OCTOBER 2018 | ISSUE 211 MIDDLE EAST
OCTOBER 2018 | ISSUE 211 A CPI Financial Publication
HISHAM AHMED AL RAYES, CEO of GFH Financial Group
economic growth soars in 2018 18 GCC
risk to attract investors 38 Managing
changing Saudi debt capital market 44 The
technology to bridge efficiency gap in transaction banking 56 Leveraging
Dubai Technology and Media Free Zone Authority
FINANCING THE FUTURE HISHAM AHMED AL RAYES, CEO of GFH Financial Group
FINANCING THE FUTURE
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EDITOR’S NOTE
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elcome to this month’s packed edition of Banker Middle East. Conditions have continued to improve across the GCC region, a topic we cover in some depth in this issue. 2018 has seen a long-anticipated rise in international oil prices, buoying the region’s economies. According to the Arab Economic Outlook Report 2018 the growth rates of the GCC, which has been revised upward to 1.9 per cent in 2018, is expected to rise to 2.5 per cent next year. This group of countries will continue to benefit from an increase in oil production. In June of this year the population of Jordan took to the streets to protest subsidy cuts and new taxes. Unemployment was at a two-decade high of 18.4 per cent and a third of the population live below the poverty line. Refugees have inflated the country’s population by 50 per cent since 2011, fuelling security concerns and straining public resources. Within this context the new Prime Minister, Omar al-Razzaz, will find his job difficult. Al-Razzaz faces the difficult task of reducing debt levels and pushing through structural reforms which are likely to be extremely unpopular with the population—the very problem that led to the downfall of his predecessor. Responsible investing has become an important trend in recent years. However, coupling responsible investing and Sukuk is relatively new phenomenon. Malaysia, and Southeast Asia in general, have led the way so far. Malaysia’s Tadau Energy issued the world’s first green Sukuk in July 2017 with a $58 million Sukuk to finance a solar project. In 2017
Thomson Reuters estimated that the estimated shortfall in supply of Sukuk at $143 billion. This points to the unmet investor demand that institutions could look to tap. Governments and regulators also need to pay attention to this trend as well, as regulatory support and a standardisation of legal documentation and Shari’ah interpretation would benefit the green Sukuk market—as well as the wider Halal economy. You will also notice that in this issue we feature a slightly longer Technology section. We have covered a range of issues this month from data protection, efficiency gains to be had in transaction banking and looking at how to go beyond the digital transformation paradigm. Technology has, and will continue, to transform the financial services industry, so as always this section aims to provide some light on what the latest trends might be. As usual I wish you a productive read. Nabilah Annuar EDITOR, BANKER MIDDLE EAST
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CONTENTS
OCTOBER 2018 | ISSUE 211
NEWS 10 Turkey’s ambitious airport 14 News highlights
THE MARKETS 18 GCC economic growth soars in 2018
18 OPINION 22 GCC asset managers: strategies to navigate challenges and opportunities ahead 26 United Arab Emirates issues National Public Debt Law
28 22 COVER INTERVIEW 28 Financing the future
COUNTRY FOCUS 32 Jordan: coming to terms
EQUITIES 38 GCC equities: managing risk to attract investors
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CONTENTS
OCTOBER 2018 | ISSUE 211
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ISLAMIC FINANCE 42 The future of green Sukuk 44 The changing Saudi debt capital market
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WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718
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FINANCING THE FUTURE HISHAM AHMED AL RAYES, CEO of GFH Financial Group
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EDITORIAL ASSISTANT KUDA MUZORIWA kuda.muzoriwa@cpifinancial.net Tel: +971 4 391 3729
HISHAM AHMED AL RAYES, CEO of GFH Financial Group
economic growth soars in 2018 18 GCC
risk to attract investors 38 Managing
changing Saudi debt capital market 44 The
technology to bridge efficiency gap in transaction banking 56 Leveraging
EDITORIAL editorial@cpifinancial.net Dubai Technology and Media Free Zone Authority
FINANCING THE FUTURE A CPI Financial Publication
SEPTEMBER 2018 | ISSUE 210 MIDDLE EAST
SEPTEMBER 2018 | ISSUE 210
50 Why data protection is your new strategic priority 52 The future banking paradigm 56 Leveraging technology to bridge the efficiency gap in transaction banking 60 Transforming lending for tomorrow: going beyond digital 62 Banking on digital—the significance of fintech in Middle East 66 SWIFT Middle East Regional Conference 2018
EDITORS MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716
ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476
OCTOBER 2018 | ISSUE 211
TECHNOLOGY
EDITOR - BANKER MIDDLE EAST NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726
A MAN WITH A VISION SALIM SFEIR, Chairman and CEO of Bank of Beirut
A MAN WITH A VISION A CPI Financial Publication
three-way bank merger: positive for the industry 08 aUAE’s
Unlocking the value for 42 infrastructure
and integrity the Middle East 54 inProfessionalism
Cryptocurrencies and their architecture 64 revolutionary
AUGUST 2018 | ISSUE 209
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SALIM SFEIR, Chairman and CEO of Bank of Beirut
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AUGUST 2018 | ISSUE 209
A BANK FOR BANKS KORHAN ALEV, CEO, Bahrain Middle East Bank
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A CPI Financial Publication
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KORHAN ALEV, CEO, Bahrain Middle East Bank
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ANALYSIS
TURKEY’S AMBITIOUS AIRPORT
The new airport will feature the world’s largest terminal space, at 1.3 million square metres (CREDIT: KOSTAS TSIRONIS/BLOOMBERG).
Turkey’s current economic development plan has been brought to the fore with the completion of the first phase of construction of Turkey’s new Istanbul Airport 10
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wenty miles outside of Istanbul on the coast of the Black Sea, President Recep Tayyip Erdogan of Turkey declared the completion of the first stage of construction in a gigantic new airport. The project will cover some 76.5 million square metres upon completion, an area greater than the size of Manhattan. By 2020 the airport will look to serve 100 million passengers annually, with a target of 200 million by 2029.
The name for the airport was also revealed during the ceremony and will be dubbed ‘Istanbul Airport’. Upon its official opening Istanbul Airport will replace Ataturk Airport, the current main international airport, which Erdogan has said will be shut down and turned into a public garden. “We’ve succeeded in this despite countless provocations, traps and attacks in the past five years,” Erdogan said from a terminal-building stage
in the new airport. “We’re creating the infrastructure and targets for our 2053 and 2071 visions,” he added. These two years represent important anniversaries in Turkey, that of the 600th anniversary of the Ottoman conquest of Istanbul, and the 1,000th anniversary of the battle of Manzikert between Ottomans and Greeks respectively. “Turkey’s devoted to becoming a symbol of prosperity and one of the world’s top 10 economies.”
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ANALYSIS
In some ways the airport is a manifestation of Erdogan’s desire to move the country up the global power rankings. Erdogan’s party, the ruling Justice and Development Party, came to power in 2002 and broadly the project is a symbol of the model for development that has been pursued since the party, and Erdogan, came to power. In a recent report, Bloomberg points to the tens of billions of dollars that have been invested in real estate and infrastructure which has led to the country maintaining a consistent growth rate above five per cent annually since the party came to power. However, this growth and development has left the country saddled with huge debts whilst it has failed to keep up in other important developmental indicators. Under Erdogan’s reign freedom of press and speech have been sharply curtailed, with measures in transparency and education falling. Furthermore, like the country, the development of the airport project has not been without its issues. Its construction has faced labour disputes, financing challenges, corruption challenges and worker strikes in the face of reportedly disastrous working conditions. Turkey’s tourism sector took a hit following the attempted coup in 2016 and a series of terrorist attacks. This has led Turkish Airlines to a greater reliance on transit passengers, a key ingredient of the business strategy for the new mega-airport. Ataturk was the fifth largest airport by traffic in 2017 in Europe,
Recep Tayyip Erdogan led the opening ceremony for the new Istanbul Airport (CREDIT: KOSTAS TSIRONIS/BLOOMBERG).
following London, Paris, Amsterdam and Frankfurt. The Istanbul Airport will face competition from the other mega-hubs across Europe and the Middle East and only time will tell should it be successful. Turkey’s economy has been hit with serious inflation pressures which has led to severe measures being taken by the authorities to prevent further price increases—including tasking police to check that shops have not increased their prices. However, in late October pressure on the lira has begun to stabilise, along with pressure on the central bank to continue interest-rate increases.
TURKEY GDP
USD Billion
1000 800 600 400 200
2001
Source: TradingEconomics.com/World Bank
12
2004
2007
2010
2013
2016
However, as of time of writing inflation currently stands at nearly five times the central bank’s official target of five per cent. Bloomberg has also pointed to key indicators in consumers confidence to industrial production pointing to a rapid slowdown in the economy, which will help curb some cost pressures—especially in light of policy makers delivering the biggest rate hike in September since at least 2002. The overall spike in consumer inflation was brought about due to a destruction in the value of the lira, which lost more than a quarter of its value in August, partly due to a diplomatic disagreement with the US. In addition, the Turkish Statistic Institute revealed that confidence in the country’s economy has fallen by 4.8 per cent month-on-month in October. In a report, the organisation said that the economic confidence index reached 67.5 points in October, down from 71 points in September. “This decrease in economic confidence index stemmed from the decreases in consumer, services and retail trade confidence indices,” the report said. In line with this the consumer confidence index fell 3.4 per cent in October, whilst the services and retail trade confidence indices dropped 4.7 and 1.8 per cent respectively.
NEWS HIGHLIGHTS
Egypt monetary policy must consider community impact Central banks do not set monetary policy in a vacuum and must consider the impact of their decisions on the wider community, said Egypt’s central bank governor Tarek Amer, as he reflected on the balancing act he faces as the country presses ahead with an IMF-backed reform programme. “Policy makers have to have a sense of the market. At the end of the day these decisions are very political,” Amer said at the International Monetary Fund’s annual meeting in Bali. “You can’t be in closed-doors and think raising interest rates is good, but you don’t know how the community is going to take that.’’ The comments offered a rare glimpse into the concerns facing the central bank as it decides whether to reduce interest rates to ease the budget deficit and boost growth. Egypt floated its currency in November 2016 as the first step in broad changes aimed at curbing a crippling dollar shortage, reviving growth rates and boosting investor interest in the Arab world’s most populous nation. The move, accompanied by interest rate hikes and cuts in energy subsidies, helped secure a $12 billion IMF loan, but also sent inflation soaring to over 30 per cent. Egypt has described the programme as home-grown measures aimed at ending long-standing policies that hammered the economy. [Bloomberg]
Saudi Arabia plans special economic zone at Riyadh airport The zone will be located in King Khalid International Airport in Riyadh and will focus on integrated logistics. Saudi Arabia has announced the establishment of a special economic zone which will apply special rules and regulations in a bid to draw more foreign investment into the Kingdom, according to local newswire, Saudi Press Agency. A Royal decree was issued to approve the regulation of the Integrated Logistics Bonded Zone (ILBZ), which is part of a broad plan to establish special economic zones in competitive locations for promising sectors such as ICT, logistics, tourism as well as industrial and financial services.
Saudi sells $866.44 million in domestic Sukuk The Islamic bonds were divided into three tranches of five, seven and 10 years. Saudi Arabia’s ministry of finance has announced that the Kingdom sold SAR 3.25 billion ($866.44 million) of local currency Sukuk. The Kingdom raised SAR 2.33 billion in five-year Sukuk, SAR 360 million with a seven-year maturity and SAR 560 million riyals with a 10-year maturity, reported Reuters.
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Abu Dhabi scraps Cepsa’s IPO as investors balk Abu Dhabi shelved plans for an initial public offering of a 25 per cent stake in Spanish oil refiner Cepsa as investors balked at the valuation amid a stock market rout. “Recent international economic developments have created uncertainty in international capital markets,” Cepsa, which is controlled by Abu Dhabi’s state-owned Mubadala Investment Co. Bankers scrambled last week to save the IPO, expected to the largest by a European oil company in more that a decade, as investors balked at Mubadala’s valuation. The sale coincided with a rout in the global equity market, with European stocks down to the lowest since 2016 levels. The offering would have valued Spain-based Cepsa at between EUR 7 billion ($8.1 billion) and EUR 8.1 billion. Mubadala’s preference was to pull the IPO rather than accept a lower valuation, people familiar with the matter said last week. Mubadala said it would consider reviving the IPO. “As a long-term investor, we will consider returning to the market when we believe conditions are favorable,” Mubadala Chief Executive Officer Musabbeh Al Kaabi said in an emailed statement. [Bloomberg]
Abu Dhabi lead on crowdfunding huge boost to SMEs
Oman mandates banks for seven-year dollar Sukuk sale Oman plans to sell seven-year benchmark size Sukuk. The Sultanate of Oman has hired banks to arrange a global investor call ahead of a planned sale of dollardenominated Islamic bonds. Gulf International Bank, HSBC as well as JPMorgan, KFH Capital and Standard Chartered have been mandated as joint lead managers and bookrunners for the potential sale.
The ADGM framework for regulation of Private Financing Platforms is lifeline for “key engines of the country’s economic growth.” The arrival of a new private financing platform in the UAE to support start-ups, private enterprises and SMEs will give a huge boost to “key engines of the country’s economic growth”, a legal expert said. Zisha Rizvi, Partner at STA Law Firm, says the lead taken by the Abu Dhabi Global Market (ADGM) is a vital move to ensure the continued growth of crowdfunding, which can mean the difference between business success and failure for SMEs. The ADGM, an international financial centre in Abu Dhabi, last month launched its framework for the regulation of online Private Financing Platforms (PFPs) for non-public companies, with the aim to reduce the risk of obtaining financial support from crowdfunding. “SMEs, which comprise about 95 per cent of the total establishments in the UAE, employ more than 42 per cent of the workforce and are key engines of our economic growth,” said Rizvi. According to STA the UAE is witnessing a continuous rapid growth of crowdfunding through a plethora of online platforms, and it was essential that government authorities should take steps to regulate the risk and protect the rights of the parties involved in such transactions. [Bloomberg]
SOVEREIGN RATINGS AS OF 1 OCTOBER 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/Stable/B
12-May-2018
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/Negative/A-1
21-Jul-2018
14 Sharjah
BBB+/Stable/A-2
27-Jan-2017
Copyright © 2018 S&P Global Ratings. All rights reserved.
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NEWS HIGHLIGHTS
Morocco considers selling stakes in Maroc Telecom in 2019 Maroc Telecom is 53 per cent controlled by the UAE's Etisalat. Morocco’s economy and finance minister said that the Kingdom is considering selling stakes in Maroc Telecom next year, as it aims at raising MAD 5 billion ($527 million) from the sale of public enterprises. Maroc Telecom is listed on both the Casablanca Stock Exchange and Euronext Paris, the Kingdom owns a 30 per cent stake. Mohamed Benchaaboun, the Economy and Finance Minister, said that the Moroccan government will further open the capital of public enterprises to private investors and will restructure state-owned enterprises and institutions. The selling of stakes in public enterprises is also expected at boosting liquidity on the Casablanca stock exchange. The economy and finance minister also said that privatisation, as well as restructuring state-owned enterprises, will help the Government generate up to MAD 8 billion to narrow the budget deficit to 3.3 per cent in 2019, reported Reuters.
Kuwait to push economic reforms despite higher oil prices Sheikh Sabah Al-Ahmad Al-Jaber al-Sabah said that Kuwait needs to push through economic reforms despite higher oil prices. The Emir of Kuwait has urged the parliament to work with the Government to implement measures aimed at diversifying revenues and developing the economy, stressing the need to push through economic reforms despite higher oil prices. The Gulf state, whose state finances are among the strongest in the region, has been trying to introduce new taxes and reform a lavish welfare system to curb state spending. The Gulf's six oil-exporting countries originally agreed to introduce a five per cent value-added-tax (VAT) at the start of 2018. Saudi Arabia and the UAE introduce VAT early this year, the other states have delayed because of political opposition, potential damage to consumer spending as well as the technical challenges of a new tax. Sheikh Sabah Al-Ahmed Al-Jaber al-Sabah, the Emir of Kuwait, said, “I hope that the recent temporary improvement in oil prices does not obstruct this important path, which aims to protect future generations.” In May, the Parliament's budget committee said that Kuwait would not implement VAT before 2021, but would push ahead this year with excise taxes on selected products, such as tobacco and sugary drinks, reported Reuters.
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Emirati banks post AED 22.7 billion profit for first nine months of 2018 The growth signalled the robust solvency of the UAE banking sector and its ability to weather challenges despite the slowdown recorded in some parts of the region. Eleven Emirati banks posted net profits of AED 22.7 billion by the end of September 2018, a growth of 11.3 per cent from AED 20.4 billion during the corresponding period in 2017, according to local newswire, WAM. The financial statements released recently showed net profits of eight banks listed on the Abu Dhabi Securities Exchange (ADX) amounting to AED 16.5 billion from January till September, a 10.7 per cent increase from AED14.9 billion during the same period in 2017. Additionally, three banks listed on the Dubai Financial Market (DFM) posted profits of AED 6.2 billion during the same period, a 12.7 per cent increase from AED 5.5 billion in 2017. First Abu Dhabi Bank (FAB) led the banking sector, recording AED 9.08 billion in profits at the end of Q3 2018 compared to AED 8.09 billion in 2017, Dubai Islamic Bank came second with a net profit of AED 3.62 billion, a 14 per cent increase from AED 3.17 billion during the corresponding period in 2017.
UAE business loan demand up in Q3, personal loans fall The net balance measure for business lending, increased to plus 14.0 in Q3 from plus 11.8 in Q2. The Central Bank of the UAE (CBUAE) has announced that the demand for business loans increased in Q3 amid a decline in the demand for personal loans, reported Reuters. In the current quarter, companies expect a further rise to plus 22.4, with demand anticipated to increase in all emirates. Demand for personal loans fell back into negative territory in Q3 posting a net balance measure of minus 9.6 and the decline was most evident in Abu Dhabi.
MBRF, RAKBANK reaffirm partnership to facilitate SME financing
Saudi Arabia opens four sectors to foreign investment The move will allow foreigners to invest in recruitment offices, audio and video services as well as road transport services and brokerage services for real estate. Saudi Arabia will allow foreigners to invest in audiovisual services, land transport and real-estate brokerages, according to local newswire, Saudi Press Agency. The Cabinet amended what it described as types of activity that had been previously excluded from foreign investment. The development coincided with the chairwoman of Tadawul’s announcement that about 320 foreign institutions have registered as qualified foreign investors in the Saudi stock market.
Bahrain’s APM Terminals plans to raise more than $30 million with IPO The firm will offer 18 million shares, equivalent to 20 per cent of its issued share capital, at BHD 0.66 per share. APM Terminals Bahrain plans to raise almost BHD 12 million ($32 million) through its planned initial public offering (IPO). The offering will start on 8 November and will remain open until 24 November, the company's shares will start trading on 9 December 2018. Bahrain's SICO is working as a lead manager, underwriter and market maker for the planned transaction. Port operator, which has operated in the country for 12 years, is part of the Netherlands-based group APM Terminals, which is itself part of the Maersk Group, reported Reuters.
The partnership will allow RAKBANK to act as a paying agent on behalf of Mohammed bin Rashid Fund (MBRF) to offer Loan Against Invoice (LAI) and Statement of Invoice (SoI) services. The MBRF of Dubai SME has signed a MoU with RAKBANK to facilitate SME access to competitive financing solutions, according to local newswire, WAM. The MoU will enable Dubai SME members to secure financing at preferential rates and also take advantage of RAKBANK’s suite of Business Banking products and services including a business current account with no minimum balance required or maintenance fees. Additionally, the collaboration will see MBRF using RAKBANK's processes, checks and balances to disburse funds to Dubai SME members. Dhiraj Kunwar, RAKBANK’s Managing Director of Business Banking, said that the partnership aims to raise the visibility of the UAE National-owned SMEs and to cement the position of RAKBANK being a lead SME banker in the UAE market.
Bahrain to receive up to $2 billion, first slice of Gulf aid Bahrain will receive up to $2 billion from its Gulf neighbours before the end of the year as the first instalment of an aid package and some funds have already arrived in state coffers, reported Reuters. The Kingdom’s finances have been hit hard by a slump in oil prices in 2014 and have been struggling to cut government spending while avoiding public anger over austerity measures. The funds will help Bahrain, which is holding parliamentary elections in November, as it implements new fiscal reforms. Bahrain released a 33-page fiscal plan last week after signing the agreement with its Gulf neighbours to fix its debtburdened finances and abolish its budget deficit by 2022. Bahrain had projected a $3.5 billion budget deficit in 2018.
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THE MARKETS
GCC ECONOMIC GROWTH T SOARS IN 2018
Buoyant oil prices throughout 2018 along with rising FDI point to positivity for GCC economies
Demand for oil is likely to increase as US sanctions against Iran come into effect, improving GCC revenues. (CREDIT: SHUTTERSTOCK/FEDOR SELIVANOV)
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he Arab Economic Outlook Report 2018 showed that the economic activities in the GCC region have improved in 2018 due to the increase in the global demand, the rise in the international oil prices, as well as the positive effects of economic reforms being implemented in some of the GCC countries. The growth rate of the GCC which has been revised upward to 1.9 per cent in 2018, is expected to rise to 2.5 per cent next year. This group of countries will benefit from the increase in oil production in the second half of the year. In 2018, oil prices remain buoyant as seems likely, with regional investment flows being boosted by initial public offerings (IPOs) and a rise in foreign direct investment (FDI), it is expected that non-hydrocarbon GDP growth in 2018 should be slightly stronger than in 2017, combined with flat (rather than reduced) oil production. Gulf countries are restructuring and opening up their economic activities, rethinking the role of foreign investors as they look to ease fiscal burdens and do away with dependence on oil, with a strong focus on technology-intensive sectors like fintech industry. Also, is believed to be are part of a broader strategic shift on the part of respective governments to prepare for an after-oil era future, where oil’s global dominance is set to die down especially as electric cars as well as solar energy is set to become the norm over the next two decades.
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Best Private Equity Firm in the Middle East, 2011, 2012, 2013, 2014 and 2015 Best Alternative Investment Firm, 2016
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THE MARKETS
OIL REVENUE Demand for Saudi oil is expected to increase as US sanctions against Iran comes into effect and will take some of its barrels off the market. The Kingdom through its energy ministry assured the world that Saudi Arabia is able to supply the demand for its crude in October which is expected to range between 10.5 million to 10.6 million barrels a day (bpd). Saudi Arabia told OPEC that it produced a near-record 10.4 million bpd in August 2018. Saudi’s oil revenues leaped 82 per cent year on year to SAR 184.2 billion, reflecting a recent rise in prices in Q2 2018, oil has already surpassed the $80 mark with Brent crude, the international oil benchmark having surged to a fresh four-year high above $83 a barrel in the first week of October. According to a monthly economic report by Al Rajhi Capital, the Kingdom’s oil revenue is expected to reach SAR 605 billion ($161.36 billion) against budgeted SAR 492 billion this year as the kingdom witnesses a continuous improvement in the economy. Additionally, Kuwait’s economy is still wholly dependent on oil production having shelved economic transformation reforms that are being implemented by its GCC allies. According to Fitch Solutions, in 2017, the hydrocarbon economy accounted for over half of Kuwait’s GDP, 92 per cent of export revenues and 90 per cent of government revenue. Kuwait’s economy, like much of the Middle East, is heavily reliant on oil exports and it is home to six per cent of the world’s crude-oil reserves. Kuwait has the highest percentage of GDP tied to oil among OPEC nations. The reliance on oil also ensures that Kuwait reduces unemployment rate as Kuwaiti nationals are guaranteed public-sector employment as part of the oil wealth distribution, while most private-sector employees are expats. The increase in the price of Brent private sector is expected to grow between 3.5 per cent and four per cent between 2018 and 2021.
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GULF COUNTRIES ARE RESTRUCTURING THEIR ECONOMIES, RETHINKING THE ROLE OF FOREIGN INVESTORS AS THEY LOOK TO EASE FISCAL BURDENS AND DO AWAY WITH THE OIL ERA, WITH A STRONG FOCUS ON TECHNOLOGY.
On the other hand, the International Monetary Fund (IMF) recently lifted its economic growth forecasts for the UAE because of expectations that oil production. Natalia Tamirisa, IMF Mission Chief to the UAE, said that the GCC’s second-biggest economy is now likely to expand 2.9 per cent this year and 3.7 per cent next year. The announcement coincided with the UAE cabinet approved a 17.3 per cent rise in the federal budget for 2019 compared to this year and rebounding oil prices have given the Government more money to spend. Bahrain, despite being the GCC’s oldest oil producer it has modest reserves, and yet it is heavily dependent on the income it generates from oil. In April, the Kingdom’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. However, Bahrain’s new oil find could eventually yield up to 2.4 billion barrels of recoverable oil reserves. Moody’s added that it may be years before Bahrain’s
new asset yields any profits, the newly discovered oil reserves are not expected to positively impact on Bahrain’s economy for at least another five years. The IMF estimated Oman’s nonhydrocarbon economic growth to soared modestly in 2017 to about two per cent, from 1.5 per cent in 2016, as higher confidence in the wake of the rebound in oil prices helped offset the impact from fiscal consolidation on economic activity. The Government’s revenue soared by 23.2 per cent to OMR 4.1 million in H1 2018, compared to the same period of last year, thanks to a major recovery in oil prices. The data released by Oman’s National Centre for Statistics and Information (NCSI) showed that the growth in oil prices resulted in the increase of the net oil revenue of the Sultanate’s government by 34.8 per cent to OMR 2.1 million in H1 2018. Reflecting the buoyant oil price environment, the Sultanate’s fiscal deficit in H1 2018 plunged by 46.2 per cent to OMR 1 million, from as high as OMR 2.4 million for the same period last. This mainly because of the rise in oil revenues in the aftermath of a major recovery in crude oil prices in the international markets. ECONOMIC DIVERSIFICATION Gulf countries are restructuring their economies, rethinking the role of foreign investors as they look to ease fiscal burdens and do away with the oil era, with a strong focus on technology. The Saudi Crown Prince unveiled a series of economic transformation reforms under the Kingdom’s ambitious Vision 2030 plan. Recently, Crown Prince Mohammed bin Salman reiterated that Aramco should complete a deal to buy a $70 billion stake in SABIC, issue debt to finance the acquisition and go public by 2021. According to the Arab Monetary Fund’s Outlook Report of September 2018, reforms being implemented in the GCC countries to improve the business climate in these countries will support economic activities during the forecast horizon.
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ASSET MANAGEMENT
GCC ASSET MANAGERS: STRATEGIES TO NAVIGATE CHALLENGES AND OPPORTUNITIES AHEAD By Mathieu Vasseux, Partner and Head of FS (MEA) and Jose Luis Juanus, Associate, Oliver Wyman
G
Mathieu Vasseux
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CC asset managers are faced with major global disruptions of evolving investors’ needs, rising share of passive funds, greater regulatory scrutiny. Despite these challenges, GCC Wealth Management industry continues to outperform global asset management industry with sustained seven per cent annual growth rates in Assets under Management (AuM) compared to five per cent globally. GCC wealth managers also face a set of unique challenges. Firstly, servicing the high proportion of HNWI and UHNWI in the region with large volumes of holdings overseas. Secondly, meeting the region-specific product demands. The ability of wealth managers to turn these challenges into opportunities will be key to continue delivering growth.
We see regional leaders transforming to better service HNWI & UHNWI and strengthening the product offering to cater for clients’ appetite.
PROPORTION OF WEALTH HELD OVERSEAS BY HNWI 2017 Global
16%
Middle East &
54%
Africa
TRANSFORMING TO BETTER SERVICE GCC HNWI & UHNWIS Regional Wealth Managers have a more concentrated and differentiated client base. Twenty per cent of AuM are held by HNWI in the GCC compared to 10-12 per cent globally. GCC HNWI have a differentiated set of needs. Firstly, HNWI hold larger portions of their wealth overseas. Secondly, we see UHNWI increasingly creating or growing their own in-house asset management capabilities / family offices. Wealth Managers in the Gulf are transforming their businesses settingup subsidiaries abroad in key jurisdictions, establishing partnerships with global manufacturers and further deepening in their regional product specialisation to better serve demands of HNWI. MEA HNWI are estimated to hold 54 per cent of their wealth overseas compared to 16 per cent globally, UHNWI are estimated to hold an even larger share of their wealth abroad - between 60 and 70 per cent. Only Latin America and Eastern Europe have similarly high overseas allocations, 51 per cent and 44 per cent respectively. Large allocations overseas in the region are driven by investors’ diversification and confidentiality objectives. This diversification push is underpinned by investor desire for access to deeper markets, broader product offerings and diversifying their exposure away their home country, decorrelating their investments and their primary source of income. While developing rapidly, regional financial markets are yet to match depth and breadth of global centers. NYSE and LSE, as an example, market capitalisations are 46 and eight times the market capitalisation of Tadawul, the largest exchange in Middle East. Wealth Managers also have narrower product suites compared to global leaders. While leading GCC Wealth managers offer
51%
Latin America
44%
Eastern Europe
23%
APAC
21%
Western Europe 4%
Japan
2%
North America
Figure 1 HNW wealth is measured across households with financial assets greater or equal to $ 1 million. Source: Oliver Wyman Wealth Management model
NUMBER OF INVESTMENT PRODUCTS FOR A SELECTION OF WEALTH MANAGERS
MARKET CAPITALISATION OF SELECTED INTERNATIONAL EXCHANGES AND REGIONAL EXCHANGES 1,788
NYSE
23,967 11,272
Nasdaq -US 1,678 1,486
Japan Exch.
6,076
Euronext
4,462 4,3676
LSE Group 1,449 1,113 316 Top 5 GCC 33-51 Wealth Manager
Tadawul
526
Qatar SE
150
ADX
133
Dubai Finan. Market
104
Bahrain Bourse
22
Muscat Sec.Mark.
19
Figure 2 LHS: Number of investment products offered by Wealth Managers including funds, SICAVs and other investment vehicles. Source: Morningstar, CMA, Wealth managers; RHS: Domestic market capitalization of selected international and regional exchanges
around 50 different investment products, international leaders have much larger product suites. Leading wealth managers typically offer 1500-2000 products in their core offering across a wide array of asset classes. International diversification is also sought by local HNWI for wealth confidentiality purposes vis-à-vis peers, regulators and government. Overseas investments represent a significant challenge for GCC asset managers.
We see regional wealth managers extending their footprint, opening offices in Switzerland, UK or Luxemburg, and establishing distribution partnerships to capture overseas flows. Succeeding in international expansion is challenging. Offices overseas typically lack the necessary scale to be able to sustain a fully-fledged international offering that can compete with global industry leaders so diversification benefit is limited. Similarly, international branches do not
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ASSET MANAGEMENT
meet the confidentiality requirements of regional HNWI as they remain with their parent entity and relationship is not always trusted to be fully armlength. Partnering with leading global names to white-label and commercialise products has been a cost-effective solution adopted by some local firms to expand their product offering. Only around a third of current investment products offered by regional wealth managers corresponds to international strategies. Partnerships provide access to an endless product catalogue of international investment products allowing managers to meet diversification objectives of their clients. Some partnerships have proven successful for the low and mid segments of the HNWI spectrum. Well-structured partnerships can be a win-win solution that allow local players to capture distribution fees and increase customer satisfaction through an enhanced offering. But establishing a successful integrated delivery partnership which is seamless for client is a significant challenge. Moreover, GCC asset managers are concerned about exposing their clients to potential global competitors and the risk of cannibalization of their client base. GCC UHNWI are also growing their own Family Offices and setting or transferring these to English Law jurisdictions (such as DIFC, UK), which further complicates coverage for GCC asset managers. Furthermore, Family Offices are increasingly trying to insource activities traditionally performed wealth managers, making coverage and client management
The NYSE and LSE’s market capitalisations are
46 eight and
times the market capitalisation of Tadawul, the largest exchange in Middle East.
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PARTNERING WITH LEADING GLOBAL NAMES TO WHITE-LABEL AND COMMERCIALISE PRODUCTS HAS BEEN A COST-EFFECTIVE SOLUTION ADOPTED BY SOME LOCAL FIRMS TO EXPAND THEIR PRODUCT OFFERING. more complex. To retain UHNWI clients, successful Asset Managers need to continuously prove that they deliver value through increased depth of analysis, superior service and product breadth which is very difficult to replicate inhouse. Similarly, a unique demand for a high-touch distribution model means the need for localized Relationship Managers with high intensity and flexibility remains critical. STRENGTHENING PRODUCT OFFERING TO CATER FOR CLIENTS’ APPETITE Wealth Managers in the GCC have been traditionally equity focused due shallow regional fixed income markets and the importance of Sharia compliance. As an example, in Saudi Arabia, 58 per centof public funds and currently open private funds are equity-focused compared to eight per cent focused on fixed income. Evolving client demands are pushing asset managers to enrich their product offering, with the introduction of white-labelled international products one emerging example. Demand for alternative investments, especially Real Estate investment, continues to rise among GCC investors, and leaders have had to adapt to satisfy client demands. The rapid urban transformation observed in many GCC cities is partially a result of the appetite for Real Estate investment in the region. Investors have traditionally focused on direct real estate investment; however, real estate investment products are becoming increasingly important in investors’ portfolios. The offer of Real Estate Funds and Real Estate Investment Trusts (REITs) has flourished over the last few years in line with client demands.
As an example, 12 out of 61 DFSAregistered funds are Real Estate focused. Similarly, since the introduction of REIT regulation in Saudi Arabiain late 2016, 15 REITs have been listed on Tadawul. Diversification, increased liquidity, access to professional property management and the opportunity to invest in large real estate developments are only some of the benefits that these products offer to investors. Wealth Managers are also designing tailored products to meet appetite of HNWI for international real estate. This can be challenging for regional wealth managers for two reasons: • successful real estate investing requires a deep knowledge of local market • 2 HNWI often demand access to iconic and prime properties. Providing these without on the ground presence in these markets is a challenge and the scale does not always justify the investments for regional houses. Leaders are overcoming these challenges through partnerships with international real estate specialists. In these arrangements, regional wealth managers facilitate access to clients as well as structuring products to meet the needs of local investors e.g. sharia compliance. Clients are at the heart of the transformation observed in regional wealth managers. GCC investors are becoming increasingly demanding and sophisticated. The ability of wealth managers to adapt their businesses expanding their product offerings to meet client demands and providing a true edge will determine the future of the industry in the region.
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OPINION
UNITED ARAB EMIRATES ISSUES NATIONAL PUBLIC DEBT LAW By Douglas Smith, Partner, Leila Drissi, Associate and Safwan Al-Amin, Associate, Squire Patton Boggs
The new legislation is likely to have a significant effect on the capital markets and state of public finances in the UAE. (CREDIT: BILLION PHOTOS/SHUTTERSTOCK).
O
n 14 October, the United Arab Emirates (UAE) issued Decree Law No (9) of 2018 (Public Debt Law or the Law), a long-awaited piece of legislation that may have a significant effect on the capital markets and state of the public finances in the UAE. The Law permits the federal government of the UAE to issue sovereign debt for the first time through the sale of bonds or other debt instruments. Government sources have pointed to the potential of the law as a means of establishing a primary and secondary market for government securities in the UAE, and a framework for
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issuing long-term bonds thereby providing an alternative source of funding for federal government projects. Government bonds have been issued at the Emirate level by Abu Dhabi, Dubai and Sharjah for more than 10 years. The Emirate of Abu Dhabi issued its first bond—a $1 billion five-year conventional bond—in 2007, prior to the global financial crisis. Liquidity concerns prompted Dubai to do the same in the wake of the crisis with a $20 billion bond issuance in early 2009, half of which was taken up by the UAE Central Bank in an effective bailout of the Emirate. The Emirate of Sharjah issued debt in excess of
$1 billion in the form of bonds and Sukuk (Islamic bonds) earlier this year, pursuant to its newly established Sukuk programme. Prior to the promulgation of the Public Debt Law, however, there was no legal framework for such issuances by the UAE federal government. IMPLICATIONS AND OBJECTIVES The Law should allow the UAE federal government to issue debt on the basis of a national debt rating as opposed to the rating of individual Emirates and give the UAE Central Bank, a federal institution, greater control in managing local banking liquidity.
Among its stated objectives, the Law cites the goal of supporting and developing a highly efficient financial market in the UAE, as well as providing a federal mechanism for financing infrastructure and development projects in the country providing government guarantees and emergency funding. MAIN PROVISIONS PDMOS The Public Debt Law contemplates the formation of a federal Public Debt Management Office (PDMO) within the Ministry of Finance to be constituted and organised in accordance with a resolution to be issued by the Minister of Finance. Under the Law, the PDMO is tasked with: • Proposing strategies and policies for public debt management in co-ordination with the Central Bank. • Implementing strategies and policies approved by the Cabinet, in co-ordination with the Central Bank. • Monitoring risks related to the issuance and trading of public debt. • Co-ordinating with the Central Bank the management, issuance and sale of federal government bonds, treasury bills and other government securities. • Co-ordinating with the government of each of the seven Emirates the development and support of primary and secondary markets for the issuance of public debt instruments by the state. • Generally providing advice and proposing policies to the Minister of Finance concerning the issuance and management of public debt. • Overseeing the borrowing and financing arrangements made by any federal government authorities and institutions and corporations that are wholly-owned by the government or by a wholly-owned government entity. The Law contemplates the establishment of local government agencies at the Emirate level with the same competencies as the PDMO.
This role is already largely performed by the Debt Management Division of the Department of Finance in Dubai and within the Abu Dhabi Department of Finance. The Law imposes a requirement on the Emirates’ local debt management offices to provide data, information and statistics of local debt issuance on an ongoing basis. RESTRICTIONS The type and offering terms of any public debt instrument must be approved by way of a Cabinet Resolution following recommendations from the Minister of Finance. Overall debt issuance is subject to certain restrictions, including that the amount of public debt outstanding must not exceed 250 per cent of ‘Self-Generated Stable Government Revenues’ (defined as revenues generated by the UAE federal government). For the purposes of this calculation, the revenues are subject to a ±10 per cent cap on a three-year rolling average. Further, the share of public debt allocated to infrastructure projects may not exceed 15 per cent of the total public debt outstanding at any time. This restriction is likely to elicit comment from investors who look favourably on government debt being applied for infrastructure development. It remains unclear what projects would be classified as infrastructure projects for the purposes of the Law. SOVEREIGN GUARANTEES The Public Debt Law specifically authorises the UAE federal government to issue guarantees on behalf of federal government authorities, institutions and corporations that are wholly-owned by the government or by a wholly-owned government entity. The terms of any such guarantee are to be specified in a cabinet resolution following a recommendation by the Minister of Finance.
ELECTRONIC REGISTRY AND LISTING The new Law stipulates that public debt instruments may be issued in electronic or paper form and contemplates the creation of an electronic registry for such instruments. It also contemplates that debt instruments may, in co-ordination with the Central Bank and the Emirates Securities and Commodities Authority, be admitted for trading, on one of the Dubai Financial Market, NASDAQ Dubai or the Abu Dhabi Securities Exchange. The Ministry of Finance is expected to promulgate executive bylaws and resolutions concerning the trading, clearing and settlement of public debt instruments and related matters within six months. CONCLUSION The advent of the Public Debt Law signals the UAE’s willingness to use sovereign debt as a means of achieving its fiscal objectives. However, some of the urgency that existed when the law was first mooted has fallen away following the recent increase in oil price and its corresponding positive effect on the UAE’s finances. Even with an expected increase of around three per cent year-on-year in consolidated government spending, the federal UAE deficit continues to narrow. According to the International Monetary Fund, it is estimated that the UAE will have a consolidated budget deficit of 1.6 per cent of GDP in 2018 and will be down from 2.7 per cent in 2017. If present trends persist, in 2019 the budget should show a surplus, making it unlikely that the UAE federal government will tap the public debt markets any time soon. While the UAE federal government’s need for funding may be less urgent, there will be opportunities for public debt issuance to be used as a means of managing existing liabilities in support of long-term development and social benefits programmes, including healthcare, public education and higher education programmes, all stated government priorities, and other special projects for the benefit of the UAE.
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COVER INTERVIEW
FINANCING THE FUTURE Banker Middle East sat for an exclusive interview with Hisham Ahmed Al Rayes, CEO of GFH Financial Group to discuss what the group’s strategy has been and what the future might hold
W Hisham Ahmed Al Rayes was recognised at the Top CEO awards in 2017.
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hat has been GFH’s investment strategy and which industries have you focused on? GFH’s strategy has been focused on the acquisition of income-generating assets across the GCC, US and Western Europe. Our focus has been on defensive sectors including education, consumer retail and healthcare as well as multiple asset classes across the US/Western Europe real estate segment.
The Harbour Row project is one of several real estate projects that GFH has been involved in, located at the Bahrain Financial Harbour.
Can you speak a little bit about any recent exits that might be of interest to potential investors? We have a strong track record of success in not only making strong income generating investments but importantly in securing strategic, profitable exits that have benefited the Group and our shareholders and investors. This is reflected in the continued strengthening of our financial results and performance and the strong investor and market confidence in GFH. Some notable recent exits include:
ULTIMATELY OUR PRIMARY FOCUS AND OBJECTIVE IS ON VALUE CREATION FOR SHAREHOLDERS. WITH THIS IN MIND, WE ARE CURRENTLY AIMING TO REPOSITION OUR TOTAL ASSETS AND FUNDS UNDER MANAGEMENT TO YIELDING ASSETS. Hisham Ahmed Al Rayes
• Exit of British School of Bahrain in 2017 for an aggregate value reaching $180 million. • Philadelphia Private School was successfully exited in 2018 with 33 per cent ROI. • The Lost Paradise of Dilmun waterpark was successfully exited in late 2018 in a deal valued at $60 million. • Exit of Diversified US Residential Portfolio (DURP) delivering cash dividends of nine per cent on a quarterly basis to investors and an ROI of 1.29x.
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GFH recently exited its diversified US residential Portfolio.
I have noticed that you have several funds devoted to private schools in Bahrain, such as the British School of Bahrain, and the UAE, such as Sheffield Private School, how large a role does education play in GFH’s private equity and asset management business and how do you see this trend likely to move going forward? We continue to see education as a strong area of focus for the Group. Our current portfolio includes the Dubai based Sheffield Private School and the international AMA Group following a number of strategic exits. We continue to actively assess opportunities for further acquisitions in the education sector in the GCC as well as in the US and Western Europe.
In 2017, we acquired a 1.2 metre squared landbank in North Africa and India and are working towards the potential monetisation of our real estate portfolio. Currently under development are a number of landmark projects both in Bahrain and the UAE. This includes the iconic Harbour Row and Villamar projects located at the Bahrain Financial Harbour and California Village in the UAE within the prestigious Dubailand project.
From a real estate development perspective, what has been the strategy behind GFH’s investments? We have a long and distinguished track record of developing landmark projects both in the GCC and international markets. Today our strategy is to undertake development through JV structures alongside world-class partners.
How has GFH set its targets to generate shareholder value? What have been the strategic aims? Our aim is to increase AUMs to $30 billion over the next two to three years through organic and inorganic acquisitions. We are targeting double digit ROE and aim to maintain above market average dividend payout ratios.
What rationale does GFH adhere when looking at potential disposals throughout the real estate portfolio? Ultimately our primary focus and objective is on value creation for shareholders. With this in mind, we are currently aiming to reposition our total assets and funds under management to yielding assets.
Can you talk to me about how GFH approaches issues of dividend distribution and buyback schemes? Our top priority is creating and returning value to shareholders. Since 2016, we have returned cumulative shareholder value of $235 million through dividends and share buybacks. Our aim going forward is to maintain our strong dividend distributions and support market cap by way of share buyback. We have completed a share buyback of five per cent during 2018, and the Group is currently in the process of seeking regulatory approvals to acquire up to an additional five per cent of shares. What is your personal management style? I believe in a culture that encourages collaboration and team work and one that encourages and demands excellence across the organisation. At the same time, I believe it’s critical to give individuals the support and resources they need to excel and at GFH we do that, we invest heavily in our people for mutual success.
Hisham Al Rayes is the Chief Executive Officer as well as the member of the Board of Directors of GFH Financial Group. GFH is a large regional financial group with some $6.2 billion assets and fund under management and shares listed in the Bahrain, Dubai and Kuwait. Al Rayes assumed leadership of the firm in 2012 with the stated objective of establishing GFH as a diverse and regionally-recognised financial group offering wealth management, real estate, commercial banking and asset management.
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COUNTRY FOCUS
COMING TO TERMS Jordan’s new Prime Minister faces appeasing the country’s investors at the expense of its people
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W
hen Jordan’s people took to the streets in June to protest over subsidy cuts and new taxes they chanted 'we have nothing'—and they weren’t far wrong. With unemployment running at a two-decade high of 18.4 per cent and a third of the population living below the poverty line for at least one quarter of the year, the people of Jordan feel they are paying for the failings of successive governments. Jordan has one of the smallest economies in the Middle East and few natural resources. It has lavished subsidies on its public thanks to the support of its richer cousins, however an unprecedented influx of refugees from Syria have put a strain on Jordan’s already fragile economy and it can no longer afford to be so generous.
CREDIT: SHUTTERSTOCK/MBRAND85
Refugees have inflated Jordan’s population by 50 per cent since 2011, and security concerns have weighed heavily public resources. Rising military, medical, and education bills have eaten into Jordan’s finances and sent debt levels soaring. At the same time, conflicts in Syria and Iraq have severed the country’s major trade routes. Saudi Arabia, previously Jordan’s most enthusiastic benefactor, has had to tend to its own financial wounds in the wake of falling oil prices and cut funding in 2016. The World Bank and the IMF stepped in with fresh funds, but in return they want to see Jordan commit to reforms that could easily see its cash-strapped population take to the streets again. “Regional developments have significantly affected foreign investment, while weakened macroeconomic activity
in the GCC has reduced remittances and investment inflows,” S&P noted. “We do not anticipate a quick resolution to the Syrian conflict and security risks will remain high, which will weigh on economic growth.” UNPOPULAR DECISIONS This makes the new Prime Minister’s job very difficult. His predecessor, Hani Mulki, was ousted by King Abdullah when his proposed reforms transpired to be too bitter a pill for the public to swallow. As a former World Bank economist, new Prime Minister Omar al-Razzaz probably knows that Mulki had little choice. Jordan’s central government debt levels soared to 96 per cent in 2017 from around 62 per cent of GDP in 2011, according to S&P. World Bank data suggests that real GDP is in its third year of two per cent growth.
Moody’s said that economic growth in Jordan will remain below potential in 2018, despite a gradual rebound. It expects real GDP growth to inch up to 2.5 per cent this year, from around 2.3 per cent in 2017. Jordan’s external financing needs increased to over 150 per cent of current account receipts and usable reserves in 2017, owing mainly to larger current account payments and a high proportion of short-term bank debt, S&P said. Jordan’s current account deficit increased in 2017 to 10.6 per cent of GDP, from 9.5 per cent in 2016. Al-Razzaz has the unhappy task of reducing debt levels and pushing through structural reforms which are bound to prove unpopular with a population prone to protesting. However, he has made a good start.
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SUPPORT NETWORK In June, GCC countries pledged $2.5 billion to help support Jordan’s economy in the form of deposits, project finance, and a very small grants portion. The package also includes guarantees to the World Bank and annual support for the budget of the Jordanian Government for five years, according to the Saudi Press Agency. The World Bank also extended $500 million in concessional financing, Bloomberg reported. The funds consist of a $111 million grant from the Global Concessional Financing Facility and a $389 million non-concessional portion with a final maturity of 35 years. The fact that Jordan is one of the region’s most politically-stable countries has not escaped the world’s attention, and international investors have also come to the country’s aid. The European Investment Bank (EIB) is preparing to invest EUR 850 million in Jordanian businesses. In January, the US committed to providing economic and military aid of at least $1.275 billion annually over five years, representing a 28 per cent increase from 2017, and the first five-year memorandum of understanding (MOU) with Jordan. To demonstrate the US’s strong commitment to Jordan, the US Congress approved aid of $1.52 billion in March for 2018, which is $250 million higher than the MOU amount. CREDIT DUE However, the odds of Jordan fulfilling its obligations to its supporters are stacked against it. “While the three-year Extended Fund Facility programme from the IMF has provided a policy anchor, we do not expect the Government to meet initial programme targets,” S&P stated. In July, Bloomberg reported that Jordan was trying to renegotiate the terms of the $700 million IMF loan. The Kingdom was reportedly trying to extend the programme beyond its current 36 months and revisit some targets.
JORDAN’S CENTRAL GOVERNMENT DEBT LEVELS SOARED TO 96 PER CENT IN 2017 FROM AROUND 62 PER CENT OF GDP IN 2011. According to S&P
Under the terms of the extended fund facility that Jordan and the IMF negotiated in 2016, the Kingdom was to have implemented reforms that would have generated an additional JOD 540 million ($761 million) this year, but state revenue in the first half was much lower than forecast. In a demonstration of commitment to the IMF programme, in September Reuters reported that Jordan’s cabinet presented an IMF-backed draft tax bill containing austerity measures to ease rising public debt. Al-Razzaz promised that he would consult civic bodies over a new tax system that would not trample on citizens’ rights. The Government claims that the new law softens the impact of the tax hikes on middle-class families by raising personal income thresholds and reintroducing personal exemptions. Unsurprisingly, this has not gone down well with the unions and civic associations behind last June’s protests, who want the Government to give priority to fighting corruption and cutting public waste. However, S&P thinks that further protests on any significant scale are unlikely. “While protests against further fiscal reforms are possible, we do not expect them to be large enough to result in social upheaval in our base-case scenario,” it said.
In October, Al-Razzaz announced a cabinet reshuffle which cut the 29-member cabinet to 27, warning that Jordan would pay a heavy price if a tax reform bill failed to pass into law this year. He said that he wanted to push through the tax bill in 2018 to retain IMF support and avoid higher servicing costs on over JOD 1 billion of foreign debt due in 2019. So far, this has worked to his credit. In September, S&P affirmed its ‘B+/B’ longand short-term foreign and local currency sovereign credit ratings on Jordan and maintained its stable outlook. “The stable outlook balances our expectation that donor funding will continue to support public finances and low interest costs against the risk that the government will reverse planned fiscal consolidation to alleviate social and economic challenges,” it said. The rating agency explained that the authorities’ efforts to implement fiscal consolidation and measures to reduce losses in state-owned enterprises could result in gradually falling government debt levels over the forecast horizon through 2021. BALANCING ACT The World Bank also expects Jordan’s fiscal balances to improve, albeit gradually. It estimates that the overall fiscal balance, including grants, will to narrow to -1.8 per cent of forecasted GDP in 2018, from -2.2 per cent of GDP in 2017. The primary balance is expected to improve to 1.5 per cent of GDP in 2018, from 0.8 per cent of GDP in 2017. “Jordan’s current account deficit is expected to narrow in 2018 on the back of a narrower trade deficit, while inflows remain sluggish,” the World Bank said. “In the first half of 2018, the merchandise trade deficit narrowed by five per cent year-on-year compared to a widening of 5.4 per cent for the same period in 2017, driven by improving exports and declining non-energy imports, despite the higher energy bill.”
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COUNTRY FOCUS
Trade with major partners such as the US and India is also rebounding, the World Bank said, and the benefits of reopening trade routes with Iraq are gradually materialising. In addition, tourist receipts are rising. The opening of the border with Iraq in late August 2017 helped increase exports to Iraq by 33 per cent year-onyear in the first half of 2018, according to S&P. Following the Syrian regime’s repossession of control over the border Daraa area, Jordan could potentially reopen the Nassib border with Syria in the medium term, which would boost exports further. CASHING IN Jordan’s banks are a further source of optimism. Throughout its severe financial shocks, Jordan’s banking system has remained remarkably sound. A financial stability report from the country’s own Central Bank ranked Jordan third among 19 European countries that have developed a similar index. It claimed that Jordan enjoys a “healthy, sound, and stable” banking sector. International credit rating agencies don’t entirely disagree. According to Moody’s, Jordan’s banks will be protected from their high credit risk by solid capital levels and strong liquidity. However, such plaudits can’t detract from the fact that its banking system is under pressure. Given the precarious financial situation its banking clientele live in, this is hardly surprising. According to Moody’s, credit risk at Jordanian banks is high, affected by rising interest rates, inflation and increasing unemployment, which in addition to high household indebtedness will hamper households’ ability to repay debt. As a result, non-performing loans will rise slightly from 4.4 per cent of loans at the end of June 2017, the rating agency said. Jordanian banks also have a concentration of exposure to the Government, which links their credit profiles to that of the sovereign.
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AL-RAZZAZ HAS THE UNHAPPY TASK OF REDUCING DEBT LEVELS AND PUSHING THROUGH STRUCTURAL REFORMS WHICH ARE BOUND TO PROVE UNPOPULAR WITH A POPULATION PRONE TO PROTESTING.
Nevertheless, Moody’s expects capital levels at Jordan’s banks to remain solid, given the modest growth in risk-weighted assets and some profit retention. Banks in the country posted a Basel III capital adequacy ratio of 17.8 per cent at the end of June 2017, one of the highest levels in the Middle East and North Africa region. “Jordanian banks on aggregate will also continue to benefit from stable retail deposits, ensuring limited reliance on foreign and short-term market funding,” said Christos Theofilou, an Assistant Vice President and Analyst at Moody’s. “We expect banks to maintain solid liquidity buffers, which stood at 39 per cent of total assets as at the end of September 2017.” Moody’s also expects stable profitability at the nation’s banks, as higher interest rates will lead to higher net interest margins that will counter elevated loan loss provisions.
MONEY MATTERS The World Bank explained that Jordan has maintained a contractionary monetary stance so far in 2018, in a bid to support the Jordanian dinar, strengthen monetary and financial stability, limit inflationary pressures and maintain a competitive return on dinar-denominated investments. Central bank gross reserves— including gold—have been declining since 2015, reaching $15.6 billion at end2017 from $16.5 billion at end-2015, S&P reported. Despite the issuance of US dollar domestic bonds of $500 million and Eurobonds of $1.5 billion, total reserves did not increase from 2016 levels. Instead, reserves continued to decline in 2018, and stood at $13.7 billion at the end of July. “Jordan’s exchange market pressure, high dollarisation rates and low foreign inflows have imposed downward pressures on foreign reserves,” the World Bank warned. “The foreign reserves at Central Bank declined to $10.7 billion by end-July 2018, 12.8 per cent lower than end-2017 levels and the lowest recorded since July 2013.” This leaves the Prime Minister facing an enormous challenge. Raising taxes is politically unpalatable in a low-growth environment with high unemployment and ongoing regional instability. The final proposal for a new tax system is likely to be shadow of its first version. Because of this, S&P expects general government debt to decline only gradually to around 74 per cent of GDP by 2021, warning that it could lower its ratings on Jordan if strong bilateral and multilateral donor support were to diminish, or the pace of fiscal consolidation were to slow significantly. This leaves Jordan more or less where we started, with continuing uncertainty, a reliance on external assistance and lenders demanding reforms that are likely to infuriate its public. Whichever way al-Razzaz turns, he’s likely to learn that he simply can’t please everyone.
JORDAN in numbers POPULATION
DEBT
9.9
78.8% of GDP
80.7% of GDP
million
1m
10m
Source: Worldometers (2018)
UNEMPLOYMENT RATE
18%
79.4% of GDP
(2018)
2016
2018
Source: CIA World Factbook
Source: Standard & Poor’s
$89.1 $87.34 $85.31
2017
BUDGET
GDP
billion (2017 est.) billion (2016 est.) billion (2015 est.)
Revenues: Expenditures:
$9.157 $11.83
billion billion (2017 est.)
Source: CIA World Factbook
EXPORTS
Source: CIA World Factbook
GDP PER CAPITA
$12,500 $12,500 $12,500
36.4% of GDP
35.1% of GDP
(2017 est.) (2016 est.) 35.6% of GDP
(2015 est.)
2016
Source: CIA World Factbook
REAL GDP GROWTH
2% 2% 2%
(2016) (2017) (projected 2018)
Source: Standard & Poor’s
2017
2018
Source: Standard & Poor’s
GDP PER CAPITA GROWTH
-0.5% -1.1% -0.8%
LIQUID ASSETS
13.8% 13.6% 13.7%
of GDP of GDP of GDP
INFLATION RATE
3.3% -0.8%
(2017 est.) (2016 est.)
Source: Standard & Poor’s
Source: Standard & Poor’s
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EQUITIES
The GCC equities market presents significant opportunities to global investors, says Thévenet. (CREDIT: ENCIKTEPSTUDIO/SHUTTERSTOCK).
GCC EQUITIES: MANAGING RISK TO ATTRACT INVESTORS By Amélie Thévenet, Fund Manager, Emerging Markets, Jupiter Asset Management
G
CC markets have attracted the attention of emerging market (EM) investors. Some markets, particularly Saudi Arabia and Qatar, are emerging as a safe-haven for EM investors. Exposure to GCC equities is diversifying risks associated with emerging market strategies, and regional markets can continue to attract investors by paying close attention to risk while focusing on investor education.
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COMPELLING MARKET CAPITALISATION Emerging market investors have long recognised the region’s potential. Countries in MENA—and in particular the GCC—are undergoing significant, wide-reaching reforms aimed at diversifying their economies. In Saudi Arabia alone, the transformation initiated by Crown Prince Mohammed Bin Salman under the Vision 2030 umbrella, has
ignited economic growth and has had a positive impact on markets. This year, the Kingdom achieved inclusion in the MSCI Emerging Market Index—the most widely followed of all EM indices—which is likely to attract foreign inflows of as much as $45 billion. The Saudi Stock Exchange, Tadawul’s market capitalisation stands at around $503 billion, and with a P/E of 16.75x makes it a compelling prospect for investors
EQUITIES
around the world. Other regional markets including the Qatar Exchange ($151 billion) and Kuwait Bourse ($85 billion) have earned their place on the radar of investors, albeit to a lesser degree. While investors remain interested in regional capital markets, liquidity concerns, macroeconomic and geopolitical risks, and corporate governance issues must be better managed if issuers are to maintain investor confidence. MANAGING RISK AND EDUCATING INVESTORS Geopolitical and security risks are front of mind for any international investor looking at emerging markets. When making investment calls, a fund manager will look at the equity story of companies as well as their market fundamentals. To satisfy investors and attract capital, MENA corporates need to integrate a range of investor education tools across their communications, to accurately and transparently convey their equity story. In the GCC and wider Middle East, a greater focus on Environmental, Social and Governance (ESG) disclosures will enable investors to understand the risks that exist for a business. Research shows that ESG integration can help achieve better operating and financial performance. So, corporates in the region should take heed, and go to greater lengths to actively communicate ESG integration into the business model. Tools including sustainability reports and integrated annual reports will enable investors to better understand businesses in the region and put perceived risks into their proper context. The role of Investor Relations (IR) teams is increasingly important. More and more, investors are contacting companies directly, rather than through brokers, to understand a business and its associated risks. IR teams must make themselves as available as they can, and work to build trust with the investor community.
40
Amélie Thévenet
WITH RAPIDLY-MOVING ECONOMIC REFORMS, AND RECENT INDEX INCLUSIONS AND WATCHLIST ADDITIONS, THE REGION IS IN THE EYE OF INTERNATIONAL INVESTORS NOW MORE THAN EVER. Amélie Thévenet, Fund Manager, Emerging Markets, Jupiter Asset Management
FUNDAMENTALS ALWAYS COME THROUGH, BE SELECTIVE While the GCC equities market presents considerable opportunity to global investors, they will need to allocate and manage their capital wisely, while actively navigating a volatile investment landscape. Investors must be selective and carefully assess risk to capture opportunities in the market. Sectors showing attractive upside potential in GCC markets currently include retail, aviation, telecoms, and healthcare. Healthcare represents a particularly interesting opportunity, because of structural growth, increased focus on government spending, and a high prevalence of chronic diseases. GCC healthcare spending is projected to reach $104.6 billion in 2022—at a CAGR of 6.6 per cent between 2017 and 2022. Furthermore, 73 per cent of
deaths across the region are a result of non-communicable, and often chronic, diseases. This is a sector to watch. As GCC economies diversify their revenues and undergo material structural change, investors will look for positive changes in stocks at company, industry and country level. With rapidly-moving economic reforms, and recent index inclusions and watchlist additions, the region is in the eye of international investors now more than ever. It is no accident that at the half-year mark of 2018, the Tadawul All Shares Index was up 15 per cent, as compared to the MSCI EM Index, which was down two per cent. International inflows aren’t likely to dry up any time soon, but issuers must realise that while investors will look at macrotrends, they will place particular focus on company and industry fundamentals to inform allocation.
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ISLAMIC FINANCE
THE FUTURE OF GREEN SUKUK In a recent report, S&P looked at the prospects for green Sukuk
A
s an instrument green Sukuk is a relatively new phenomenon. Malaysia’s Tadau Energy issued the world’s first green Sukuk in July 2017 and has been followed by a handful of others. These funds have raised investment largely in solar power generation projects. In general, green Sukuk is an Islamic financial instrument which has tapped into the trend of social investing. Finance raised from green Sukuk typically supports investments in renewable energy or other environmental assets such as solar parks, biogas plants, wind energy projects, as well as renewable transmission and infrastructure projects, according to S&P. Malaysia, and Southeast Asia, have led the way so far for issuances, with Tadau Energy’s aforementioned $58 million Sukuk to finance a solar project within Malaysia being the first. The handful of other green Sukuk that have listed following this in line with the country’s Sustainable and Responsible Investment (SRI) Sukuk framework could represent a model for future
42
green Sukuk listings across the African continent and worldwide. S&P point to green Sukuk as a way for issues to access not only the pool of conventional investors interested in green projects but also Islamic investors. Indeed, many conventional investors have already rewritten their investment guidelines to incorporate a level of social responsibility. In 2017 Thomson Reuters estimated the shortfall in supply Sukuk at some $143 billion. This should provide further support for issuers as they look to take advantage of the wider pool of investors and unmet demand in the Sukuk markets, leading to potential higher appetite, lower pricing and longer maturity. On the investor side, S&P note that investors interested in green Sukuk primarily do so for two main reasons. The first of these is that of the Islamic investor looking to find an investment which is compliant with Shari’ah law— at its simplest Islamic investors and institutions simply cannot invest in conventional products.
Conventional investors, on the other hand, might be committed to a green Sukuk fund in order to meet their own investment guidelines and objectives. Due to the nature of this form of social impact investing, investors may further enjoy the additional transparency that green Sukuk provides, because the Sukuk’s underlying assets must be identified from the outset, S&P added. Growth in green Sukuk is likely to grow in tandem with the greater demand for green energy and green energy products. This trend can already be seen growing across the African continent, and green Sukuk could provide a way for Islamic investors to support the market in ways that conventional investment products do not normally allow. Renewable energy growth requires considerable investment so the need for green Sukuk is not likely to change in the near-term. However, growth in Sukuk issuance would greatly benefit from regulatory support. Governments could pull levers to support the market. In addition, a greater standardisation of legal documentation
GREEN SUKUK ISSUANCES TO DATE Issuer
Country
Issue date Currency
$
Use of funds
Tadau Energy Sdn Bhd
Malaysia
Jul-17
MYR
58
Solar power project
Quantum Solar Park Semenanjung Snd Bhd
Malaysia
Oct-17
MYR
236
Solar power project
PNB Merdeka Ventures Sdn Bhd
Malaysia
Dec-17
MYR
461
Real estate development in Kuala Lumpur complying with certain green building acceditations
Mudajaya Group Berhad (Sinar Kamiri Sdn Bhd)
Malaysia
Jan-18
MYR
63
Solar power project
Indonesia
Indonesia
Mar-18
USD
1,250
Various green projects
UiTM Solar Sdn Bhd
Malaysia
Apr-18
MYR
57
Solar power project
Source: Bloomberg
Solar energy has been the main focus of green Sukuk thus far. (CREDIT: SHUTTERSTOCK /LOVE SILHOUETTE)
and Shari’ah interpretation would benefit the green Sukuk market, although these are issues that tend to constrain the Islamic finance sector in general. S&P Global Ratings rated the green Sukuk issued by Indonesia in early 2018.
The agency said as to its rating that, “The rating was at the same level as the issuer credit rating of Indonesia as the transaction fulfilled the five conditions or our Sukuk criteria. Generally, we equalise the rating on
a Sukuk with that on its sponsor if the Sukuk has, among others things, sufficient contractual obligations for the timely and full payment of principal and periodic distributions. Beyond credit quality, the tradability of the Sukuk during the construction phase of the underlying asset is one of the main issues that weigh on investor appetite. “This issue does not exist in conventional finance because green bonds can be traded even though the underlying asset is still being constructed. Because most green Sukuk are dedicated to the financing of greenfield assets and Shari’ah prohibits trading when the underlying asset is still to be built, this issue is relevant. It was resolved in the Indonesian case by ensuring a sufficient mixture of existing assets and assets to be built to allow for tradability. Another route that the market has followed is to use financing from multilateral lending institutions during the construction phase and then package the assets in a Sukuk transaction once they are built.”
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ISLAMIC FINANCE
THE CHANGING SAUDI DEBT CAPITAL MARKET With the introduction of primary dealers and Dutch auction, Saudi Arabia’s debt capital market is changing forever, writes Mohammed Khnifer, Debt Capital Markets (DCM) Banker at Supranational Banking Institution
S
audi Arabia may now hold the record as the fastest sovereign Sukuk issuer in the history Islamic debt capital market (after its book building process lasted 14 hours and half) without the need to conduct roadshows but with such greatness comes array of challenges for its domestic debt capital market. In July 2018, Saudi Debt Management Office (DMO) introduced an issuance system, entailing the use of Dutch auction, which coincided with the yields on government Sukuk soaring across all traches. THE DUTCH AUCTION MYSTERY By the time the DMO raised $2 billion in international 10-year Sukuk in mid-Sept 2018, observers were wondering about the reasons that led to the higher yields for July and August issuances. As a background, the DMO has appointed five primary dealers with whom they will use a Bloomberg auction platform. To widen the investor base for the Saudi Arabian Government
44
Mohammed Khnifer
SAR-denominated Sukuk programme, the appointed primary dealers purchase Sukuk sold through a Dutch auction directly from the Government, and subsequently place these securities in the secondary market for final investors, acting as market makers for government securities.
YIELDS EDGE HIGHER While the DMO succeeded in widening the investor base to reach more than 20 investors, we noticed a spike in the Sukuk yields, clearly seen in the yields of the sixth offering (April 2018) and seventh offering (July 2018). On average, between the two issuances, the yield increased by nine bps across all tranches. In fact, the yield on the five-year Sukuk in July was the highest it has ever been since the start of the programme. Essentially, under the new auction system (which is similar to that used by the US Treasury), the DMO gave the primary dealers a ceiling above which they could not price the Sukuk—the final price had to be at that level or below. But over the last two issuances, we have noticed that investors have remained right at the top of that ceiling. CONUNDRUM There are three possible answers that might justify the increase in Sukuk yields for two consecutive months.
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ISLAMIC FINANCE
First, is that this is a totally new experience for both the issuer and the investor (whom pricing of the instruments is conducted through new platform). The second is that, despite the newly appointed market makers, there is currently vey little active tradability of government Sukuk in the secondary market. This makes it significantly more complicated for the issuer to define fair market value for each tranche. Thus, actual price discovery is not existed yet. The third reason the issuer may have decided to be generous when it comes to pricing (as the Ministry of Finance tries to widen its local investors base). Note that over 20 participants have participated in the July issuance compared to the usual 12. Once you widen the investor base, you increase the demand for issuances and this should hopefully lower the cost of issuance for the government. We have not yet seen active trading, even though it is already two months after the appointment of the market makers, but hopefully this will happen in the near future. BIGGEST BARRIER Lack of secondary market trading will remain the biggest obstacle. We need to find a way to encourage the tradability of government debt instruments in the secondary market. In particular, Tadawul needs to address the fact that the fees for trading Sukuk are too high compared to other markets. We understand that they have promised to address this, and we expect them to lower the fees in the near future. DISPLAYING THE RIGHT INFORMATION The way that the local exchange (Tadawul) displays information related to government Sukuk is not conducive to making investment decisions—Tadawul needs to improve the pricing display. At the moment, Sukuk pricing is displayed in the same way as equities. We need to see the yield, the tenor, the rating, to help investors make a decision—in a similar
46
way to Malaysia, which recently created a special platform to help retail investors access the Sukuk market. GOING PUBLIC What makes Saudi Arabia special is that you have two active currency markets, the US dollar market for government-related entities, and the local debt capital market, which is primarily for local corporates. We believe that the Capital Market Authority (CMA) is relaxing its issuance requirements for corporates to issue Sukuk, and what we would like to see in the near future is corporates aiming for public listed Sukuk. Unfortunately, at the moment, around 90 per cent of issuing corporates go for privately-placed Sukuk because the regulations currently make that choice much faster and easier. LOCAL DEBT In terms of the local debt capital market in Saudi Arabia, the most commonly-used debt instrument for corporates is Sukuk. Saudi firms may opt for bonds with their dollardenominated securities. In addition to banks, the most anticipated issuer is the Saudi Real Estate Refinance Company (SRC). As it purchases the housing loans portfolios from banks, SRC is a regular issuer of Sukuk. One notable monthly issuer is the Government of Saudi Arabia. The Debt Management Office (within the Ministry of Finance) keeps issuing Riyal-denominated Sukuk. This is very helpful for corporates who use the yield curve for pricing their debt. DRIVING SUPPLY At the moment it is the banking and real estate sectors that will be driving the Saudi issuance. Nevertheless, it all boils down to the creditworthiness of the potential issuer and whether it has reached the level of maturity that enables it to consider tapping the debt capital market. The main issue here is how to change the mentality of the firms and shift their focus from banking loans to consider Sukuk or bonds. You have this learning curve that they need to go
through first. Such events help in sharing knowledge and raise awareness in one of the most promising debt capital markets in the emerging markets. PRIVATE PLACEMENT The common used maturity is five years. We have seen the following recently: First, issuers do call their Sukuk before its maturity. Second, there have been very rare incidents where some sectors (under pressure) do breach certain clauses in which they need to amend the Sukuk offering circular and reconfirm that they would be able to serve their debt obligations. One thing to note about the Saudi debt market is the fact that the majority of the corporate Sukuk issuance take the form of private placement. This is uncommon for any debt market worldwide. The regulator is trying to change such issuance behaviour by encouraging them to consider going public. SHORTCOMINGS Saudi Arabia has implemented many reforms in the local debt capital market (in which IMF has pointed them out). However, there are some shortcomings spurred from the private sector. One is in changing mentality. Treasurers of firms need to realise that short-term loans with a floating rate linked to SAIBOR are not the answer for their long-term funding needs. The government does price its Sukuk with fixed profit rate and therefore they need to build up on the sovereign yield curve. Even if they manage to overcome this issue, the limited size of the investor base may dictate the use of a floating rate for Sukuk. If this is the case, then they need to consider dollar denominated issuance, or fixed rate. There is also the challenge of finding Saudi debt capital market specialists, which is a real dilemma for the industry. This is illustrated by the fact that 95 per cent of the Saudi banks are not on the list of top lead arrangers in the Middle East. Mohammed Khnifer can be reached at mkhnifer1@gmail.com and on twitter @mkhnifer
CSR
The bank states that it has actively participated in promoting the conservation of nature.
RESPONSIBLY BANKED Lebanon’s Jammal Trust Bank illustrates its successes in its CSR initiatives
J
ammal Trust Bank (JTB) has recently looked to elevate its CSR initiatives. Following its strategy of caring and nurturing sustainable development and inclusiveness, JTB is one the very few banks in Lebanon that cover almost all of the UN’s Sustainable Development Goals (SDG). JTB strongly believes in social welfare, education, environmental sustainability and financial inclusion, to name a few, and continues to foster its legacy of giving by supporting numerous communities and providing assistance to various International and local NGOS every year.
48
EDUCATION JTB promotes the importance of education by supporting over 2,000 outstanding students at Lebanese schools and universities through the scholarships that it grants yearly. JTB also supports the Ali Jammal Social Education Institutions that consists of several schools in Jwaya, South of Lebanon, that provide educational services to limited income families. These include Jwaya University College for Technology, Ali Jammal High School and the Technical Vocational School.
ENVIRONMENT From an environmental perspective, JTB actively participates in promoting the conservation of nature, its development and biological diversity in Lebanon. Every year, JTB gathers with professors, experts and eager learners at the International Biodiversity Day at the American University of Beirut (IBDAA) to discuss creative methods and come up with sustainable solutions to environmental challenges. JTB sorts waste at the source in all its working premises and is working towards turning into a paperless institution. The Bank has
also financed the implementation of two nature reserve sites in Lebanon (one in Khirbet Selm and one in Taybeh). Notably, JTB was the first to introduce green energy loans and has added an environmentrelated parameter to the assessment of its commercial and industrial loans. FINANCIAL INCLUSION Following its slogan ‘We speak your language,’ the Bank has decided to ‘speak the language’ of those who are unbanked, which constitute almost half of the Lebanese population, according to the latest data from Global Findex 2017, by World Bank Group, by creating a product, ‘Save and Win’, geared towards financial inclusion. Those that are unbanked are commonly known as those who don’t have bank accounts nor use banking services and have rarely or have never been to a Bank. The most commonly cited reason for not having an account for them was that accounts are too expensive and they bear high commissions and fees. JTB, in collaboration with the United States Agency for International Development (USAID), became the only bank in Lebanon to promote a prize-linked saving account with no fees, no commissions and no minimum deposit amount. As part of the Bank’s corporate social responsibility initiative, ‘Save and Win’ was designed to motivate individuals to continuously save for a rainy day and give them a chance to win numerous prizes through a monthly draw as they increase their savings. JTB’s conviction is that financial inclusion contributes to alleviating poverty and to speeding up economic development by integrating the unbanked and needy into the mainstream of economic activity and effectively harnessing their potential contribution to their communities. Notably, JTB was the first bank in Lebanon to collaborate with an organisation specialised in supporting small and micro businesses with more than $96 million in loan grants to almost 60,000 borrowers.
JTB is also the only bank in Lebanon that has more than 60 per cent of its branches in rural areas and spread across non high density communities in order to come closer to its clients. FINANCIAL LITERACY Furthermore, to educate and bridge the gap between the financial sector and younger unbanked communities, JTB launched awareness courses across schools and universities, in collaboration with the Ministry of Education and Higher learning and USAID, to teach 8,000 young students more about the banking sector, ensuring their future’s financial acumen. Jammal Trust Bank invests in those that need it the most because all individuals have the potential to prosper in their own way. HEALTH In the medical field, JTB works with prominently active organisations concerned with the wellbeing of children, professional training to doctors and the Red Cross volunteers, mental health,
AS PART OF THE BANK’S CSR INITIATIVE, ‘SAVE AND WIN’ WAS DESIGNED TO MOTIVATE INDIVIDUALS TO CONTINUOUSLY SAVE FOR A RAINY DAY AND GIVE THEM A CHANCE TO WIN NUMEROUS PRIZES THROUGH A MONTHLY DRAW AS THEY INCREASE THEIR SAVINGS.
home care to people with terminal illness, the elderly and drug addiction treatment, among others. All of these organisations are specialised in what they offer, have expertise in their various fields and believe in building a better tomorrow for the people they serve. Their impact has already been felt at more than one level by the Lebanese Public, and JTB is proud to contribute to their various missions. DEMINING In addition, JTB has been actively supporting mine action operations in Lebanon for many years and has helped both local and international NGOS with very badly needed equipment and financial support to clear lands in the south from mines and cluster bombs. JTB has also been collaborating with the Embassy of Japan to Lebanon to support mine risk awareness programmes in schools in Lebanon and the LMAC demining school that teach affected communities how to recognise landmines, better manage the risks and dangers associated with these mines and report threats. JTB believes in the importance of spreading awareness about the mines, as this by itself would decrease civilian casualties by 85 per cent. JTB has also, developed a microfinance programme in order to help owners of cleared lands develop their properties into a sustainable project. A loan is given over an extended period of time with encouraging interest rates for land owners to become self-sufficient. This in turn will increase their living standards and boost the Lebanese economy at the same time. FINAL NOTE Last but not least, JTB believes in gender equality and reducing inequalities, as 56 per cent of senior managers at the bank are women. The Bank also promotes the importance of eradicating poverty and hunger and sponsors every month a dinner at Tawlet’s Soup Kitchen (Aasha el Tayeb) to welcome needy families, orphans, refugees and people in need.
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TECHNOLOGY
WHY DATA PROTECTION IS YOUR NEW STRATEGIC PRIORITY By Promoth Manghat, Executive Director and Chief Executive Officer at Finablr
I
f I asked you to compile a list of some of the most precious and valuable commodities, I expect you would think of gold, diamonds, platinum and so on. The usual suspects. What if I asked you to create another list, this time with some of the things you would least like to lose. You might say your phone, your wallet, or maybe your health. I wonder whether trust would feature on either of your lists. Trust is a very valuable commodity. It’s also very fragile—easy to break and hard to repair. The undocumented contract that exists between a business and its customers is all about trust. Any breakdown of trust has the potential to damage your corporate reputation, and the news of such damage can spread like wildfire. If someone asked to borrow your wallet, or your phone, it’s not likely that you’d just hand them over. Not unless you knew them well and had a wellestablished relationship with them. Yet, when it comes to looking after customers’ trust, many businesses make all the right noises but don’t live up to expectations.
50
Promoth Manghat
DATA: THE FRONTLINE OF TRUST Living as we do in an era defined by data and, in particular, how much customer data is available to businesses, the importance of trust has never been more relevant than it is today. One of the most important things to remember about customers’ personal data is that it belongs to the customer. It’s also very personal to them. The clue is in the name, after all. But while that might sound a little flippant, it’s something that needs to inform every organisation’s attitude to data security as a matter of priority. There are plenty of regulatory reasons to manage customer data effectively, with the European Union’s General Data Protection Regulation, known to all as GDPR, being one of the most recent and talked-about examples. But while the regulators are the ones putting the legislation in place, it is customers who are driving this change, compelling the regulators to act. Why? Because increasingly, customers have come to understand the value of their data. They have become more aware of its possible misuse, too.
Consequently, people are more likely to only do business with brands they trust. It’s a clear sign that the age of selfregulation is over. We all now operate in an era of increasing mandatory compliance. BIG DATA’S EVEN BIGGER IMPLICATIONS From sales orders and accounting ledgers to basic customer information, organisations have always worked with structured data. But in recent years, this has been added to by the growth of digital channels, which has opened the door to swathes of unstructured data—big data. When you start combining data from different sources, you can reach some powerful conclusions. Everything you do online—every action, reaction and interaction—leaves a trail. The infamous digital footprint. Once it is passed through sophisticated data science platforms, it becomes relatively straightforward to build detailed pictures of customers, not just in volume but at a very personal level. In the early days, this manifested as getting offers from your supermarket loyalty card that relate to the things you buy. But now it’s a lot more personal. So much so that it might start to feel intrusive. And that can be a problem. WHEN PERSONALISATION TIPS OVER INTO INTRUSION Augmenting behavioural data (what was bought, what was searched for, etc) with additional sources of information is no longer a purely hypothetical notion. It’s very real. Your age, where you live, your health, educational attainment, credit status, your tastes in music or movies, your political affiliations and so much more. All of this exists online and is accessible to those with the tools and resources to find – or buy – it. This data is then sliced and diced to produce a detailed and sometimes highly personal picture of an individual and their preferences.
WELL-MANAGED DATA ENABLES A BUSINESS TO IDENTIFY TRENDS, TO ADD RELEVANCE TO CUSTOMER OFFERS, AND MEASURE THE EFFECTIVENESS OF A WIDE RANGE OF STRATEGIC UNDERTAKINGS.
When combined with your digital footprint, the outputs aren’t only quite startling but can have huge implications too. Your choice of smartphone, the format of your email address and your online browsing patterns are all predictors of your creditworthiness. Researchers in Germany believe you are more likely to default on repayments if you: shop from your mobile, use a free email service provider, or place orders at night. Your digital footprint could soon be used instead of traditional credit scoring. That might be bad news for anyone with a poor digital footprint but a sound financial background, of course. But it could be great for anyone currently struggling to provide a credit history, as there are now fintech tools that can help evaluate your credit worthiness based on an analysis of many data points. CULTURAL CONCERNS As an organisation, you can choose what kind of citizen you will be in this new, datainfused world. This will be determined by your overall corporate culture.
There will be those who seek to monetise customer data to the maximum degree. But any data breach has the potential to be a breach of trust, and as a consequence of that, can deliver an unwelcome PR headache if customers feel they have been snooped on. It may well be that this is a managed risk, that the likelihood of this becoming a problem is deemed to be so low that there are no good financial reasons not to pursue the maximum level of data scrutiny. But some risks, no matter how small, can represent a calamity in waiting. Beyond the day-to-day interactions and processes of data security, there are also important mindset changes to focus on. You should never forget that it is the customer’s data—it is personal to them, and they will regard an invasion of their privacy as totally unacceptable. This is an outlook that needs to become part of your organisational DNA. Once it is, it will quickly become apparent to all your stakeholders that trust and long-term successful relationships are your priority. It’s understandable that privacy and compliance are regarded as necessary evils. Often the message that gets pushed is the negative one—the dangers of being hacked, the risk of huge fines. These are very real considerations. But that’s not the whole picture. As part of the leadership team of your organisation, you need to see privacy as an opportunity, not just an obligation. Well-managed data enables a business to identify trends, to add relevance to customer offers, and measure the effectiveness of a wide range of strategic undertakings. You could transform your entire sales and marketing model from a mass-market approach to one that focuses on the customers you have identified as your most profitable. But you can only do that with the right data, with the right tools for analysis, and the consent of your customers. Well maintained data is an extremely powerful force—just don’t allow it to backfire on you.
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TECHNOLOGY
THE FUTURE BANKING PARADIGM Banker Middle East sat for an exclusive interview with Benny Boye Johansen, Head of OpenAPI at Saxo Bank
H Benny Johansen
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ow do you see developments such as the PSD2 and open banking shaping our industry here in the Gulf? On a worldwide basis open banking is gaining significant momentum because collaboration makes sense. For those who adopt it, it will lead to better user experiences, faster innovation, and lower overall cost. Therefore, all banks, including those in the Gulf region, will have to form an opinion and a strategy of how to compete in this new reality.
At Saxo Bank we see a burgeoning interest from the Gulf region, especially the UAE, but we think there is still work to do for the Gulf region to maintain the pace of the developments that are being led by banks in Europe and Asia. There has always been a debate about whether to compete (take digital innovation and capabilities in-house) or collaborate with fintech companies. What is your take on this and why do you think this is the best route to take? At Saxo we have always believed in partnering and collaboration. Collaboration is the foundation for any successful business outside the banking industry. No automotive company or telecommunications company builds all of the parts in-house, no airline builds the aircraft, builds the aviation systems and runs the operations so why should this happen within banking? In this context, the question is not whether to collaborate, but with whom to collaborate. For a bank it all starts with a strategic decision about what their core competency is. Stripped down to the very basic, what are the one or two things that this bank will aspire to do better than anybody else. This you must build, this you must own, this you must live, breathe and work on to improve every day. For all of the rest, you must consider if the capability can best be acquired through collaboration. I think it is important that banks must define what they need, and then go looking for the player who can best serve that need. This is in contrast to simply inviting in a number of fintechs/ start-ups to do innovative stuff and then try to adopt some of the most promising projects. In my experience such initiatives either never get a proper foothold in the mother organisation, or they end up being an unintentional add-on, which in reality is not 100 per cent aligned with the bank’s core offering.
TECHNOLOGY
The financial space currently has nontraditional players such as start-ups and tech companies that offer basic banking services. How do you think banks should tackle this area in their business model and operations? From your point of view should banks focus on transforming themselves or build a stand-alone digital challenger bank? Both options are possible, and unfortunately, I think both options are tough. But looking at transformation, I think that is an imperative for any bank. The world is changing so banks must adapt, or in most cases actually transform. This does not necessarily mean that you should change your vision and mission, it just means that you must update your technology organisation and culture to make sure that you can also deliver this effectively in the 21st century. Part of this transformation may very well be to decide to outsource a system or service, which previously the bank has provided in-house. How do you see the relationship between banks and their tech partners evolving over the next three years? One thing is certain. If banks want to be successful they must deploy significant resources to IT throughout the value chain. As discussed above, these resources can be sourced internally through partnering, but the IT spend must be significant. In my opinion there is not a single aspect of banking, which cannot be improved or cost-reduced or both through the intelligent usage of IT. It is therefore paramount that any bank has a plan for acquiring the requisite IT capabilities. Some of this can very likely be achieved through partnering, but I think a bank should choose their tech partners wisely. Does the tech partner actually know enough about banking? At the same time, the bank should also ensure there is enough internal IT talent to understand what the tech partner is doing. To summarise, I think for banks to
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effectively be able to work with a tech partner, they must have some level of IT competency to ensure that the result of the engagement will be successful.
I THINK IT IS IMPORTANT THAT BANKS MUST DEFINE WHAT THEY NEED, AND THEN GO LOOKING FOR THE PLAYER WHO CAN BEST SERVE THAT NEED. Benny Boye Johansen, Head of OpenAPI, Saxo Bank
Where are you seeing banks focus most of their effort on in terms of innovation in the Middle East market? And which technological capability do you think is most important for a bank to acquire in a digital transformation process? Across the Middle East region many financial institutions traditionally focus their offering on regional equity and bond markets. As the performance and liquidity in these markets has been challenging, we are now seeing many regional banks beginning to diversify their offering and scale their platforms to offer trading on international markets as well as other asset classes. This is being primarily managed through outsourcing of technology, connectivity and operations to handle such expansion. We have also seen in the last few years significant interest from existing regional wealth management divisions as well as start-ups to provide digital advisory and managed portfolios. I think in order for banks to innovate and expand their technological capabilities, the bank must be able to have some level of IT competency. Here I do not just mean the ability to develop software or run a server farm. Instead I think the bank must have an understanding of what modern technology can do, and how it can be best deployed. In Saxo Bank this knowledge is spread throughout all departments and is more or less a part of our DNA. A more traditional bank must at least have a part of the organisation which really ‘gets’ digital. This is partly a question of understanding what is possible, but it is also a question of being able to architect and execute on complex IT projects. Most IT projects are not just simply IT projects, but a mix of the introduction of new technology and business transformation.
TECHNOLOGY
LEVERAGING TECHNOLOGY TO BRIDGE THE EFFICIENCY GAP IN TRANSACTION BANKING Bana Akkad Azhari, Head of Relationship Management CIS & MEA, Treasury Services, BNY Mellon discusses how technology initiatives can enhance transaction banking in the Middle East
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ransaction banking is undergoing unprecedented change. New initiatives—including SWIFT’s global payment innovation (gpi) initiative, developments in application programming interfaces (APIs) and artificial intelligence (AI)—are being introduced and explored in the world of cash and trade; challenging traditional models and potentially transforming how we process transactions. There is a growing need for technology to enhance the transaction industry. Payment processes, for example, have often been challenged by time and cost inefficiencies; legacy back-end payment systems and procedures can be slow and expensive. These issues are accentuated in cross-border payments. With multiple banks involved in the chain and money moving between the networks of different countries, payments can take days to settle, tracking payment status can be complex resulting in a lack of transparency, and costs can be high.
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Trade finance has equally struggled with inefficiencies. Manual and paper-based tasks mean that processes are both labour and document intensive—again increasing costs and decelerating cash flow.
Bana Akkad Azhari
CLIENT DEMANDS ARE DRIVING CHANGE Evolving client expectations are encouraging banks to provide new, enhanced capabilities. Fuelled by the digital steps taken in retail payments, corporate clients are seeking faster and more transparent payment and trade solutions. The Middle East’s growing millennial population is also driving the need to go digital—some 60 per cent of people in the UAE are under 25. This youthful population has grown up with technology, so many are used to managing their affairs quickly and easily from their technology devices—an expectation that extends to banking.
Digitisation of transaction banking services has led to ever-greater efficiencies (CREDIT: WHO IS DANNY/SHUTTERSTOCK).
MasterCard’s 2016 Impact of Innovation study is a testament to this attitude: 59 per cent of the UAE respondents state that mobile phones are their preferred payment device, highlighting a universal desire to manage one’s finances efficiently and conveniently. As millennials increasingly enter the business world, they bring with them their modern expectations—this only fuels the need for more efficient payment and trade processes in order to meet evolving requirements. INNOVATION IS BRIDGING THE GAP A number of technology initiatives are helping to digitalise transaction banking services. Recently, SWIFT leveraged its network to create the gpi initiative, which aims to make international payments faster, more transparent and easily traceable. SWIFT gpi has already made significant headway in the industry.
AS MILLENNIALS INCREASINGLY ENTER THE BUSINESS WORLD, THEY BRING WITH THEM THEIR MODERN EXPECTATIONS—THIS ONLY FUELS THE NEED FOR MORE EFFICIENT PAYMENT AND TRADE PROCESSES IN ORDER TO MEET EVOLVING REQUIREMENTS. More than 160 financial institutions (FIs) have become members—including 18 banks from the Middle East—and nearly all of the approximately $100 billion worth of SWIFT gpi messages sent in the daily flow of transactions are now being credited within 24 hours. Gpi is also helping to improve visibility through its Tracker—which facilitates the end-toend tracking of all payment actions— resulting in a reduction in the costs of tracing payments for member banks, in some cases by as much as 50 per cent. Further in the future, AI could hold significant potential for the industry. AI is a term used to refer to computer systems that can perform tasks that normally require human intelligence and thinking, such as speech recognition, visual perception and decision making. Banks are increasingly exploring the use of AI to automate business processes, such as chatbots or robotic process automation
(RPA) between systems. AI systems can replace many simple, repetitive and standard procedures with automated processes, allowing staff to concentrate on more strategic priorities; thereby improving efficiency and transparency, reducing costs and accelerating cash flow. APIs can also enrich the client experience. APIs act as a “go-between,” enabling software programs to interact by permitting streamlined communication between various software components. APIs can therefore be used by banks to enable systems to share information and can be particularly valuable in creating digital ecosystems that connect different parties to provide value-added services. BNY Mellon has been developing a robust digital platform which integrates solutions and data from BNY Mellon, clients and select third-parties, which clients can access via APIs as well as via a single portal.
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TECHNOLOGY
Finally, blockchain is attracting significant attention in the trade space. A blockchain is a digitalised, decentralised ledger that is inviolable and transparent. The technology records digital information and adds it to its database in chronological order—allowing market participants to keep track of transactions without a central controlling body. It is therefore less subject to human error or manipulation. Banks are examining the use of blockchain to help speed-up payment processes. It is believed blockchain could streamline cross-border payments between participants operating under different levels of regulation and security, which has the overall effect of speeding up the entire transaction. Similarly, trade services often involve ecosystems of external partners, which can add complexity to the process. As blockchains facilitate transactions under one system, ongoing developments also aim to support faster trade operations. For example, accelerating processing time through smart contracts—computer codes that are capable of monitoring, executing and enforcing an agreement— and automated processing. TECHNOLOGY INITIATIVES GAINING TRACTION IN THE MIDDLE EAST Given the enhancements technology can provide, it is no surprise that the Middle East is increasingly embracing digital solutions. In 2016, fintech investment in the Middle East totalled $18 million. In 2017, that number was surpassed with a single $20 million investment in PayTabs, with the total fintech startup deals in the MENA region growing significantly year-on-year to $66.6 million. The number of MENA fintech start-ups is also soaring, more than doubling over just two years—from 46 in 2013 to 105 in 2015. This figure is predicted to rise to 250 by 2020. The majority of startups are based in the UAE, followed by Jordan, Lebanon and Egypt.
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The number of MENA fintech start-ups is also soaring, more than doubling over just two years—from
46
in 2013 to
105
in 2015.
The Middle East is increasingly becoming a home for fintech development. Last year, for example, the World Blockchain Forum took place in Dubai. Following this level of activity and potential, governments across the region are looking to support this thriving fintech ecosystem. For example, the Bahrain Fintech Bay, launched earlier this year by the Bahrain Economic Development Board, supports local and global fintech start-ups and partners with large financial and non-financial companies, to support the countries digital transformation. From a regulatory perspective, governments are also accelerating development through sandboxes, which have permitted a bespoke, firm-specific licensing regime for a limited testing period. There are currently three sandboxes across the Middle East: the Dubai International Financial Centre (DIFC), the Abu Dubai Global Market (ADGM) and Bahrain. These sandboxes also allow governments to learn about new technologies and to help shape regulations accordingly. A COLLABORATIVE SOLUTION Fintechs are developing a solid presence in the Middle East, and bank-fintech engagement—including incubator programmes and venture capital investment—is on the rise. In fact, fintechs are increasingly playing a role in helping local banks digitalise their offerings. A recent survey in the region revealed that 70 per cent of bankers believe GCC banks are open to integrating innovations by fintech providers. The rationale behind
such collaboration is to bring together the strengths of local banks and fintechs to create something stronger than either can provide alone. Such alliances combine institutional expertise with fintech innovation and efficiency. However, some challenges hinder participation. Resources are limited and some regional banks may choose to concentrate their investments elsewhere, but collaboration between local banks, global banks and fintechs can help to overcome this. Many global banks are investing heavily in technology and their talent pool. And through non-compete correspondent banking partnerships between local and global banks, local banks can tap in to these fintech initiatives and digital solutions without the need for significant investment. Through this tripartite collaboration, local banks can access the technology initiatives to enhance their processes. All parties benefit: local banks gain access to technology solutions that can improve efficiency and transparency, global banks gain access to the unrivalled countryspecific insights and expertise of local banks, and fintechs gain from the extended reach of global banks. A tripartite alliance can, therefore, create a financial services provider that is both efficient, modern and innovative, helping to ensure reliability, safety and security. The value of fintech is being recognised by FIs across the Middle East. And with the appetite for digitalisation growing, banks are increasingly looking to harness new capabilities to address the need to enhance existing trade and payment processes. Although local banks may sometimes struggle to access the fintech developments necessary to modify their transaction services alone, a collaborative approach can help to ensure they are positioned with enhanced solutions that could bring real value to the region’s businesses and their payment and trade operations.
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TECHNOLOGY
TRANSFORMING LENDING FOR TOMORROW: GOING BEYOND DIGITAL By R P Singh, CEO, Nucleus Software
Customers will increasingly look for more personalised experiences, said Singh. (CREDIT: PESHKOVA/SHUTTERSTOCK)
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he digital transformation of financial services has helped banks address a number of challenges including rapidly changing customer expectations, fast evolving regulatory requirements, and an increasingly competitive landscape. However, many banks seem to believe that digital is a destination rather than a stepping stone. We believe that digital is much more than being available on all channels, being paperless and having automated processes. Moreover, offering digitised, automated and multi-channel loan operations will soon become ‘table stakes’, indeed in some markets it already has. As products and services become more commoditised, customers are looking for personalised experiences and lenders need to stay ahead of the curve. Here are some aspects which banks and other financial institutions should consider in order to turn this into a win-win situation. Lead with speed—customers today expect loan decisions in minutes not days. And while ‘trust’ and quality of service are important when making a choice, speed and convenience are increasingly crucial. Faster loan processing not only adds to your capacity without adding more cost, but also reduces the unit cost of processing a loan. Innovate with offerings—with fast changing customer demands, there is a continual need to conceptualise, design and launch innovative loan products quickly and easily, perhaps anticipating market need in certain cases. First mover advantage in a highly competitive market can be tremendously valuable.
R P Singh
Make better credit decisions faster— comprehensive credit-scoring, which incorporates inputs from traditional as well as non-traditional data sources along with analytical insights can help provide better visibility into the credit profiles of applicants. Not only does this help improve the quality of credit portfolio, but it also helps reach new customer segments considered noncredit worthy traditionally. Adopt targeted marketing—today’s informed customer may react only to relevant and personalised offers, which are sent at the right time and via the right channel. Data driven insights from analytics can help boost lead conversions by identifying who to target, with what products and when they are most likely to accept. Plug into bots—while the debate on ‘mobile first’ and ‘mobile only’ hasn’t reached a conclusive end, it does underline the fact that mobile needs
to be incorporated seamlessly. In the future, it is possible, perhaps likely, that there will be no direct interaction between customers and lenders, as their requests for loans will be handled by digital assistants and bots— operating completely autonomously. Differentiate your positioning—fast, frictionless and personalised customer experiences, that focus on ‘customer first’ not only drive loyalty but also help you differentiate from your competition. Studies indicate that many customers are willing to pay a premium for faster, better and tailored experiences. Virtually all companies are in different phases of their digital transformation journey as it offers numerous benefits including enhanced efficiency, reduced costs, improved customer satisfaction, increased competitiveness and improved agility. However, digital needs to be part of a wider agenda to reshape the business to ensure that it continues to be relevant in the future and the right technology will play a key role in this approach. Nucleus Software offers advanced technology solutions for retail and corporate lending that deliver the business agility you require to cater to the complex needs of lending to retail customers as well as large corporate and small-to-medium enterprises (SME) customers. Our solutions cover the complete loan lifecycle across multiple channels, including web portal and mobile. With cutting edge machine learning and artificial intelligence capabilities, Nucleus Lending Analytics is a powerful solution enabling lenders to make informed loan decisions through data visualisation and business insight generation.
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TECHNOLOGY
BANKING ON DIGITAL— THE SIGNIFICANCE OF FINTECH IN MIDDLE EAST By Pieter Zylstra, Director for Digital Transformation, Orange Business Services Regional
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n the Middle East new industries and new commercial imperatives have been developing to take the region in a new economic direction, and away from its traditional reliance on petro-chemicals. The use of digital technologies in the financial services sector has emerged as an area of huge potential. Fintech is considered a key strategy for local governments, and is destined to drive digital transformation in the banking and financial services industry across Middle East. What is fintech? As the name implies, financial technology refers to the evolving crossover of traditional financial services using digital technologies. ‘Fintech’ implies new digital services launched by traditional banks, the emergence of disruptive start-ups, and big technology companies or telecoms providers launching new innovations like mobile money that changes the way financial services are provided. Fintech gives traditional banks and financial services companies an edge, by bringing traditional banking services into the 21st century. Fintech allows banks
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to embrace the new platform economy, by offering a multitude of innovative and profitable financial services to existing and new clients, primarily using mobile and digital channels. Fintech is bringing banking to the unbanked in geographically disparate places, it can mean making payments and money transfers quicker, easier and cheaper than ever before.
Pieter Zylstra
Why is fintech important? It is not overstating things to say that fintech has already transformed the lives of billions of people, especially when we think of the incredible success of mobile money in Africa or mobile payments in Asia. Over the last years digital banking services have been launched in Europe and Middle East. Not very long ago the only way to open a bank account was by walking into a physical high street branch—fintech has changed all that. In developing and emerging nations, where high street banks do not exist in the same way as in the west, hundreds of millions of people the coming years are able to digitally open accounts, make money transfers and payments and even apply for loans, all from their smartphones.
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Fintech has also made borrowing and lending money easier than before. For example, traditionally, a small and medium enterprise would need to go to a bank and submit a dozen forms and statements to borrow a sum—typically at a high or punitive interest rate. Today, thanks to fintech, it is now possible for these smaller commercial entities to crowdsource funding to raise capital for a big idea or commercial proposition in a fraction of the time, often on competitive, and flexible terms. Fintech ultimately helps people bank and brings financial services to the unbanked. What is the situation in Middle East? Compared to other parts of the world, fintech has been a little slow to get up and running in MEA mainly due to the region having a very established way of doing things in the financial sector and strong regulators being a little wary about throwing such a traditional industry into the arms of innovators and start-ups. Today however, things are changing: 2017 saw the Dubai International Financial Centre’s (DIFC) fintech Hive announce the first 11 start-ups that had qualified for its 12-week accelerator programme, an annual scheme designed to nurture innovative talent and help fintech start-ups thrive. Furthermore, United Arab Emirates, Bahrain and Kingdom of Saudi Arabia governments in 2018 are actively pursuing ‘sandbox’ strategies, where the impact of new fintech solutions can be tested and evaluated prior to market launch. Also, private entrepreneurs abound. The Middle East is home to pioneering companies like Arabot, a ‘Bot-as-aService’ provider that is helping banks in UAE, Saudi Arabia, Egypt and Jordan build their own customised chatbots using Artificial Intelligence and Big Data to offer a greatly enhanced customer experience. As Abdallah Faza, CEO of Arabot says, “It is a hugely exciting time for fintech in the Middle East. Banks are recognising the importance of using digital technology to improve the
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customer experience, to improve their own operations over all, removing human error and interference wherever possible and, ultimately, to offer simplicity in a traditionally complicated industry.” Also, global fintech companies are targeting the Middle East. Swissbased Additiv is currently piloting a number of robo-advisory solutions for wealth management with local Middle East banks. Michael Stemmle, CEO of Additiv, said, “Our cloud-based Digital Finance-as-a-Service solution (DFaaS 4.0) allows financial institutions to automate their wealth management services and addresses the urgency to reduce operating costs. The integration into the financial institutions’ existing core banking system is simplified through standard API layers. We see ourselves as the catalyst for change in the financial services industry through easy, quick and affordable digitalisation.” What approach should Middle East banks take to fintech? Fintech is such an exciting area precisely because it forces companies to change traditional ways of doing things. Digital often disrupts companies and their established processes, but it is with positive long-term benefits in mind. At Orange, we see fintech development and success in the Middle East being centred in four distinct areas pillars: 1. Innovation-on-demand. Successful banks today recognise the importance of the as-a-service (XaaS) approach that lets them control costs better and only use as much of a technological service as they need. With innovationon-demand, Middle East banks and financial institutions can proactively partner with regional digital start-ups to uncover new ways of doing things that create new revenue streams and strengthen the customer experience. 2. Channel-as-a-strategy. A great way to drive competitive advantage in financial services is to differentiate between
direct and indirect channel strategies. Think about channels today – you used to have to go to the bank, today you choose to go to the best app. Banks will need to design API libraries, in order to design, build and implement a variety of digital banking channels to bring simplified banking operations for customers and employees alike. 3. Banking-as-a-platform. Banks tend to suffer from a legacy environment, where they have an amalgam of technology systems from across the last 20 years or so. Knowing that these technologies are insufficient for the digital era, banks need to develop new services on platforms outside of the legacy. The deployment of new platforms and the ability to offer new services, directly and thru fintech partnerships lets banks be more flexible and more agile, and enables banks to create API-driven infrastructures and architectures in which legacy systems and cloud-based systems can co-exist, enabling controlled IT transformation. 4. Network-as-a-service. Using network resources on demand will give banks better control and therefore greater cost-effectiveness, bandwidth flexibility, application visibility and cybersecurity of all the applications in a hybrid network-environment. Banks in the Middle East will want to scale network services as and when they need to, and the controlled move towards XaaS approach empowers them to do that. Why fintech is the future? The signs are good. The past ten years have seen fintech start-ups in the Middle East raise more than $100 million in funding, with this investment forecast to double by 2020 according to the 2017 State of Fintech report. Three out of four banking customers in our region say they are prepared to change banks to enjoy a better digital experience. The potential is there. Let’s make it happen.
TECHNOLOGY
BUILDING THE FINANCIAL SERVICES OF THE FUTURE Embracing far reaching industry changes took centre-stage at the SWIFT Middle East Regional Conference 2018
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ver 400 delegates from 25 countries came together in Dubai in late September for4 the SWIFT Middle East Regional Conference 2018. Held under the patronage of HH Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, Deputy Ruler of Dubai and President of Dubai International Financial Centre, the event sought to examine the evolution of the financial services sector and the role that technology is playing in driving that change. “Banks are embracing these changes,” said Onur Ozan, Head of the Middle East, North Africa and Turkey for SWIFT. “Harnessing technology and developing new and innovative payment schemes to develop more secure, efficient and transparent payments for their customers.” The keynote speaker for the conference was Ian Khan, a technology futurist, who focused on how technology has become increasingly embedded in our lives coupled with the increasing speed with which technology has advanced. Monitoring the developments in the technology space will be essential, stressed Khan, as they will fundamentally impact our shared future.
“Technology can be misunderstood and misused,” said Khan. “It is our responsibility to understand new technologies, the changes they bring, and what they can and can’t do.” SWIFT encouraged industry leaders, regulators and financial experts to embrace disruptive technology on the traditional business model of banks to better serve their customers. The firm also provided an innovation hub to showcase what banks and fintechs across the region are doing to develop a new, more innovative and dynamic offering. Alain Raes, SWIFT’s Chief Executive, EMEA & APAC, said that SWIFT is at the centre of banking and payment innovation, creating collaborative solutions for the banking community. “This will be an endless race. We need to stay ahead of the game. The environment is changing at a pace never seen before and we need to collaborate, as a community and as an industry,” said Raes. “SWIFT is the world’s leading provider of secure financial messaging services with many DIFC clients relying on this platform,” added Salmaan Jaffery, Chief Business Development Officer, DIFC Authority.
IT IS OUR RESPONSIBILITY TO UNDERSTAND NEW TECHNOLOGIES, THE CHANGES THEY BRING, AND WHAT THEY CAN AND CAN’T DO. Ian Khan
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For generations, the better way to bank. Over 40 years ago, Dubai Islamic Bank pioneered a way of banking that was truly better: Islamic banking. Since then, many generations of customers continue to enjoy world class products and services backed by the very latest in banking technology. For them as for you, this is still the better way to bank.
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