQUIS DUBAI

For more information, email us at events@cpifinancial.net or call us on +971 4 365 4538


The business continues to attract new senior relationship managers and gathered over $700 million net new money in the first quarter. With the ongoing volatility in 2018, we are committed to staying close to our clients and helping them to navigate the opportunities across our footprint. As for the challenges, they are threefold: competition, regulation and client preferences There is a noticeable emergence of local wealth management firms, alongside the traditional Swiss banks and universal banks. At the same time, in this increasingly saturated market, clients are also looking at consolidating their holdings across two or three banks. It is thus imperative for private banking players to have a distinctive proposition that sets its offerings apart from others. The financial services industry is seeing an unparalleled level of regulatory reform taking place globally. While this has an impact on the operational cost base in the short term, we believe that it is the right thing to do and makes the industry, as a whole, stronger and more sustainable. Having a robust controls and governance framework ensures we safeguard the interest of not just the bank, but also our clients. The third challenge is the tendency for our clients to be multi-banked, which means that we are, at times, not able to have a complete view of the client's portfolio holdings to provide truly informed advice in managing their personal assets. However, I believe that this is an indirect challenge, and the holistic approach we can offer through our universal banking proposition is an enabler in deepening client relationships. What is your outlook and projections on the market for the rest of the year and going into 2019? Global equities have been range-bound after paring back start-of-the-year gains in February. While valuations have come-

A LOT OF PEOPLE SAY THAT THE COST OF COMPLIANCE HAS INCREASED TODAY, ALL I TELL THEM IS “HAVE YOU LOOKED AT THE COST OF NON-COMPLIANCE?” THE HEFTY AMOUNT FINES THAT LARGE INSTITUTIONS HAD TO PAY OVER THE PAST FEW YEARS—THAT IS THE COST OF NON-COMPLIANCE. Naushid Mithani, MD, Market Head, GSAC EMEA & PvB Head, UAE, Standard Chartered

off from multi-year highs and earnings expectations remain strong, these positive factors are likely being offset by ongoing worries about global trade tensions, rising oil prices and a renewed rise in bond yields. The US dollar has rebounded against the euro and other major currencies in the past month. We maintain our preference for global equities, given that global growth remains robust, despite softening of some economic activity indicators from multiyear highs. We should also note that some of the strongest equity market returns tend to occur late in the cycle (averaging about 20 per cent in the 12 months leading to the pre-recession equity market peak). This also explains our preference largely for cyclical sectors in most regions, and our preference for multi-asset balanced strategies from a total return perspective. Our preference for Asia ex-Japan equities, and our preference for China within the region, remains in place, with the continued presence of value relative to Developed Markets (DMs) still offering room for further outperformance. We have also raised our preference for US equities. The equity pullback earlier this year has created a more attractive point to raise exposure, in our view, as valuations have now moderated to a more reasonable level than before. Meanwhile, the ongoing Q1 earnings season continues to illustrate strong earnings growth, while also offering significant upside surprise relative to market expectations.

Rising inflation expectations, meanwhile, are likely a major driver behind the renewed rise in US bond yields. We are not excessively worried about this. A return of two per cent inflation would likely be consistent with 10-year yields just above three per cent; we believe yields are likely to be capped below 3.25 per cent short of an inflation overshoot, and strong earnings growth suggests any spillover into equities is likely to be very limited. Corporate and EM bond valuations (as measured by credit spreads) have also eased year-to-date alongside moderating equity valuations. History suggests a further easing of valuations (credit spread widening) is unlikely—usually valuations tend to hold around elevated levels late in the business cycle. We still believe corporate bonds form a solid core holding, particularly in Asia ex-Japan, where they remain less volatile than in other regions. However, we continue to prefer an aggregated exposure via multi-asset income strategies. Having said that, we still see more attractive relative value in EM USD government bonds than in corporate bonds. Relative to their own history, valuations in the former still appear less elevated than in corporate bonds, where valuations remain close to current-cycle highs. EM local currency bonds also offer the advantage of diversification into bond markets that are less correlated with rising US Treasury yields.

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IN DEPTH

A METICULOUS J

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S JOURNEY

In an exclusive interview with Banker Middle East, Sanjay Khanna, Chief Information Officer at RAKBANK, takes us through the bank’s digital transformation agenda

W

hat are your views on the development of financial technology in the retail banking market? In the last few years technology has rapidly evolved—big data, cloud computing, smartphones and high bandwidth are all common now. Almost all banks and financial institutions have already experimented successfully with the digital aspect of banking and business. Now the focus revolves around finding ways to take advantage of the technologies available to save cost while generating revenue for investors and stakeholders alike.

PHOTO CREDIT: Shutterstock/IR Stone

Financial institutions in the region all have digital transformation agendas. In your opinion, what is the most important aspect of this initiative? The age of digital banking has to be fundamentally different and must operate with an enhanced business model that offers new capabilities, customer proposition, products and services. Therefore, the most important aspect of a digital transformation is the business model transformation itself. It is all about starting new initiatives in diverse ways that in the end will create new values for customers as well as employees.

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IN DEPTH

How has RAKBANK carried out its digital transformation agenda? Which operational areas has this initiative covered and what were the challenges encountered during the implementation? When carrying out our digital agenda at RAKBANK the focus is mainly on building a digital platform that is robust enough to track the digital transformation and innovation’s progress and must be flexible enough to ensure value creation for our customers. Here is a list of a few initiatives that the bank has completed or is still in progress: • The bank enhanced its online and mobile banking platforms, combined into one, and renamed as RAKBANK Digital Banking Platform. The bank’s digital transformation is designed to provide end users with features such as heightened security, maximum convenience, and real time transaction processing. The underlined RAKBANK Digital Banking Platform is powered by Infosys Finacle; • We partnered with C3, a prepaid card service provider, in order to provide C3 with a BIN sponsorship on their prepaid cards to strengthen the C3 payroll offering. With this partnership, UAE based companies will be able to provide immediate salary transfers to their blue-collared workers on the C3 prepaid payroll card. This enables RAKBANK to offer payroll solutions for both banked and unbanked employees and companies, thus promoting financial inclusion and opening up new market space for the bank; • We are among the first few banks in UAE to leverage blockchain for powering cross border payments. Recognizing the rising power of the technology, we have launched an instant, frictionless, and secure money transfer services through RAKBANK’s award winning RAKMoneyTransfer (RMT) to Axis

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Sanjay Khanna, Chief Information Officer, RAKBANK

THE MOST IMPORTANT ASPECT OF A DIGITAL TRANSFORMATION IS THE BUSINESS MODEL TRANSFORMATION ITSELF. IT IS ALL ABOUT STARTING NEW INITIATIVES IN DIVERSE WAYS THAT IN THE END WILL CREATE NEW VALUES FOR CUSTOMERS AS WELL AS EMPLOYEES.


Bank account holders based in India using the power of blockchain. The customer interface of RakMoneyTransfer has been built on Rakbank’s Digital Banking Platform which is powered by Infosys Finacle. • The bank also launched contactless cash withdrawal facility that is available on more than 170 NFC enabled ATMs. The integration of additional fintech models into the bank’s operations will provide new opportunities for customers similar to the Apple Pay and Samsung Pay experience, which were rolled out back in 2017; • In the analytics space we have used the power of log analytic to analyse the data in the system logs and got insights into the customers’ journey while accessing the various channels and offering understanding to the customer service managers, which enables them to service customers instantly; • Digitalisation is not only attained at customer level, but also at back office functions also such as Virtual Desk Automation, 360 customer insights and adoption of latest digital methodologies such as Agile, DevOps. As part of this journey, the different challenges we faced was in attracting new customers and strengthening our relationship with them via better customer service, digitalisation of services and leading the innovation whilst keeping up with the pace of changes that are occurring in the digital realm. The challenges we faced were: • To develop a workforce that understands how to operate in a digital environment; • Defining the factors that contribute to success and then measure performance; • Redesigning the information and technology operating model to accelerate digital business execution.

THE UAE GOVERNMENT HAS A VISION TO BE DIGITAL IN THE NEXT COUPLE OF YEARS AND BANKS ARE KEEPING UP WITH THAT DIGITAL AGENDA. BANKS AND FINANCIAL INSTITUTIONS WILL HAVE TO OPERATE IN A LARGER DIGITALIZED INFRASTRUCTURE.

What is the main goal of this transformation and how have things improved since? Main goals: • Build a digital platform robust and flexible enough to operate at a large scale; • Create an open ecosystem for partners and technology; • Enabling the business to adapt to new business models and to launch new kinds of products for new customers in new industries; • Rapidly and innovatively delivering working products for changes inspired by real customer needs or regulatory requirements; • Creating value from data through data analytics and then offering better services; • Delivering a personalised experience to customers. Things that have improved since then: • Agile development; • DevOps adoption; • Data analytics; • Implementation of technologies like Open API platforms and blockchain enabling business to enter new markets; • Personalised customer experience through portals and digital banking website. Looking to the future, how do you see the digital aspects of banking evolving? How will multi-channel implementation change the way banks operate moving forward? In the near future, the ecosystem around us is going to be digitally connected. The UAE government has a vision to be digital in the next couple of years and the banks are keeping up with that digital agenda. Banks and financial institutions will have to operate in a larger digitalised infrastructure. The next stage will require the integration of these disparate pockets of technology into enterprise wide deployments that will vary widely. Multichannel implementation would give seamless digital banking experience to customers in the new connected world.

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EVENTS

SEAMLESS MIDDLE EAST 2018 The Middle East’s most dynamic summit and large-scale exhibition bringing together the converging worlds of commerce, fintech, retail and payments

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The conferences covered a wide range of topics under various themes from payments and automationto digital identification and the mall of tomorrow concept.

eld under the patronage of HH Lt. General Sheikh Saif bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Interior, the Seamless Middle East 2018 gathered over 350 exhibitors and expert speakers from across the globe to showcase the latest payment, retail, ecommerce and financial technology. “The Middle East region is going through an exciting phase, with the UAE claiming 15th rank in the Euromonitor International’s Digital Consumer Index 2017 and highest among emerging markets, underlining the government’s commitment to transforming the society and the industries digitally and seamlessly for the future,” said Joseph Ridley, General Manager of Seamless Middle East at Terrapinn. While Saudi Arabia is also joining the force by claiming a place among the top five emerging markets, he adds, it further shows that the region is fast turning into a hotbed for the latest innovations and evolutions in the field of fintech, blockchain, ecommerce and payment solutions. Artificial Intelligence (AI), for instance, is expected to be a major game changer in the global economy, with PwC estimating that AI will contribute up to $15.7 trillion to the world economy and $320 million to the Middle East economy in 2030. The spending on cognitive and AI systems in the Middle East and Africa region is estimated to grow from $37.5 million in 2017 to over $100 million by 2021, representing a growth rate of 32 per cent a year, adds PwC citing analysis of the International Data Corporation. No matter how big or small the business challenges, Ridley says, this power-packed show promises to offer solutions for everything, coupled with a number of live attractions, demonstrations and launches that will help understand what is shaping the future of finance and ecommerce. The conferences covered a wide range of topics under various themes including payments and fintech, retail

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The Seamless 2018 exhibition saw more than 350 exhibitors participating from across the globe.

and ecommerce, automation and AI, blockchain, mobile payments and wallets, digital ID, mall of tomorrow, omnichannel as well as delivery and fulfilment. A new feature at the conference this year was the fintech showcase which featured an all-star lineup of international and regional fintech companies, that are disrupting traditional retail banking, institutional and corporate banking, insurance and lending. The launch pad area is a space where genuine innovation was showcased as the latest products and services never before

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seen in the Middle East are unleashed. It was an exciting focal point for press, investors and buyers looking to learn about the newest technologies which are transforming the way we do business and will give you a competitive advantage in a crowded market. Companies included in this year’s launch pad were Beijing Wiseasy Technology, Capillary Technologies, DataProm, Intellect Commerce, Invomate, Krish TechnoLabs, Microblink, Network International, Renome-Smart, Software Group, Twixor and V-Count, with more to be announced.

The conference also featured a start-up zone, an area to meet ground breaking start-ups in the regional commerce space. Sponsored by OMA Emirates Group, the pitch-off session witnessed fintechs and commerce start-ups from across the world pitching their products or solutions for five minutes to an expert panel made up of VC’s, funds and consultants to win a cheque of $5,000 and a potential investment up to $500,000. Companies competing in the pitch off included Point Checkout, Yalla Bargain, Zicon, SAAS coin, PIP IT and Twixor.


The launchpad is one of the show’s busiest attractions as it is where genuine innovation is showcased as the latest products and services never before seen in the Middle East are unleashed.

Commenting on this, Niranj Sangal, Group CEO of OMA Emirates commented, “The companies that we have shortlisted are based on the ideas that they have put forth and the disruptive technologies that could help consumers with the maximum benefit.” This year’s exhibition saw more than 350 exhibitors participating from across the globe showcasing a wide range of innovative products and solutions—from mobile payments, analytics, inventory management and POS, self-service and ATM’s to digital marketing with omnichannel retailing, blockchain and AI.

With the explosion of new and innovative ecommerce companies over the past 12 months, Seamless Middle East hosted some of region’s most innovative start-ups in order to showcase the new technologies and solutions that are coming up through grass roots of the region.

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EVENTS

THE CRO ROUNDTABLE An exclusive invitation-only meeting for GCROs and CROs of UAE’s leading banks to discuss issues that face financial institutions in today’s economic environment, specifically involving enterprise risk management oversight, risk assessment framework and other regulatory requirements

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ince 2014, financial institutions and businesses, particularly in oil-dependent countries have had to deal with depressed and volatile macroeconomic conditions. Four years on, as things begin to show signs of recovery, banks, particularly those in the Middle East still deal with existential risks, both globally and within the region itself. Banks have needed to develop more sophisticated risk management models in response

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to the increasingly complex operating and regulatory environment. Regulatory requirements have been a major contributor to how financial institutions have evolved in the time since the financial crisis. Bringing these problems into perspective, Banker Middle East, in partnership with SAS hosted The CRO Roundtable, gathering Chief Risk Officers from the best banks in the country to deliberate on these issues.

The event which was held on 8 May 2018, was attended by credit and risk officers including, Alex Jakob, Chief Credit Officer at Abu Dhabi Islamic Bank; Alan Grieve, Chief Risk Officer of Commercial Bank of Dubai; Arif Usmani, Chief Risk Officer of Mashreq; K S Ramakrishnan, Chief Risk Officer of RAKBANK; Tariq Beg, Head of Risk Practice at SAS Middle East; Martim Rocha, Risk Global Director at SAS; and Nikolay Filipenkov, Solution Architect of SAS EMEA.


MANAGING THOSE RISKS AND SETTING THE STAGE FOR GREATER EFFICIENCIES AT AN ENTERPRISE LEVEL BRINGS A NEW SET OF CHALLENGES FOR RISK OFFICERS; ORGANIZATIONAL RESISTANCE TO CHANGE MAY PUT RESTRICTIONS TO MAKE THE NECESSARY ADJUSTMENTS TO THE BUSINESS MODEL AND CORE OPERATIONS.

PHOTO CREDIT: CPI FinancialSiyamudheen Painayil

The dialogue kicked off with a discussion on key risks currently impacting the operating environment in the country— global economic conditions, regional conflict and credit risks. External factors include, regulatory compliance, financial crime and cybersecurity and technology risks. Internal risks highlighted a during the discussion include, corporate governance, human capital and data management. These factors have caused the priorities of risk functions in various financial institutions to change, including the roles of Chief Risk Officers. One must now not only tackle external exposures of the bank’s business and seek ways to mitigate these risks, they must also manage internal risks that are not only fraud and financial crime-related aspects but also to a certain extent manage the expectations of stakeholders.

To address these hurdles, financial institutions need the right fit-for-purpose tools to carry out their stress testing and financial modeling tasks, as well as data management capabilities. Technology has become more embedded in the way banking is conducted. It is therefore pertinent to acquire the latest and most suitable infrastructure systems along with competently skilled professionals (both technical and techno-functional), be it in house or outsourced, to ensure that the respective functions are carried out efficiently. The issue of talent is something that can never be said enough. Financial institutions must make it a point to hire professionals with sufficient experience, capacity and capability for the role they are assigned to. In addition to that, it would be ideal if they also have the understanding and awareness of risk and compliance. Commenting on these issues,Tariq Beg, Sr Manager, Head of Risk Practice-Sales Support at SAS Middle East, “A common challenge for risk officers nowadays is the lack of an overall understanding and assessment of risks in their organization (ERM), as well as the interaction and integration of risk processes between different departments. As newer and more rigid regulatory requirements are being imposed on banks, it has increased the demand for a stronger understanding of these risks.” “It goes without saying that those new stringent regulatory compliances will require banks to look ahead and rationalize their processes by using technology applications in order to facilitate and integrate greater efficiencies within their institutions.

Managing those risks and setting the stage for greater efficiencies at an enterprise level brings a new set of challenges for risk officers; organizational resistance to change may put restrictions to make the necessary adjustments to the business model and core operations. Another challenge in implementing efficiencies in managing risk is an institutions culture that may not encourage the timely identification and escalation of risk concerns to higher management, impacting the robustness and transparency of their risk identification and risk reporting efforts.” he added. It is an irrefutable fact that the business of banking in this day and age is run on a plethora of data. In light of the fact that technology (and all the cybersecurity risks that it brings) develops faster that one can expect, it has now become a requirement for banks to possess strong data management and governance capabilities. Moving forward in an era of technological sophistication and increasing operational efficiencies, these data need to be analysed and simlulated to derive meaningful conclusions and assist insitutions in decision making processes. Explaining how SAS can assist in addressing these issues, Beg said, “SAS aims to deliver comprehensive, scalable and proven solutions required for the continuous assessment of firmwide risk, from aligning data quality with modeling workflow to delivering scalable analytics for insight and actionable deployment. Customers have reported significant reduction in costs through scalable, SAS workflow automation as well as a positive impact on the bottom line gained from improved capital allocation.”

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TEMENOS INNOVATION JAM Banker Middle East provides an exclusive insight into the Temenos Innovation Jam in Abu Dhabi, a yearly competition to find the best fintech firms regionally and across the globe

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n pursuit of finding best-in-class technology, Temenos has introduced the Innovation Jams to help to identify fintech companies that add real business value to its customers. Its series of regional Innovation Jams showcase the most impressive demos of financial software solutions to financial institutions. It presents some of the most interesting fintech ideas and explains how to get the best out of the Temenos MarketPlace. The Jam also provides an informal forum for discussing the digitisation of the financial industry with Temenos experts and peers. Held in various capital cities across the world each Innovation Jam consists of several fintech providers showcasing their latest solutions in order to compete for a place in the final at this year’s Temenos Community Forum in Dublin. The Abu Dhabi Innovation Jam is one of eight regional competitions being held across the globe in 2018. This year, the event was held in partnership with the Abu Dhabi Global Market (ADGM) at its International Financial Centre in Abu Dhabi. Covering the MENA region, the Abu Dhabi Innovation Jam witnessed the victory of Docswallet, a blockchain digital locker services provider, who won the public vote for best fintech solution.

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Jean-Paul Mergeai, Managing Director Middle East and Africa at Temenos and Richard Teng, CEO of the Financial Services Regulatory Authority of Abu Dhabi Global Market with Docswallet, winners of the Abu Dhabi Innovation Jam.


Throughout the event, eight fintech companies brought to life the areas where innovation and collaboration—such as data, blockchain and payments—can assist banks to stay ahead of the competition. Each of the start-ups had seven minutes to give a live presentation or demo of their solution to an audience composed of banks, fintech startups and tech enthusiasts. This year’s Abu Dhabi Innovation Jam winner, Docswallet, enables users to get digitally certified copies of documents in Blockchain from their official sources, store and organise them in a locker, and submit them as required. The introduction of the Docswallet ‘Digitally certified documents on blockchain’ is as much about protecting the privacy of users as it is about strengthening the integrity of the document authentication process.

OUR GOAL WITH TEMENOS MARKETPLACE IS TO FIND THE BEST FINTECH COMPANIES AND INTEGRATE THEIR SOLUTIONS WITH OUR TECHNOLOGY SO THAT TEMENOS CUSTOMERS CAN ACCESS THE LATEST FINTECH INNOVATION AS QUICKLY AND AS EASILY AS POSSIBLE. Ben Robinson

Ben Robinson, Chief Strategy Officer,Temenos

Speaking exclusively to Banker Middle East on the development of fintech in the region over the past few years, JeanPaul Mergeai, Managing Director Middle East and Africa at Temenos, said, “There is a definite surge of fintech companies in the Middle East and this is a very recent phenomenon. They are however still very much in their infancy and they tend to focus on trending areas such as payments, Islamic banking and inclusive finance. But from the consumer side, our clients are craving for the access to global fintechs in terms of the solutions they offer and how those assist other European and Asian banks to emulate them and take the lead in the GCC banking scene.” “Our goal with Temenos MarketPlace is to find the best fintech companies and integrate their solutions with our technology so that Temenos customers can access the latest fintech innovation as quickly and as easily as possible. The Innovation Jams form an important part of this work, since they enable us to uncover great solutions from all over the globe. The winner of the Abu Dhabi Innovation Jam is a case in point. DocsWallet, designed to speed the processing and stamping of official documents, is a highly innovative blockchain-based solution that can be applied across the world to enable the more secure sharing of documentation between banking intermediaries but also to put customers in greater control of their own data,” added Ben Robinson, Chief Strategy Officer at Temenos. Mergeai also highlighted that the in terms of technological advancements on the government level, UAE and Saudi Arabia are ahead of the curve with blockchain technology but they are slightly behind on some areas such as cloud banking for example. And it is believed that events such as these—curating and supporting the developments in the global fintech space—significantly assists the technological aspects for financial institutions in region.

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THE LONG VIEW

IN BRANDS WE TRUST By Tony Long, CEO, CPI Financial

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here is a widely used and oftenmisunderstood phrase which says, “May you live in interesting times.” I say misunderstood, because whilst purporting to be a blessing, it is in fact a curse. It is believed to originate from ancient China and was allegedly heaped on the enemy with the clear implication that ‘uninteresting times’ of peace and tranquillity are more life-enhancing than ‘interesting’ ones. But in today’s world, and in a literal business sense, these are truly interesting times—especially within the banking industry. The quantum leaps in technology that have fuelled an explosion of innovation and disruption have also increasingly led to the disintermediation of the role of traditional banks and banking services. But for all the threats that new entrants to banking services may pose— be they fintech’s, telco’s, e-commerce giants or whoever, there are equally huge opportunities for banks to take a significant share of the many millions of people joining the banked community every year in emerging markets around the world. Last year, insights from the World Bank’s Global Findex Database stated that 515 million people gained access to an account with a financial institution or mobile money provider between 2014 and 2017, and although 1.7 billion people remain unbanked globally, around twothirds have a mobile phone and seventy per cent plus are under the age of thirty, so the opportunity could not be clearer.

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Tony Long CEO, CPI Financial

The majority of these people may be at the very lowest point in the banking pyramid; simply storing and transferring a few dollars via mobile phones, but they represent a huge base of the youngest populations in the world, and it is this first stage of financial inclusion that will be the basis of growing and prosperous economies in these countries and regions for decades to come.

The danger for banks is that other agile competitors are already making large gains in attracting new customers. Back in the 90’s Bill Gates stated, “We need banking, but we do not need banks anymore.” That may have been a rather premature obituary for the banking industry, but the message was clear. Thankfully, trust is a fundamental part of every relationship and thanks to the new digital ecosystems, brands have greater global reach than ever, and brand reputations are being spread at an everincreasing pace through communities by social media and word of mouth. Fortunately, people still trust established brands all around the world—even in the remotest, poorest countries—and nowhere are people more concerned about trust than when it comes to their money. Banks have a considerable advantage in this regard over many newer companies, as their brands are well established and trusted in most instances, and those who are swift to understand the needs of this new generation of customers and provide affordable and effective solutions will surely fare well and prosper in the vast open spaces that these new opportunities represent. Never has ‘carpe diem’ been more appropriate than in the context of the challenges and opportunities facing the global banking industry today. Seizing these opportunities is no easy task, but with visionary leadership, the willingness to change and adapt, and the means to invest in the future, there is no doubt that these opportunities are the banking industry’s to lose. It is very much all to play for.



BEST COMMERCIAL BANK Banker ME presents ABK with the 2018 Best Commercial Bank in Kuwait award. Simpler Banking


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