#212 - November 2018 by CPI Financial

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EDITOR’S NOTE

uch of the Middle East economies are inevitably highly dependent on oil. The steady increase in prices throughout the year from the lows of 2016 and 2017 have breathed hope into the market as industry players take comfort in the recovery. This was however shortlived as prices dropped again this month. The ‘damage control’ efforts exercised since the crash in 2014 must be carried on as stability clearly doesn’t seem like its approaching anytime soon. Furthermore, market observations have suggested that oil remains an important component of the GDP, export and revenues in GCC countries, and is expected to remain a significant contributor to GCC financial markets at least in the next few years. We explore the ongoing impact of this more thoroughly in our analysis section, including the most recent efforts to counter heavy reliance on oil across Arab economies. Being in a region that is intriguing, the Middle East never runs dry of exciting developments. Sponsored by Bank of Beirut, we bring you a special report on Lebanon, covering issues both on the financial front as well as the economy. The report features an exclusive interview with Salim G. Sfeir, Chairman and Chief Executive Officer of the bank, and a veteran banker, as he takes a deep dive into the impact of technology on Lebanese banks. Another exciting trend developing across the industry is mergers and acquisitions. Over the last couple of years, we have had several announcements in Saudi Arabia, UAE, Oman, Bahrain and Kuwait (refer to the analysis section in

our September issue for more details). Addressing this trend, we highlight best practises in navigating such transactions, from a regulatory, technological and operations perspective. As investors both retail and institutional alter their preference towards socially responsible investments, a subset of this is also discussed in our Islamic finance section which includes the International Islamic Trade Finance Corporation and their views on trade opportunities between the Arab world. Touching various key facets in our industry, our November issue also include exclusives with Mashreq, Trade Bank of Iraq and Jammal Trust Bank. Until the next edition, I wish you a fruitful read. Nabilah Annuar EDITOR, BANKER MIDDLE EAST

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CONTENTS

NOVEMBER 2018 | ISSUE 212

NEWS 10 Under pressure 14 News highlights

LEGAL PERSPECTIVE 18 Creating a GDPR compliance framework with security technology

COVER INTERVIEW 22 Transforming Kuwait

COUNTRY FOCUS 28 Kuwait: Buying time

LEBANON SPECIAL REPORT 37 Bank of Beirut: navigating the future 42 Banking trends amid security concerns 46 Debt locked

ISLAMIC FINANCE 52 Seize the day 54 Access to Islamic investment for everyone

37 6

CONTENTS

NOVEMBER 2018 | ISSUE 212

MERGERS & ACQUISITIONS 60 Amid banks’ consolidation, retaining dominance of financial intermediation is key 62 Five key success factors for a

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best-in-class integration

NOVEMBER 2018 | ISSUE 212 MIDDLE EAST

66 Supporting growth

CHIEF EXECUTIVE OFFICER TONY LONG tony.long@cpifinancial.net Tel: +971 4 391 4681

TRANSFORMING KUWAIT Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait

64 Improving the customer journey

NOVEMBER 2018 | ISSUE 212

IN DEPTH

CHAIRMAN Saleh Al Akrabi

EDITOR - BANKER MIDDLE EAST NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726

70 Limitless innovation in GCC’s financial

TRANSFORMING KUWAIT A CPI Financial Publication

services industry

Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait

GDPR compliance framework security technology 18 with

36 Lebanon Special Report

dominance financial intermediation 60 ofRetaining

Trade Bank of Iraq: Growth 66 Supporting

Dubai Technology and Media Free Zone Authority

TECHNOLOGY

OCTOBER 2018 | ISSUE 211

WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718

OCTOBER 2018 | ISSUE 211

72 UAE-India Trade Forum: Tit for tat

MIDDLE EAST

EVENTS

EDITORS MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716

FINANCING THE FUTURE HISHAM AHMED AL RAYES, CEO of GFH Financial Group

ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476

FINANCING THE FUTURE 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

WEB EDITOR JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024

BUSINESS DEVELOPMENT MANAGERS DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526 AKASH AMBALE akash.ambale@cpifinancial.net Tel: +971 4 433 5320 NEEMA SAJNANI neema.sajnani@cpifinancial.net Tel: +971 4 391 3717 ADVERTISING sales@cpifinancial.net

EDITORIAL ASSISTANT KUDA MUZORIWA kuda.muzoriwa@cpifinancial.net Tel: +971 4 391 3729 EDITORIAL editorial@cpifinancial.net

SEPTEMBER 2018 | ISSUE 210 MIDDLE EAST

SEPTEMBER 2018 | ISSUE 210

A MAN WITH A VISION SALIM SFEIR, Chairman and CEO of Bank of Beirut

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

Dubai Technology and Media Free Zone Authority

SALIM SFEIR, Chairman and CEO of Bank of Beirut

A CPI Financial Publication

A MAN WITH A VISION

CHIEF DESIGNER BUENAVENTURA R. JALUAG, JR. jun@cpifinancial.net Tel: +971 4 391 3719

SENIOR DESIGNER FLORANTE MAGSAKAY florante@cpifinancial.net Tel: +971 4 391 3724

DIGITAL MANAGER SIYAMUDHEEN PAINAYIL siya@cpifinancial.net Tel: +971 4 391 3722

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FINANCE & DATA EXECUTIVE KHALED TAHA khaled.taha@cpifinancial.net Tel: +971 4 433 5322

EVENTS MARKETING MANAGER CRIS BALATBAT cris.balatbat@cpifinancial.net Tel: +971 4 391 3725

FINANCE & DATA MANAGER SHAIS MEMON, ACCA, CMA Shais.memon@cpifinancial.net Tel: +971 4 391 3727 ADMINISTRATION & SUBSCRIPTIONS CAROL BASA carol@cpifinancial.net Tel: +971 4 391 3709 enquiries@cpifinancial.net

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ANALYSIS

UNDER PRESSURE GCC financial markets remain under strain from lower oil prices, explains Ehsan Khoman, Head of MENA Research and Strategy at MUFG

he recent precipitous decline in oil prices is beginning to weigh in on GCC equity markets with the MSCI GCC Index falling by 2.6 per cent since the beginning of October against a 30.7 per cent decline in Brent crude during the same period—importantly the correlation coefficient between the two series back to January 2017 is 0.83, suggesting a significant relationship. President Trump’s ongoing oil market intervention through Twitter and various statements since June 2018—which in

our view has been the root cause of the precipitous decline in oil prices into bearish territory recently—is testing Saudi Arabia’s (and broader OPEC+’s) tolerance. Indeed, Saudi Arabia clearly considers to be hard done by the one of many “made in the USA” factors that have been at work in driving the oil price down, with the US primarily responsible for much of the current oversupply. Saudi Arabia adhered to US pressure to revive oil output back in June this year to offset the expected sharp declines in Iranian crude exports,

to only then be caught off-guard with a higher-than-expected level of US waivers for purchases of Iranian oil in early November. POINT OF VIEW We remain convinced that both Brent and WTI are “oversold” and that they will rebound from their current bearish market mode—technical indicators signal a rebound is on the horizon, with the current 14-day Relative Strength Index (RSI) below 30 (the critical threshold level flagging excessive declines).

(PHOTO CREDIT: KODDA/SHUTTERSTOCK)

GIVEN THE IMPORTANCE OF OIL AS A COMPONENT OF GDP, EXPORTS AND REVENUES FOR GCC COUNTRIES, THE HIGH CORRELATION BETWEEN OIL PRICES AND GCC FINANCIAL MARKETS WILL REMAIN A PERMANENT FIXTURE FOR THE FORESEEABLE FUTURE.

However, the rebound is likely to be cyclical in tone given that higher oil prices will only incentivise shale growth (faster learning rates, productivity gains, lower tax rates, project redesign, as well as access to low cost of funding which continues to drive engineering cost deflation), leading to market share gains that will likely be difficult to reverse. Moreover, a sustained period of higher oil prices will assist in repairing shale players balance sheets and fund renewed investments, leaving for a potential greater supply response in 2019 and beyond.

MSCI GCC Equity Index (LHS)

Brent (USD/b) (RHS)

Source: Bloomberg, MUFG MENA Research

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ANALYSIS

LOOKING AHEAD Given the importance of oil as a component of GDP, exports and revenues for GCC countries, the high correlation between oil prices and GCC financial markets will remain a permanent fixture for the foreseeable future. The next catalyst point for oil markets will be the G20 summit in Buenos Aires on 30 November wherein the messages conveyed by the Big 3—the US, Russia and Saudi Arabia—on coordinated oil production market management and policy potentially giving markets guidance on the likely course of action in Vienna on 6 December. Our base case is for OPEC+ members to see through the pressure from

President Trump and concentrate efforts on curbing the current oversupply in the market by conforming to a new production cut agreement next month in Vienna. The question therefore turns to the speed and magnitude of the cuts, as well as the quota allocation of each member state—which at this stage is not priced into markets. As it stands, the spectrum of OPEC+’s possibilities is wide—with anything between 500,000 barrels per day to up to two million barrels per day of cuts possible—and (i) the dynamics between the US, Russia and Saudi Arabia; (ii) OPEC+’s members expectation of the demand outlook for 2019; and (iii) where

the front end of the curve is trading—all amalgamating as critical factors of the decision making process. Central to OPEC+’s decision process heading into Vienna will be Saudi Arabia’s relationship with the US and Russia. The Kingdom remains cognisant that the US may have geopolitical leverage over the country but we view that the Saudi authorities will see through US pressure and concentrate efforts on their ‘Saudi First’ policy and thus prioritising its domestic needs for oil prices to hover closer to its fiscal breakeven price of $72 per barrel in 2019, above entertaining calls from President Trump to further raise production levels.

Country Bahrain Egypt

Boursa Kuwait launched an over-the-counter trading platform, becoming the first Arabian Gulf exchange to offer stocks of unlisted companies.

Iran

European banks and firms who engage in a special European Union initiative to protect trade with Iran will be at risk from newly reimposed US sanctions, a US envoy for Iran warned.

Iraq

Iranian President Hassan Rouhani said Iran and Iraq could raise annual bilateral trade to USD20bn from the current level of USD12bn.

Israel

Israel's economy grew 2.3% in the third quarter of the year, far slower than the strong expansion seen in the second half of 2017 but more in line with its long-term potential.

Jordan

The UAE and Jordan have signed a USD100m agreement aimed at financing micro, small and medium-sized enterprises in the kingdom. A World Bank official said that the Lebanese economy is 'not doing great' and urged the country's leaders approve USD1.1bn worth of projects put forward by the World Bank.

Libya

Libya expects to end a long-running liquidity crisis by early 2019 as a foreign currency tax helps the official and black market exchange rates converge at less than LYD3 to the USD.

Oman

Oman's state budget deficit for the first nine months of 2018 shrank 36.1% from a year earlier to OMR1.9bn (USD5bn) as oil revenues rose sharply.

Qatar

Qatar's cabinet approved a 2019 daft budget, including provisions for the 2022 World Cup as well as Qatar National Vision 2030.

Saudi Arabia Sudan

Saudi Arabia's King Salman inaugurated 151 projects in Tabuk worth more than SAR11bn (USD2.9bn). Sudan's annual inflation eased slightly to 68% in October from 68.6% in September, due to lower food and drink prices.

Syria

The US said it had moved to disrupt an Iranian-Russian network that sent millions of barrels of oil to Syria and hundred of millions of USD to indirectly fund Hamas and Hezbollah.

UAE

Residential property prices in Dubai are anticipated to continue their downward slump in 2019 as increased supply enters the market.

Yemen

Egypt's budget deficit for the first quarter of the 2018-2019 fiscal year starting in July was slightly down to 1.9% from 2% last year.

Kuwait

Lebanon

Source: MUFG

Bahrain intends to sell stakes in at least three companies in the next two years on its stock exchange as the country seeks to boost government revenue.

Saudi Arabia and the UAE, who lead a coalition of Arab states fighting against the Houthi movement, pledged a new USD500m food aid programme for Yemen.

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NEWS HIGHLIGHTS

Saudi Arabia launches uranium exploration programme The Kingdom has launched a uranium exploration programme and initial indications were positive Saudi energy minister Khalid al-Falih said on Monday, Al-Arabiya Business reported on Twitter, adding that a project to construct two nuclear plants, was proceeding at an excellent pace according to plan. No further detail was given. Saudi Arabia has said it wants to build the nuclear power stations with the help of US technology. Non-proliferation advocates are concerned that any civilian nuclear deal between Riyadh and Washington that could allow the kingdom to enrich uranium and reprocess plutonium could one day be covertly altered to produce fissile material for atom bombs, reported Reuters.

Saudi Arabia’s wealth fund said to plan health-care investments Saudi Arabia’s sovereign wealth fund is planning investments in the Kingdom’s private health-care services and hospitals as it seeks to modernise domestic infrastructure, people familiar with the matter said. The Public Investment Fund may appoint an adviser in the near future to help identify investment opportunities, the people said, asking not to be identified as the deliberations are private. The plan may require billions of dollars, though no final decisions have been made, they said. It could involve investments in existing health-care companies or partnering with foreign companies looking to establish operations in the Kingdom, the people said. “The Public Investment Fund regularly explores potential investment opportunities to support portfolio diversification efforts, but does not comment on specific discussions or activities,” a spokesman for the fund said. [Bloomberg]

Saudi seeks to more than triple mining revenue by 2030 Speaking at a mining conference in Cairo, Energy Minister Khalid al-Falih said, “We are seeking to develop the mining sector through the implementation of a comprehensive strategy ... and raise its contribution to GDP from $17 billion to $64 billion, with the generation of 160,000 additional jobs by 2030,” according to Reuters.

Dubai Investments expands healthcare portfolio Dubai Investments, one of the leading diversified investment companies listed on the Dubai Financial Market, has grown its healthcare portfolio with a 20 per cent stake in an equity partnership in the AED 465 million Clemenceau Medical Centre, a new development which will offer specialty care across multiple disciplines in Dubai Healthcare City Phase 2. The equity partnership with Khansaheb Investments (55 per cent) and CMC SAL (25 per cent) is the latest addition to the Dubai Investments healthcare portfolio, which also includes an equity partnership for a multi-disciplinary hospital and day care clinics in Dubai under worldrenowned British teaching hospital King’s College Hospital London. Construction at the Clemenceau Medical Centre is now 68 per cent complete, and the 110-bed specialtycare facility is expected to open June 2019.

UAE Cabinet approves long-term visa system for investors The UAE Cabinet approved long-term visa system for investors, entrepreneurs, specialised talents and researchers in the fields of science, knowledge and outstanding students to facilitate business and create an attractive and encouraging investment environment for the growth of business for investors, entrepreneurs and professional talents, according to state news agency WAM. The decision of the Cabinet follows the previous decision approved earlier this year to grant investors ten-year residency visa, as well as to grant residency visas of up to 10 years for specialised specialists in the medical, scientific, research and technical fields, and for scientists and creative talents of culture and arts, including their spouses and children. The decision aims to maintain the position of the UAE as an optimal business environment.Â The decision includes the terms and conditions for obtaining long-term visas for investors, entrepreneurs, specialised talents, researchers in the fields of science and knowledge, and outstanding students to attract talents in all vital sectors of the national economy. The visa benefits also include the spouse and the children to ensure a cohesive family and social structure and to create a stimulating environment for stability and growth.

SOVEREIGN RATINGS AS OF 1 NOVEMBER 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-2017

6 Kuwait

AA/Stable/A-1+

20-Jul-2011

7 Lebanon

B-/Stable/B

2-Sep-2016

8 Morocco

BBB-/Negative/A-3

6-Oct-2018

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

bankerme.net

NEWS HIGHLIGHTS

Egypt sees US interest in offshore projects Egypt has seen and increase in the interest from US energy companies in developing its offshore oil and natural gas resources and expects them to participate in two bidding rounds due before year-end, Petroleum Minister Tarek El Molla said. Egypt has recently become an attractive destination for foreign energy firms following a string of major discoveries in recent years including the giant Zohr offshore field, which holds an estimated 30 trillion cubic feet of gas. According to Reuters, Molla said Egypt wants to become a regional trading gas hub having achieved its goal of self-sufficiency but would focus on meeting its existing commitments—including a contract to supply Jordan—once exports are resumed.

Iran oil buyers line up after US exemptions Armed with waivers to keep importing Iranian oil without running afoul of US sanctions, some of the Islamic Republic’s top customers are preparing to buy. The exemptions mean at least some supplies from OPEC’s third-biggest producer will keep flowing into international markets, after its exports plunged almost 40 per cent since April—the month before Washington announced the curbs. In a bid to keep customers, the state-run National Iranian Oil Co. has been offering record discounts on its crude. Almost all major buyers of Iran’s oil had negotiated with the US for the waivers, arguing that cutting purchases to zero would affect their energy industries and boost fuel costs. While the US granted exemptions to eight buyers of Iranian oil, that number will effectively shrink to five by year-end and an oversupplied market in 2019 will help cut Iranian oil sales further, according to Brian Hook, State Department’s special representative for Iran.

Islamic Development Bank makes first public euro-denominated trade Islamic Development Bank (IsDB) has issued of EUR 650 million Trust Certificates due 2023 under its $25 million Trust Certificate Issuance Programme, which was previously updated by IsDB and IDB Trust Services Limited on 7 June 2018. Dentons advised IsDB in this matter. ThefFirm has regularly advised IsDB on the issuance of debt securities denominated in US dollars in the past, and this transaction represents IsDB’s first public euro-denominated trade under their Sukuk programme. The transaction was successfully completed on 7 November 2018.

Three Bahraini logistics-linked companies to IPO in two years Bahrain intends to sell stakes in at least three companies in the next two years on its stock exchange as the smallest Arabian Gulf economy seeks to boost government revenue, according to a statement by the country’s transportation and telecommunications minister on Sunday. The Gulf state wants to sell at least 20 per cent in Bahrain Airport Services, the operator of Bahrain International Airport, Bahrain Duty Free and the $1.1 billion new airport terminal, Kamal bin Ahmed told CNBC Arabia, saying that “As the main shareholder in these companies, we hope the other shareholders agree and we float a small percentage of about 20 per cent of the companies on the Bahrain Bourse.”

Bank ABC arranges Shari’ah-compliant finance for residential development Bank ABC in London has successfully arranged and closed a GBP 250 million senior residential development facility for a consortium of institutional and high net worth investors from the Gulf and Europe. Bank ABC is the Sole Arranger, Investment Agent and Security Trustee for a facility that will be used to fund the redevelopment at Regent’s Crescent, a landmark prime residential scheme consisting of 67 apartments and nine mews houses in Marylebone, central London, on the edge of London’s Regents Park.

EIBFS launches mobile app with ‘Ask an Expert’ feature

Oman GDP jumps more than 15 per cent in 2Q18 Total revenues increased by 23.5 per cent to reach OMR 4.9 billion compared to OMR 4 billion at the end of 2Q17. The National Centre for Statistics and Information (NCSI) recorded a growth of 15.1 per cent, while the value added of non-oil activities increased by 5.1 per cent and those of oil by 37.1 per cent. The quarterly analysis of the economic situation of the Sultanate revealed that the GDP at current prices increased from OMR 12.8 billion at the end of 2Q17 to OMR 14.7 billion at the end of 2Q18, according to the Times of Oman, adding that this is attributed to the increase in oil prices from $51.8 per barrel in 2Q17 to some $63.9 per barrel in 2Q18. At the end of the second quarter of 2018 value added of oil activities was OMR 5.4 billion compared to OMR 4 billion during the same period of 2017, and similarly, the value added of natural gas increased by 97.9 per cent to reach OMR 1.3 billion at the end of 2Q18 compared to OMR 0.6 billion at the end of 2Q17.

The Emirates Institute for Banking and Financial Studies (EIBFS), a regional leader in banking and finance education and training, has launched a state-of-the-art online research portal that will enable region’s bankers, finance professionals as well as students, faculty and researchers to access the latest industry and economic reports and whitepapers, scholarly articles and surveys and support them in their training and education via the web. The EIBFS 2019 Annual Training Plan involves the launch of four mobile learning apps, one of which will be EIBFS Research. This app, containing all features of the research portal, will be available on the App Store and in the Android App Bundle on Google Play, catering to smartphone-savvy learners and supporting a seamless, scalable and interactive learning process.

Goldman predicts commodities soar in 2019 as oil, gold climb Commodity bull Goldman Sachs Group Inc. is undaunted by the sell-off in raw materials and is forecasting returns of about 17 per cent in the coming months, describing the current situation as unsustainable and touting this week’s G-20 meeting in Buenos Aires as a potential turning point. “Given the size of dislocations in commodity pricing relative to fundamentals—with oil now having joined metals in pricing below cost support—we believe commodities offer an extremely attractive entry point for longs in oil, gold and base,” analysts including Jeffrey Currie said in a report. The note listed its top 10 trade ideas for 2019, including a rebound in Brent as OPEC cuts supply.

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LEGAL PERSPECTIVE

CREATING A GDPR COMPLIANCE FRAMEWORK WITH SECURITY TECHNOLOGY By Rabih Itani, Regional Business Development Manager, Security, Middle East and Turkey at Aruba, a Hewlett Packard Enterprise company

yber criminals today are attempting to penetrate your organisation’s network to try to get hold of critical assets with most looking for the valuable personal identifiable information (PII). It is a fact that cybersecurity attacks are on the rise all over the world, and the Arab world is no exception. There are even some recent reports stating that the Arab countries are among the ones facing the highest number of attacks.

M e a nw h i l e i n E U, G D P R wa s launched back in May 2018 to create a new benchmark for personal data protection, and its influence was felt far and wide. It is now the template for privacy laws throughout the world. So how can organisations in the Middle East create a framework to ensure attacks are dealt with in a GDPR-aware manner, minimising fines, reducing breach-related costs, and ultimately better protecting the personally identifiable information?

There has been a lot of talk of GDPR over the last year, so organisations today understand the serious repercussions of non-compliance and many have put basic frameworks in place with a focus on two pillars—‘people’ and ‘process’. Pe o p l e — G D P R s t i p u l a t e s t h e appointment of a data protection officer (DPO) for any organisation that is a public authority that has a core activity involving the monitoring of individuals on a large scale, or the processing of large volumes of sensitive data. The DPO needs to have a thorough knowledge of GDPR and have an independent voice within the organisation. Process—Many organisations’ GDPR approach so far has been data mapping— identifying where, why and how personal data is being used, while also eliminating any unnecessary data processing. Once this is done, each organisation has a foundation from which to ensure secure policies and processes are in place. While the two GDPR pillars—‘people’ and ‘process’ have been looked at, there has been a bit of lag in the use of the third pillar—‘technology’—which plays an important role in detecting attacks and crucially, responding to attacks. Do organisations need to rip and replace existing cybersecurity tools? Let’s now look at the technology aspects of data protection and GDPR: TECHNOLOGY: SECURITY SOLUTIONS TO THE RESCUE A GDPR security strategy should look at four technology areas. By applying good quality security solutions to each of these areas, security teams and the DPO can together manage the inevitable exposure to the risk of cyberattack: NETWORK ACCESS CONTROL (NAC) Businesses today embrace the idea of anywhere, anytime connectivity, but have largely ignored the need for secure NAC. Many employ a laid-back 'connect now, secure later' NAC philosophy.

LEGAL PERSPECTIVE

Others simply choose the same vendor for security that they use for network infrastructure. Both of these approaches give the illusion of security—even compliance—but in realit y, leave extensive security gaps. Network access control (NAC) offers, at a minimum, authentication of a user or device. With mobile access now the norm and Internet of Things devices connecting to the network, the only way to ensure proper access is maintained is to go beyond simply validating credentials. The next level beyond this is to tightly control who and what is authorised to access IT assets, including personal information. With advanced NAC, the IT team knows where personal data is located. They can use NAC to stipulate who is entitled to access that information and under what circumstances. In an ideal world, NAC and policy management solutions will provide device discovery, role-based access to IT assets and a closed-loop, policy-based attack response. For complete convenience, it should also integrate seamlessly with existing network infrastructure, perimeter security systems and service and support offerings. ASSURANCE The next level of protection relies on the fundamental security of the underlying network infrastructure. If data can be easily tapped off the network in normal day-to-day business flows and process, the chances of a breach increase. This is where technologies such as equipment tamper-proofing, encryption, key management and secure network administration are critical to the overall security strategy. BREACH DETECTION GDPR requires the reporting of a data breach within 72 hours. Many existing systems can take almost all of this time to detect and generate the required event information.

level of monitoring that complements existing defences, one that uses new types of attack detection such as machine learning to detect small behavioural changes that suggest an attack has occurred. Actions can range from requiring re-authentication or quarantining to totally blocking network access. Machine learning can establish a ‘risk score’ based on the characteristics of suspected unusual behaviour and how these characteristics differ from the norm. This helps organisations to prioritise their resources and investigate suspected attacks before they do damage.

Rabih Itani, Regional Business Development Manager, Security, Middle East and Turkey, Aruba

While prevention is better than cure, early detection of a breach is a close second. There’s a huge range of different technologies and products available that find attacks before they do damage. Today more and more attacks are specifically designed to breach traditional defences. It is because these exploits almost always result in the loss of personal information (and a quick sale on the dark web) that new approaches to attack detection are required. For example, a high volume of breaches make use of valid credentials, which means phishing attacks and social forensics are one of the biggest risks. The result is the bad actor using legitimate credentials to execute an attack that may take days, weeks or even months to unfold. How do you stop an ‘attack’ using valid credentials to tap information the real user has a valid reason to access? Because these are previously unknown attacks, it’s no use to look for a signature or pattern to detect them. This means IT and security teams introducing an additional

RESPONSE TO BREACH Th e G D P R’s b r e a ch n o t i f i c a t i o n requirements are very clear when it comes to what an organisation must do when a personal data breach occurs. These include notifying the regulator within 72 hours of being ‘aware of the breach’ and notifying impacted individuals ‘without undue delay’. The notifications must include details of the breach including: • The type of data, type of exposure and the number of individuals involved • The probable consequences of the breach • Any mitigation actions taken So, in the unfortunate event that a breach occurs, the DPO and his team need to rapidly gather the facts: what happened, the scope of the damage, and a plan of containment and remediation. This all has to be communicated to the regulators and authorities in a clear, concise manner. It is vital they have the tools and solutions to deliver this information efficiently. Any delays in gathering this information could cost the organisation dearly, both reputational and financially. In conclusion, GDPR ‘compliance’ is not fully defined by the law and will be determined in part by rapidly advancing security technology capabilities and evolving best practices. Only technologies that are open and interoperable will make it through to the next generation of cybersecurity defences.

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COVER INTERVIEW

TRANSFORMING KUWAIT

Banker Middle East sits down with Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait, for an exclusive insight into the exchange's strategy in propelling the Kuwaiti market to new highs

hat led to the introduction of a Boursa Kuwait’s new Rulebook earlier this year? Prior to the take-over, the exchange was regulated by various decisions issued by Kuwait Stock Exchange (KSE) setting forth rule and regulations with respect to selected topics. By issuing its rulebook, Boursa Kuwait provided efficient and wellregulated market place satisfying the requirements of the Capital Markets Authority’s. Boursa Kuwait’s aim is to provide issuers, brokers, listed companies and all market participants with attractive, efficient and well-regulated market and to define roles and responsibilities. In addition, Boursa Kuwait Rulebook introduced mechanisms with respect to the access the activities and services of the exchange, re-enforcing fairness and transparency towards investors, which is fundamental to implement sound practices, orderly functions of the exchange and sustain confidence in the overall financial market. The Rulebook encompasses transformational changes such as a three-tiered segmented market, the introduction of new market-capitalised indices and circuit breakers on securities and indices to curb volatility, as well as entirely new listing requirements that was made effective 1 April 2018. This phase marked a milestone within Boursa Kuwait’s mission to develop a liquid, reliable and sound capital market providing issuers with efficient access to capital, and investors with diverse return opportunities, which is set to see Boursa Kuwait fortify its position as a leading regional exchange. The new market segmentation is a particularly major step, creating a ‘Premier’, a ‘Main’ and an ‘Auction’ market, each with unique characteristics and obligations. In response to this segmentation, Boursa Kuwait also introduced new marketcapitalised indices, which represent the segmented markets. All sectorial indices have been reset to reflect the start of the new markets.

In light of these major developments and changes, the Boursa Kuwait Rulebook, was also amended to include all the listing requirements reflective of the market segmentation. Moreover, a circuit-breaker system on securities and indices has been put in place as a measure to prevent potential market disruptions. Boursa Kuwait has an unequivocal commitment to pursuing best practices and increasing transparency for the benefit of their stakeholders. Its strategy focuses on developing the overall market status and addressing the needs of market participants through the provision of investment tools, restructuring the market to increase its competitiveness and liquidity, and attracting investments from local and international investors. Are we likely to see further regulatory overhaul and reforms? Given the nature of the exchange operations in any given market, there is always room for further regulatory overhaul’s and reforms. For the Kuwait market in particular, we will continue to develop the overall market status in terms of rules and regulations and products and services, while developing the overall framework of the exchange.

BOURSA KUWAIT IS ALSO IN THE STAGE OF INTRODUCING THE THIRD AND FOURTH PHASES OF MARKET DEVELOPMENTS, WHICH WILL INCLUDE THE INTRODUCTION OF SHORT SELLING, REITS, TRADE AT LAST (TAL), OFF-MARKET TRADE ENHANCEMENTS TWO AND STOCK SWAPS IN 2019. Khaled AbdulRazzaq AlKhaled

Moreover, Boursa Kuwait recently introduced the Over The Counter market (OTC), which serves as a trading platform for companies that are not listed on Boursa Kuwait. OTC transactions will be carried out through licenced brokerage offices working under Capital Market Authority bylaws and Boursa Kuwait rules relating to the OTC market. The newly introduced market will create a transparent environment by bringing buyers and sellers together using fully supervised mechanisms and will adopt the clearing and settlement procedures. Boursa Kuwait is also in the stage of introducing the third and fourth phases of market developments, which will include the introduction of short selling, REITs, trade at last (TAL), off-market trade enhancements two and stock swaps in 2019, and moving forward, we will also witness the introduction of cash-CCP, qualified brokers, margin lending, equity repos, derivativesccp, index futures, security options and exchange traded funds (ETFs). In June this year FTSE Russell announced that its Industry Classification Benchmark had been licenced by Boursa Kuwait for all equity stocks listed on its markets. What was the strategic incentive behind this adoption and what effect will have in the long-term? Adopting the FTSE Russell Industry Classification Benchmark ensures that our exchange will adhere to international standards and increase transparency as well as adopt universal benchmarks, allowing the exchange to flourish and expand. Our goal to achieve worldwide status and becoming a regional leader just became a little closer with this step, an important milestone in our journey and goal of developing a liquid, reliable and sound capital market providing issuers with efficient access to capital, and investors with diverse return opportunities, evolving into a leading regional exchange.

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COVER INTERVIEW

Pursuing best practices and increasing transparency for the benefit of its stakeholders is part of Boursa Kuwait’s mission to evolve as a leading regional exchange.

Following the announcement that MSCI would include the MSCI Kuwait Index in its 2019 Annual Market Classification Review for a potential reclassification from frontier markets to emerging markets status, how likely we will see Boursa Kuwait’s accession to emerging markets status? The reclassification from frontier to emerging markets is a major achievement for any country, which typically brings with it large capital inflows from international investors. The State of Kuwait is a nation that is fully equipped to be considered for the reclassification and with our ongoing efforts to continuously develop the infrastructure of the exchange, and solidify its position on an international level, I am confident that Boursa Kuwait will reach the emerging markets status.

THE STATE OF KUWAIT IS A NATION THAT IS FULLY EQUIPPED TO BE CONSIDERED FOR THE RECLASSIFICATION AND WITH OUR ONGOING EFFORTS TO CONTINUOUSLY DEVELOP THE INFRASTRUCTURE OF THE EXCHANGE, AND SOLIDIFY ITS POSITION ON AN INTERNATIONAL LEVEL, I AM CONFIDENT THAT BOURSA KUWAIT WILL REACH THE EMERGING MARKETS STATUS. Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait

How has Boursa Kuwait sought to establish a robust corporate governance framework? Our efforts towards establishing a robust corporate governance framework initiated from the company’s internal culture and approach, in compliance with Capital Market Authority regulations and requirements, while also maintaining focus on accommodating the needs and expectations of all stakeholders. By building a robust corporate governance framework we aim to develop all policies, procedures and regulations in relation to governance, and more importantly to build the culture of governance across all company sectors. Within this governance framework we focus greatly on creating independent regulatory functions, and enhancing levels of accountability, responsibility and transparency.

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COVER INTERVIEW

Our aim is to become the leading stock exchange in the Middle East, which falls in line with our nation’s 2035 vision, for which one of the key objectives is to establish Kuwait as a regional financial hub, and the full membership is surely a significant step towards achieving that goal.

Boursa Kuwait invested tremendous efforts in identifying functions and responsibilities of each member of the board and the executive management, to ensure efficient coordination amongst all, in addition to outlining privileges and authorities delegated to the executive management.

Accordingly, the framework has been established with the aim of applying policies and procedures, and the formation of a committee made up of the company’s board members, while taking into consideration the competencies and expertise required from all members of the committee. Moreover; Boursa Kuwait invested tremendous efforts in identifying functions and responsibilities of each member of the board and the executive management, to ensure efficient coordination amongst all, in addition to outlining privileges and authorities delegated to the executive management. Boursa Kuwait recently received admission as a full member to the World Federation of Exchanges. What does this membership admission mean for the exchange? The WFE membership is an important point of reference for many international investors. The full membership status reflects Boursa Kuwait’s commitment to implement the highest standards and international best practices.

THE RULEBOOK ENCOMPASSES TRANSFORMATIONAL CHANGES SUCH AS A THREE-TIERED SEGMENTED MARKET, THE INTRODUCTION OF NEW MARKET-CAPITALISED INDICES AND CIRCUIT BREAKERS ON SECURITIES AND INDICES TO CURB VOLATILITY, AS WELL AS ENTIRELY NEW LISTING REQUIREMENTS. Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait

What was the reasoning behind the launch of the new digital educational portal, Boursa Academy Online? The platform was successfully launched in September and is one of Boursa Kuwait’s important milestones. The aim of Boursa Academy Online is to improve capital market knowledge and educate investors on a wide range of relevant topics, ranging from how to trade, common investment mistakes as well as risks of investing, to enable them to make informed investment decisions. From the day it was launched, the online portal has provided educational and training facilities such as ‘Market Watch’, ‘Virtual Trading’, ‘Statement of Account’, ‘Portfolio’, among other, targeted to investors of various experience levels. The launch of the ‘Boursa Academy Online’ is testament of Boursa Kuwait’s long-standing commitment to develop a reliable and sound capital market. Its goal is to ensure that individual investors are equipped with the right tools and information so that they are confident when getting involved in trading and are aware of the choices available to help them make investment decisions. The academy also aims to promote financial literacy among the Kuwaiti public more generally, which will in turn help increase investment in the local capital market. With this new educational offering, Boursa Kuwait addresses the need to bridge the knowledge gap in trading and financial know-how, which is one of the main factors driving individual investors to participate in the capital market. The academy will act as a trusted source of information where members can access state-of-the-art tools and resources.

Boursa Academy Online is also an important platform to educate the recent development or updates to the financial markets which are constantly evolving. Therefore, it is important for institutions like Boursa Kuwait to ensure individual investors are kept informed of the new trends and risks associated with investing. We see it as our mission at Boursa Kuwait to help build a sustainable financial environment through continuously improving Capital market literacy, thus enabling investors to maintain an in-depth understanding of the different structures and procedures within the capital market so they can better asses their goals.

Additionally, the portal delivers training solutions to help beginners—such as university students—understand the basics of investing and the instruments available in the market. The content is delivered in an Information rich platform. Pursuing best practices and increasing transparency for the benefit of its stakeholders is part of Boursa Kuwait’s mission to evolve as a leading regional exchange. To this end, its strategy focuses on developing the overall market status and addressing the needs of market participants through the provision of investment tools, restructuring the market to increase its competitiveness and liquidity, and attracting investments from local and international investors.

What is your personal management style? Managing an exchange requires a complete hands-on approach on all fronts. But that is not possible to do without an efficient, experienced and strong team. At Boursa Kuwait, that is how the operation is managed; as a team. To date, by allowing every experienced and specialised person to do their job while offering the support required to ensure it’s done properly, is what got us to where we are today. I am proud of each and every team member across the entity, and the success we have witnessed today is due to their unwavering diligence and commitment.

Boursa Kuwait recently introduced the Over The Counter market (OTC), which serves as a trading platform for companies that are not listed on Boursa Kuwait.

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COUNTRY FOCUS

BUYING TIME

Kuwait may be slow with fiscal reforms, but it can afford to take its time

uwait packs a lot of financial punch for its size. It boasts the world’s oldest sovereign wealth fund, the world’s most expensive currency and is the seventh richest country in the world per capita. It’s easy to forget that these economic accolades haven’t simply been bought with black gold. In what is referred to as its golden era from the 1940s to the 1980s, Kuwait’s liberal values cradled a respected theatre industry, the freest press in the Arab world and a literary renaissance in the Middle East. As creator of the world’s first Sovereign Wealth Fund and the first stock exchange in the Gulf, Kuwait was also a posterchild for diversification away from oil.

It’s easy to forget because today Kuwait derives around 55 per cent of its GDP, more than 90 per cent of its exports, and about 90 per cent of fiscal receipts from hydrocarbon products. Frictions between a cabinet handpicked by the Emir and a democratically elected parliament has stunted Kuwait’s diversification efforts, leaving it lagging behind its GCC peers. FIGHTING BACK The squabbles that have delayed Kuwait’s fiscal reforms have left the country economically paralysed. The tendering process of several publicprivate partnerships stalled in 2017, and the planned introduction of VAT has been pushed back to 2021. The parliament also

delayed the passing of a new debt law after the previous one expired in October 2017, blocking any debt issuance thus far in 2018. At the end of 2017, Kuwait’s entire cabinet resigned rounding off a year of mixed fortunes. Overall, real GDP growth contracted an alarming 2.9 per cent in 2017, according to S&P. The oil sector contracted by 7.2 per cent; however, growth in the non-oil sector held up at 2.2 per cent, as households and government relaxed their purse strings and began to spend. Kuwait has carried over many of these positive themes into 2018, however the country’s financing needs remain large and deeper reforms are needed to sustain them.

(PHOTO CREDIT: ANSON FERNANDEZ DIONISIO/SHUTTERSTOCK)

While Kuwait has sound financial buffers, keeping its population in the lifestyle to which it has become accustomed isn’t cheap. Kuwait’s citizens have enjoyed a generous welfare state and a prominent public sector that employs 80 per cent of the national workforce. Kuwaiti authorities would rather watch their reserves slowly erode than break that social contract. BUYING SECURITY Luckily for Kuwait, some savvy investments decades ago means it can afford to take its time. Sheikh Abdullah Al-Salem set up the Kuwaiti Investment Authority (KIA) in 1953, which is now thought to have assets of $580 billion, or 460 per cent of GDP, although its performance is not disclosed.

The Reserve for Future Generations Fund (RFFG) was created in 1976 to provide financial security when Kuwait’s oil reserves finally dry up. It was seeded with a deposit of a mere few hundred thousand pounds in the Bank of England; today it is thought to be worth $420 billion. To sustain the fund’s growth, 10 per cent of all oil revenues are siphoned off and transferred into it. The General Reserve Fund holds the accumulated government surpluses after transfers to the RFFG; the government has been tapping this fund for financing, and its value is thought to have fallen for the fourth year in a row, according to Fitch. While the RFFG would allow Kuwait to sustain current deficit levels for decades, Fitch estimates that the GRF could sustain the country for five years before it runs out.

“We estimate that Kuwait's net external asset position will remain very strong at more than 6x current account payments over 2018-2021,” S&P said. “Moreover, we project that the current account receipts plus usable reserves will cover the country's gross external financing needs over the next four years.” BANKING IS BRIGHT These nest eggs have given Kuwait ample space to smooth fiscal consolidation, and Kuwait’s banking system has reaped the rewards of this financial security. According to the IMF, resilient non-oil activity and strong financial sector oversight have kept the banking system sound. High capitalisation, steady profitability and good asset quality characterise

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COUNTRY FOCUS

Kuwait’s financial sector. Moody’s said that Kuwait’s banks will be supported by steady non-oil economic growth and solid financial fundamentals over the next year. The rating agency expects annual domestic credit growth of around six per cent over the next 12 to 18 months. Household credit growth will be the key driver on the back improving economic sentiment and steady employment growth. While corporate credit growth will be slower, due to corporate repayments and moderation in the development project space, banks will still find opportunities for corporate credit and non-cash business arising from substantial active projects, Moody’s said. "Non-performing loans levels will stabilise at around two per cent of gross loans amid favourable domestic conditions," said Alexios Philippides, an Assistant Vice President and analyst at Moody's. "We also believe that banks have cleaned up their portfolios before this year's implementation of IFRS 9 accounting standards by mobilising the large pool of general provisions accumulated in recent years, which will help limit impairments going forward."

HIGHER OIL PRICES AND LARGE FISCAL BUFFERS PROVIDE A DANGEROUS INCENTIVE TO KEEP THE STATUS QUO.

The main risks as far as the rating agency is concerned are adverse domestic political and geopolitical developments or renewed weakness in oil prices. Any of these factors could flatten confidence and subdue equity markets and the real estate sector, to which banks are exposed, potentially reducing business growth and pressuring banks' asset quality. Kuwaiti banks, however, maintain strong loss absorption buffers, with the system's Basel III Tier 1 capital ratio at 15.8 per cent as of December 2017. The rating agency also says that significant general provisions will allow banks to migrate to IFRS 9 without a negative impact on capital. Moody's also expects that growth in deposits together with current excess liquidity will allow banks to grow their loans without increasing their reliance on confidence-sensitive market funding over the next 12-18-months.

Rising oil prices have provided relief to the Kuwaiti economy. (PHOTO CREDIT: PAVEL IGNATOV/SHUTTERSTOCK)

The CBK has been proactive in improving supervision and regulation, the IMF noted, although the sector could do more to enhance its crisis management and liquidity forecasting frameworks. WELLING UP Nonetheless, it seems Kuwait’s banks won’t have too much to worry about. While an initial drop in confidence in 2014 soured activity in the nonoil sectors, there have been signs of recovery. Moody's forecasts non-oil GDP growth of 3.5 per cent in 2018 and 4.0 per cent in 2019, driven by growing government spending. Non-oil activity expanded by 2.8 per cent in the first quarter of this year, according to World Bank data, which helped to lift aggregate GDP growth to 1.6 per cent—the first positive in five quarters. However, out of all the countries in the GCC, Kuwait remains the most dependent on hydrocarbons and oil will continue to have the biggest impact on its economy. Luckily, for the foreseeable future, that impact is likely to be positive. Kuwait is the fifth largest OPEC oil producer, and one of the few OPEC members with spare oil production capacity. Plans to invest $115 billion in the oil sector over the next five years should further boost oil production, according to the World Bank. The recovery in oil prices over the past year, which are close to threeand-a-half year highs, and rising public sector employment have also bolstered household spending and sentiment, as reflected in buoyant retail spending. Following a correction in 2016 and 2017, real estate prices have also stabilised.

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COUNTRY FOCUS

The country has recently unveiled several new infrastructure projects which will help attract foreign investment. (PHOTO CREDIT: ZHAO JIAN KANG/SHUTTERSTOCK)

Rising oil prices are providing much relief to Kuwait’s finances. While lower oil prices since 2014 have caused Kuwait's central government balance to remain deep in deficit, the country is becoming fiscally fitter every year. During 2017 the central government deficit narrowed to 14.6 per cent of GDP, from close to 18 per cent in 2016, owing to higher oil revenues. S&P estimates that temporarily higher oil prices in 2018 will support a further reduction in the deficit to 10.6 per cent of GDP in fiscal 2018.

CHINA COULD BE A POWERFUL ALLY AS KUWAIT SEEKS TO MODEL ITSELF ON HONG KONG UNDER ITS REVISED 2035 PLAN.

THE NEW BLACK However, Kuwait can’t afford to be carried by higher oil process. Over the next few years, several projects in power, infrastructure, and housing, currently in various stages of implementation, are expected to come to fruition. In March, the government unveiled its Northern Gulf Gateway project, which aims to add $220 billion to the country's GDP, attract up to $200 billion in foreign direct investment create 400,000

knowledge-based jobs and tempt 3-5 million visitors to Kuwait. The project would fuse Kuwait into China’s Belt and Road Initiative, a 21st Century take on the Silk Road made up of a “belt” of overland corridors and a maritime “road” of shipping lanes. Kuwait is the first GCC country to sign up to China’s efforts to tie Southeast Asia to Eastern Europe and Africa, a swath of the globe that accounts for 71 countries, half the world’s population and a quarter of global GDP. At the epicentre, Kuwait has the opportunity to become a major commercial centre and a base for a network of railways which start from China and pass through Central Asia and Gulf states. China could be a powerful ally as Kuwait seeks to model itself on Hong Kong under its revised 2035 plan, the aim of which is to become a leading regional financial, commercial and cultural hub by 2035. The plan involves transforming five islands into economic zones with an investment value of up to $160 billion. They would also double as tourist attractions that would hopefully entice investments in commercial and residential complexes as well as infrastructure. THE BEST LAID PLANS The New Kuwait Vision 2035 is actually a second draft of a plan that was first released in 2010, and quickly thwarted by political gridlock, geopolitical tensions and overly-ambitious plans to compete with established financial centres in the region. It was quickly binned when Sheikh Nasser resigned as Prime Minister in 2011. The new plan faces the same hurdles as geopolitical tensions remain high, policymaking continues to be delayed by domestic bickering and Kuwait’s never-ending red tape still threatens to deter investors. For the same reasons, there is a worry that the Government's policy response to its current challenges will be limited. Higher oil prices and large fiscal buffers provide a dangerous incentive to keep the status quo.

KUWAIT’S CITIZENS HAVE ENJOYED A GENEROUS WELFARE STATE AND A PROMINENT PUBLIC SECTOR THAT EMPLOYS 80 PER CENT OF THE NATIONAL WORKFORCE.

“We expect reform momentum aimed at diversifying revenues will slow further in the context of higher oil prices during 2018,” S&P said. “We expect the government to focus on moderating expenditure growth by somewhat limiting new employees in the public sector, strictly enforcing current welfare policies to reduce overspending, and charging nominal fees to cover the cost of providing services to its citizens.” The authorities also plan to introduce excise taxes on certain goods in 2019. The government intends to divest underutilised assets and privatise around 40 assets over the next 25 years. It is currently studying the feasibility of privatising the North Shuaiba power plant, fixed line and broadband telecoms infrastructure, the Ministry of Electricity

and Water Central Workshop, and the national stock exchange. However, “Notwithstanding plans to further curtail current spending and introduce revenue measures, including a value-added tax, more ambitious efforts are needed to bring the fiscal balance closer to levels implied by intergenerational equity considerations, reduce financing needs more rapidly, and create space for growthenhancing capital outlays,” the IMF said. Kuwait may currently boast the strongest finances among GCC countries, but it cannot afford to become complacent. Kuwait was once a trailblazer for Arab economies that it now lags behind. Unless it rediscovers its pioneering spirit and rises above petit squabbles, it will always be playing catch-up with countries it once inspired.

Introduction of excise taxes will provide some help to balancing the fiscal landscape, said analysts. (CREDIT: ENCIKTEPSTUDIO/SHUTTERSTOCK)

bankerme.net

COUNTRY FOCUS

KUWAIT in numbers OIL AND GAS SECTOR REAL OIL GDP (annual percentage change)

POPULATION

4.2

-2.1 -1.7 2.3 -6.0 4.6

(2014)

million

MEDIAN AGE

33.5 Source: Worldometers (2018)

GDP

(2015) (2016) (2017) (projected 2018)

REAL NON-OIL GDP (annual percentage change)

$289.7 billion (2017 est.) 5.0 (2014) $299.7 billion (2016 est.) 0.0 (2015) $293.2 billion (2015 est.) 2.0 (2016) 2.5 (2017) 3.0 (projected 2018) 3.5% (2016) -2.9% (2017) 2.0% 2018 (projected 2018) $65,800 billion (2017 est.) 3.2 (projected 2018) $69,900 billion (2016 est.) $69,200 billion (2015 est.) Source: CIA World Factbook

REAL GDP GROWTH

Source: IMF

GDP PER CAPITA

Source: Standard & Poor’s

Source: CIA World Factbook

TOTAL OIL AND GAS EXPORTS (billions of US$)

97.6 48.5 41.5

(2014) (2015)

45.3 47.4

(2017)

(projected 2018)

(2016)

AVERAGE OIL EXPORT PRICE (US$/barrel)

96.5 49.0 41.7

(2014) (2015)

49.1 49.0

(2017) (2018)

(2016)

Source: IMF

CPI GROWTH

2.9% 3.5% 3.7% 1.5% DEBT (as a percentage of GDP)

7.6% 11% 18.6% 18.9%

(2014) (2015) (2016) (2017)

Source: Standard & Poor’s

Lebanon Special Report

BANK OF BEIRUT: NAVIGATING THE FUTURE

Salim G. Sfeir, Chairman and Chief Executive Officer of Bank of Beirut

LEBANON SPECIAL REPORT

BANK OF BEIRUT: NAVIGATING THE FUTURE Salim G. Sfeir, Chairman and Chief Executive Officer of Bank of Beirut, provides an exclusive insight into the bank’s strategy on technology and disruption

ould you describe, in holistic terms, your vision for the bank’s digital transformation strategy? Holistic is the perfect term to describe our digital transformation strategy. At the most basic level we all appreciate the value of more efficient business processes and transactions. Digital transformation is at risk of becoming a ‘one vision fits all’ proposition. Digital transformation should focus on the specific measurable values, unique to each institution. Banking anywhere, anytime, will become generic. The key is to provide positive and effortless access to the most relevant options. A challenge is to balance real risk of uncertain opportunity, and make sure that digital transformation does not get in the way of or depersonalise our services. A true holistic digital strategy will genuinely nurture personal relationships with clients, customers, staff, regulators, suppliers and communities.

Digital strategy is not a transformation substitute, but just one more important way to be effective. In the case of Bank of Beirut, it’s better described as “continuous evolution” as opposed to a 'transformation'. How have you sought to compete with new disruptive fintech companies operating in the finance and banking industry? Over next three to five years the prime threat will not be fintech companies, but rather the incumbent banks which can better leverage fintech innovations in increasingly regulated environments. Optimising technology vendors, managing efficient technology transfer and developing the talent to excel are all more consequential than directly competing with mostly edge non-core fintech markets. Fintech collaborations can always be on the radar, when properly risk-managed. It’s all about digital ROI.

What role has Big Data played in the bank’s digital transformation journey? Big Data has become an ambiguous term. In banking, Big Data emerged when datasets became too large and complex. As a result, Big Data management became the primary focus for major financial institutions or new entrants trying to build a customer base from scratch. Commoditised banking services and new entrants will remain under intense pressure, and better big data analytics can help separate those particular winners and losers. Digitally credit scoring the unbanked is different from negotiating Letters of Credit or buying your first home. At a certain point, it becomes a zero-sum proposition for purely digital relationship banking. Bank of Beirut set out to deliver simple, direct, client-centric, differentiated products and services. Equally, our slogan: “Banking Beyond Borders” has resulted in a unique International footprint. Be i n g p r e s e n t i n t e n c o u n t r i e s ,

COMMODITISED BANKING SERVICES AND NEW ENTRANTS WILL REMAIN UNDER INTENSE PRESSURE, AND BETTER BIG DATA ANALYTICS CAN HELP SEPARATE THOSE PARTICULAR WINNERS AND LOSERS. Salim G. Sfeir

focusing on and understanding the genuinely unique needs of each local diaspora will be helped but not fundamentally transformed by Big Data. If and when Amazon or Facebook decide to deliver fintech-banking solutions, the largest data-dependent fintechs will be the most at risk. Niche bankers with deep client loyalties like Bank of Beirut face different challenges and data needs.

On a more practical level, Sfeir asserts that banks need to better address the risks of ‘digital distraction’, with virtually guaranteed budget overruns.

How have you addressed the challenge of reskilling staff to support new technologies? When we started as a small outsider bank with five branches and less than 100 staff, we had to be agile and constantly deliver innovations in a risk managed environment. That set us up to grow a sustainable cultural competitive advantage. From there, we developed a success-training center, the Bank of Beirut Academy. Reskilling is a far deeper, direct challenge for the megabanks.

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LEBANON SPECIAL REPORT

Over the next five years, talent management will become even more important. National training and reskilling requirements will increase. This is one of Lebanon’s many challenges. Developing the workforce of tomorrow, building great vocational training environments, creating jobs for our many underserved communities requires an urgent commitment from our national, municipal and educational leaders. The good news is that Lebanon’s educational institutions are strong, and we count on them to respond. For the record, we will welcome and support the best vocational training initiatives. Beyond driving down costs and improving efficiencies, what are some of the other advantages from pursuing overall digitalisation? Replacing back office, paper-based document systems was a priority long before today. Not only will our clients benefit from technological progress, our staff will enjoy increased job satisfaction, working with faster and more powerful support systems. With our new hybrid and digital branches it will be easier to recruit and grow talent than for the traditional back office paper-based jobs of the past. It’s an exciting time to join the financial services industry. What are some of the risks that have arisen due to the advent of the new digital economy and how has Bank of Beirut sought to mitigate them? There is wide recognition of the potential, even existential risks from cryptocurrencies and cyberthreats. Both provide compelling incentives to work ever more closely with our regulators and the Association of Banks in Lebanon. On a more practical level, banks need to better address the risks of ‘digital distraction’, with virtually guaranteed budget overruns.

OVER THE NEXT FIVE YEARS, TALENT MANAGEMENT WILL BECOME EVEN MORE IMPORTANT. NATIONAL TRAINING AND RESKILLING REQUIREMENTS WILL INCREASE. THIS IS ONE OF LEBANON’S MANY CHALLENGES. THE GOOD NEWS IS THAT LEBANON’S EDUCATIONAL INSTITUTIONS ARE STRONG, AND WE COUNT ON THEM TO RESPOND. Salim G. Sfeir, Chairman and Chief Executive Officer of Bank of Beirut

Do you see a role for artificial intelligence and blockchain in Bank of Beirut, and if so, how? Today we see artificial intelligence as a very useful tool which is still quite narrow and reactive. The general consensus is that the real value of AI will come to fruition over the next decade. It’s the same for blockchain. You have to ask: how is this moment like solar energy at the beginning of the 21st century? Are the current start-up AI and blockchain solutions the ones which will prevail in five to 10 years? Probably not. Can you talk a bit about PAYMENT GATEWAY, Bank of Beirut’s internet payment solution, and how it differentiates from other products in the marketplace? Setting up an e-commerce solution or online store needs to be faster, more secure and genuinely intuitive. Bank of Beirut’s Payment Gateway provides clients with tokenisation, multiple checkout options, a high level of security and real-time management reporting tools. But this goes back to your earlier question about training and the value we place on staff being supported by technology rather than technology being supported by staff. Our big difference is there are real people to talk to and our client support ratios should be among the best in the industry.

A challenge is to balance real risk of uncertain opportunity, and make sure that digital transformation does not get in the way of, or depersonalises services.

How has the customer journey changed and what role has focusing on omnichannel solutions had? Of course, we seek to identify and acquire new customers, particularly the next generation of customers, and the omni-channel solution plays an enormous role. Over time, every channel contributes to understanding your customer 360 profile. Each customer journey depends on

THE GENERAL CONSENSUS IS THAT THE REAL VALUE OF AI WILL COME TO FRUITION OVER THE NEXT DECADE.IT’S THE SAME FOR BLOCKCHAIN. Salim G. Sfeir

the starting point. Our first duty is to retain and develop existing customers. A key focus of our omni-channel solution is to make certain that the most relevant content appears in the right channels. I have just returned from anextended trip to meet with our customers and staff in Australia. I learn and gain real insight, every time I meet personally with customers and staff.It’s still the best part of my job.

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LEBANON SPECIAL REPORT

BANKING TRENDS AMID The structural characteristics of banks and financial institutions in MENA, are a mix of conventional and Islamic entities, as well as being both retailfocused and corporate-aligned in which from a potential future merger perspective will offer value-added consolidations

he Middle East, home to some of the fastest growing economies in the world, is seeing a booming banking sector attracting some of the world’s heavyweights in the industry over the past years since the recovery from the oil crisis of 2014. Regional lenders, especially in GCC, are increasing their international foray, reduce a glut of banks through a wave of synergies, adopting fintech and increasing presence in emerging markets like Saudi Arabia. However, banks operating in MENA are not independent to regional security concerns like political and diplomacy fallouts which pose severe threats to the operating environment for both international and regional institutions. BANK MERGERS Despite being referred to as one of the unstable region in the world, the business portfolios of lenders from the Middle East and GCC, in particular, are doing well. Recently the global rating agency, Moody’s, reported that the outlook of the UAE’s banking sector will remain stable, reflecting a gradually recovering economy and banks’ strong capital, resilient profitability as well as solid

funding. In its report, the rating agency projected a GDP growth of 2.2 per cent in 2018 for the UAE and 2.9 per cent in 2019, following a slowdown to 0.8 per cent in 2017 and this economic recovery will, in turn, stimulate credit growth. The UAE is witnessing a wave of consolidation among banks in the Gulf returning to Abu Dhabi. Last year, the merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) which resulted in the formation First Abu Dhabi Bank (FAB), the largest bank in the UAE and one of the largest after Qatar National Bank in MENA region, provided the significance of banking industry synergies in the UAE.

THE INTERNATIONAL MONETARY FUND (IMF) SAID THAT AT 152 PER CENT, LEBANON’S NOMINAL DEBT TO THE GROSS DOMESTIC PRODUCT (GDP) IS THE THIRD-HIGHEST IN THE WORLD, CAUTIONING LEBANON OF THE NEEDS FOR AN IMMEDIATE AND SUBSTANTIAL FISCAL ADJUSTMENT TO MAKE ITS PUBLIC DEBT SUSTAINABLE.

Ad d i t i o n a l l y, t h e r e c e n t t h r e e UAE banks, state-owned Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB), as well as Shari’ah compliant Al Hilal Bank’s confirmed merger, has a possibility of creating what is going to be the fifth largest bank in the Middle East. The three lenders announced in early September that talks are underway to combine into one entity with $110 billion of assets, according to a bourse filing by Abu Dhabi Commercial Bank (ADCB). Earlier this month, Bloomberg reported that under plans being discussed ADIB will acquire UNB to form a conventional lender and the Islamic divisions of ADCB and UNB would merge and then take over privately-held Al Hilal Bank to form a new Islamic lender. In Saudi, the Saudi British Bank (SABB) and Alawwal confirmed that they have entered into a binding merger agreement last month having started discussions on a potential merger in April 2017. Alawwal bank and SABB merger will create the Kingdom’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets. On completion of the merger, SABB will continue to exist and Alawwal

SECURITY CONCERNS

The rise in global commodity prices and the ongoing expense of housing refugees from conflicts in neighboring Syria and Iraq has stretched the nation’s finances, while assistance from the Gulf this year has been limited to a grant from Kuwait. (PHOTO CREDIT: BLOOMBERG)

bank will cease to exist as a legal entity and its shares will be cancelled and new shares in SABB will be issued to shareholders of Alawwal bank. The second quarter of 2018 has also seen several potential bank synergies in the region. In July, Kuwait Finance House (KFH) invited Bahrain’s Ahli United Bank to begin a due diligence process for a potential merger. In a bourse filing, KFH said that the scope of the

agreement includes valuation studies and work to assess the feasibility of establishing a new banking entity and it would disclose any matters related to the possible merger in a sequential and timely manner. In the same month, Bank Dhofar and National Bank of Oman (NBO) announced plans for a potential merger and according to EFH Hermes the merged bank, with a combined asset of $20 billion (AED

74 billion) will be the second-largest financial institution in Oman after Bank Muscat. HE Abdullah bin Salim al Salmi, the President of CMA, said that Oman needs bigger and stronger institutions not only in financial sector but in all the corporate sectors, adding that too many small players in Oman’s corporate sector will not be able to compete regionally and internationally as they will need to sustain their growth.

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The structural characteristics of banks and financial institutions in the region as a whole, are a diverse mix of conventional and Islamic entities, as well as being both retail-focused and corporatealigned in their stance which from a potential future merger perspective will offer value-added consolidations. MUFG MENA Research forecasts better asset pricing discipline as banks merge with lower concentration risks in loan portfolios. THE LEVANT In Lebanon, the postponement in the formation of the Government has transformed a longstanding doubt of

economic recovery into disappointment because of the lack of seriousness being displayed by lawmakers in mapping a way forward. The Lebanese people went to the polls in May, five years after they were originally scheduled, this resulted in a Shia militant and political group Hezbollah making record gains. About four months later, politicians have been fighting over political positions in a long-drawn-out saga reflective of the country’s complex sectarian divides and deeply entrenched system of patronage. The squabbling has prevented the creation of a national unity government that is representative enough of the major parties to ensure political support across

the country. Despite a positive gain in the real estate industry earlier in 2018, Lebanon is tipping into a property slump—and perhaps a banking crisis that threatens its currency. Trouble in the banking sector, which draws investors from around the region, might be felt beyond Lebanon’s borders. The International Monetary Fund (IMF) said that at 152 per cent, Lebanon’s nominal debt to the gross domestic product (GDP) is the third-highest in the world, cautioning Lebanon of the needs for an immediate and substantial fiscal adjustment to make its public debt sustainable. Despite revenue gains, the fiscal deficit more than doubled to $1.9

Despite a positive gain in the real estate industry earlier in 2018, Lebanon is tipping into a property slump—and perhaps a banking crisis that threatens its currency. (PHOTO CREDIT: SHUTTERSTOCK/DIEGO FIORE)

billion in the first Q1 2018 against an increase in cash revenues by 3.4 per cent to a record high of $3.8 billion during the period. According to the Institute of International Finance (IIF), Lebanon’s outlook for the remainder of 2018 looks dismal in light of the burgeoning deficit, highlighting the need for transformative fiscal reforms. Additionally, it not only the politicalsectarian divides that are rocking Lebanon’s banking industry. In July, the local newswire, National News Agency, confirmed a nearly successful cyberattack by an Iraqi network that spread false information about Lebanese banks in order to extort them, aiming their ownership of deeds of assets to the value of millions of dollars. Though a joint IraqLebanon intelligence network managed to thwart the attempt, the attempt raised questions about the threat detection and advancement in technology within Lebanon’s banking sector. THE KINGDOM Saudi Arabia’s banking industry has been doing well with a number of international banks trampling on each other for licences to operate in the Kingdom following the announcement of the Tadawul’s inclusion in the MSCI emerging markets and the FTSE 100 index, the Crown Prince’s ambitious Vision 2030 economic transformation a plan as well as the future investment initiative and the impending initial public offering of Saudi Aramco. However, the recent international outrage against the Kingdom following the murder of journalist Jamal Khashoggi in Saudi Arabia consulate in Istanbul is casting a grey cloud on what the future holds for the banking industry in the Kingdom. Last month, chief executives from HSBC Holdings, Société Générale (SocGen) and Credit Suisse Group among other international banks boycotted the Future Investment Initiative (FII) dubbed ‘Davos in the Desert’-- even though their senior investment bankers attended.

IN LEBANON, THE POSTPONEMENT IN THE FORMATION OF THE GOVERNMENT HAS TRANSFORMED A LONGSTANDING DOUBT OF ECONOMIC RECOVERY INTO DISAPPOINTMENT BECAUSE OF THE LACK OF SERIOUSNESS BEING DISPLAYED BY LAWMAKERS IN MAPPING A WAY FORWARD.

The conference, which was expected to be the stage for announcing new ventures and billion-dollar contracts was overshadowed by unfavourable headlines, putting hundreds of millions of deals at stake in fees up for grabs over coming years as the Kingdom reorganises the economy away from its dependence on oil. This has also raised numerous security questions amongst international lenders that have been seeking licences to operate in the largest economy in the Middle East. In spite of these, a number of regional and international lenders are still in pursuit of Saudi riches, saying their business interest in Saudi Arabia will not be affected. The Standard Chartered Bank, one of the leading lenders in the region said that it is pressing on with its application for a banking licence in Saudi Arabia. The UAE’s FAB is set to launch commercial banking operations in Saudi Arabia by the end of this year and it will be joined with the Trade Bank of Iraq which is continuing its international foray across the Middle East since opening a representative office in Abu Dhabi last November.

IRAN The US’s tougher Iran policy, which includes the US withdrawal from the international nuclear accord negotiated by President Barack Obama in May, and re-imposition of sanctions under the Trump administration has a dealt a blow to the banking industry in the Persian Gulf countr y. International b a n k s a n d f i n a n c i a l i n s t i tu t i o n s withdrew their operations in fear of sanctions or hefty fines from the US if they continue to service the country. The unstable security environment in the region has also made it impossible for Iranian lenders to conduct business with the outside world. In July, Iran lost the bid to repatriate $350 million which was being held by the European-Iranian Trade Bank, majority-owned by Iranian state-owned banks, and registered w i t h G e r m a n y ’s c e n t r a l b a n k , from Germany. Under the re-imposed US sanctions, Iranian banks will be excluded from t h e m a i n c r e d i t c a r d n e t wo r k s , including VISA and MasteCcard, making it difficult for Iranians travelling outside the country. Recently the Belgium-based firm, SWIFT, disconnected some Iranian lenders from its financial messaging service, adding that it was regrettable that the firm was not being allowed to be neutral. Although SWIFT made no mention at the time of US sanctions as the reason for the decision, it is said that the Trump administration told the firm that it is expected to comply with sanctions or else it could face them itself if it fails to do so. However, the UAE granted two Iranian lenders, Bank Melli and Bank Saderat, servicing the country to continue with business as usual as the Central Bank of the UAE does not see any material impact from the renewed US sanctions on Iran. The re-imposition of sanctions has affected the economic activities of many international corporate companies-banks are not spared.

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LEBANON SPECIAL REPORT

DEBT LOCKED Political deadlock could rob Lebanon of a golden opportunity to reform its sluggish economy

s Lebanon celebrated its 75 th independence day in November, more than a few of its residents may not have felt like joining the party. It was hoped that May’s election, the country’s first in nine years, would smooth the path for political progress and unlock urgently-needed economic reforms; however, the result did little to fundamentally shift the political status quo or ease the countr y’s fiscal challenges. Prime Minister Saad Hariri lost 40 per cent of his seats but remains in power, and six months on he has yet to form a government. His failure to form a new coalition could cost the country $11 billion in foreign funds, which donors pledged on the condition that promised reforms would finally see the light of day. While the country faces political deadlock, the World Bank estimates that some 200,000 additional Lebanese have been pushed into poverty as a result of the Syrian crisis, unemployment is in excess of 35 per cent and economic growth remains well below potential with little hope of picking up in the near future. Lebanon’s economy is plagued by corruption and characterised by high

public debt, current account deficit and urgent funding needs. The two stalwarts of its economy, real estate and construction, have been flattened by regional turmoil and are unlikely to recover any time soon. A confluence of factors, local and global, continue to weigh down on Lebanon’s already fragile finances. The conflict in Syria rages on, while the persistently sluggish economy is taking a toll on private and public balance sheets, further quashing economic growth. GOLDEN MOMENT Its current political paralysis couldn’t have struck at a worse time. In April, Lebanon convinced delegations from 41 nations to hand over an $11 billion aid

package to overhaul the country’s ailing infrastructure and lift the economy’s faltering growth. However, in return for their generosity, donors wanted Lebanon to stick to promised reforms including an overhaul of its legal frameworks, fiscal discipline and regulatory environment. Lebanon’s new benefactors wanted to see the country commit to a fiscal consolidation plan that will tame its debt and soothe corruption. Unless Hariri forms a government, this isn’t going to happen. If this line of credit is snapped back, it would be an enormous blow to sentiment and economic activity is likely to remain stagnant, leave businesses struggling with deteriorating basic infrastructure and the government with large external and fiscal deficits.

LEBANON’S REAL GDP GROWTH HAS DECELERATED SHARPLY SINCE 2010, BUT ITS MAIN DRIVERS HAVE REMAINED SERVICES CHARACTERISED BY LOW PRODUCTIVITY AND LOW EMPLOYABILITY POTENTIAL FOR HIGH-SKILL LABOUR.

Lebanonâ&#x20AC;&#x2122;s banks are paying the highest interest rates on deposits in almost nine years as lenders seek to shore up their capital to cope with political uncertainty and the high borrowing needs of the government. (PHOTO CREDIT: BLOOMBERG)

A country in urgent need of financial assistance and fiscal reform cannot afford to waste such a golden opportunity. FISCALLY UNFIT However, although the loans would provide financial relief, Lebanon is already the most indebted country in the Middle East. The IMF estimates that public debt is above 150 per cent of GDP, which could rise to 180 per cent in the next five years.

Slowing deposit inflows combined with large external financing needs has been steadily draining foreign assets from the economy since 2011. In 2017, the net foreign assets position accumulated a loss of $156 million, according to the World Bank. S&P notes that the Lebanese Government's debt-servicing capacity depends largely on the domestic financial sector's willingness and ability to add to its holdings of government debt, which

in turn relies on bank deposit inflows, particularly from non-residents, and also on central bank financing. According to the World Bank, this is proving increasingly challenging in light of slower deposit growth, especially as US interest rates rise. Meanwhile, there is a near-complete void of government initiative to address macroeconomic imbalances and other structural bottlenecks such as power generation in Lebanon.

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LEBANON SPECIAL REPORT

Progressively potent interventions by Banque du Liban to actively manage economic and financial challenges facing the country, even when successful, offer only temporary reprieve, and are not without additional macro-financial risks, the World Bank wrote. After a temporary improvement in the fiscal deficit in 2017, S&P expects Lebanon to face rising deficits averaging close to 11 per cent of GDP over 20182021. According to the IMF, overall fiscal balances will reach well above 10 per cent of GDP and public debt close to 180 per cent of GDP by 2023.

THE GLOBAL COMPETITIVENESS INDEX BY THE WORLD ECONOMIC FORUM RANKS LEBANON 105TH OF 137 COUNTRIES, AHEAD OF ONLY YEMEN IN THE REGION.

A FLAWED MODEL S&P forecasts that the economy will grow by an average of 2.3 per cent over 2018-2021, from an estimated 1.6 per cent in 2017 – far below real GDP growth of 9.2 per cent over 2007-2010. However, the World Bank and the IMF seem to think this is over optimistic, and don’t expect growth over 1.5 per cent. Furthermore, the World Bank recently wrote that Lebanon’s previous dizzying growth rate masked a flawed economic model. “Lebanon’s real GDP growth has decelerated sharply since 2010, but its

The World Bank estimates that some 200,000 additional Lebanese have been pushed into poverty as a result of the Syrian crisis, unemployment is in excess of 35 per cent and economic growth remains well below potential with little hope of picking up in the near future. (PHOTO CREDIT: LIGHTSPRING/SHUTTERSTOCK)

S&P forecasts that the economy will grow by an average of

2.3%

over 2018-2021, from an estimated

1.6%

in 2017 – far below real GDP growth of

9.2%

over 2007-2010.

main drivers have remained services characterised by low productivity and low employability potential for high-skill labour,” the World Bank said. Breaking it down, Lebanon’s service sector constituted 72.4 per cent of real GDP over the 2004-2016 period, while industry and agriculture made up a much less 14 per cent and 4.3 per cent of GDP, respectively. Real estate is the largest service sector, averaging 13.7 per cent of GDP over the same period, and increasing to 17.3 per cent if combined with construction. Wholesale and retail trade is also a principal output for the economy, making up 13.4 per cent of GDP. This is followed by public administration at 9.4 per cent of GDP and financial services at 7.3 per cent of GDP. Out of the above, all but financial services are low value-added sectors and do not generate high skill employment opportunities, the World Bank noted. On the demand side, the economy is strongly biased towards a large structural external deficit position. Lebanon’s economy is heavily consumption based, with private consumption averaging 88.4 percent of GDP over the 2004-2016 period. The main supply-side sectors identified by the World Bank do not produce the consumption goods in demand, which are instead largely imported. “This renders the external sector a large net negative on output, averaging -24.4 percent of GDP over the 20042016 period,” the World Bank said. “Meanwhile, total investments at 23 per cent of GDP has mostly been focused on a non-productive, rent-seeking, real estate sector.” It is perhaps little wonder that Lebanon ranks as one of the least competitive economies, both globally and regionally. The Global Competitiveness Index by the World Economic Forum ranks Lebanon 105th of 137 countries, ahead of only

Yemen in the region. Moreover, Lebanon’s backslide in competitiveness has been the most marked in the region over the past decade, the World Bank noted. DEBT TRAP Lebanon’s banks are shouldering the bulk of Lebanon’s debt. Thankfully, it appears to be in safe hands for the moment. Moody’s outlook for Lebanon's banking system is stable, reflecting the expectation of a modest pick-up in economic activity and continued inflows of foreign deposits, helping banks to finance the government and the economy. "Operating conditions in Lebanon have stabilised but will remain challenging," said Alexios Philippides, a Moody's Assistant Vice President, Analyst. "We forecast a modest rise in real GDP growth to a still weak 2.5 per cent in 2018 and three per cent in 2019 from 1.9 per cent in 2017. This will be driven by greater economic policy coordination and our expectation that the government will resume long-delayed public investment projects." However, the rating agency warns that renewed political or geopolitical unrest could derail the reform agenda and damage confidence. With interest rates rising, Moody's expects modest domestic credit growth bet ween two and three per cent over the next 12-18 months. Banks' heavy sovereign exposure are another threat. Large fiscal deficits of around eight per cent this year and next will be financed primarily by the banks. Sovereign exposure made up about half of banks' total assets at end-2017, linking their creditworthiness with the heavily indebted Lebanese Government and exposing them to interest rate and liquidity risks. Continued pressure on the banks' loan quality is expected, driven by seven years of sub-par economic growth, rising interest rates and the impact of low confidence on the real estate sector and consumption.

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LEBANON SPECIAL REPORT

Moody's base expectation is that Lebanese banks will continue to attract the needed inflows of customer deposits, much of this from the Lebanese diaspora. Deposits should grow by between five and six per cent. A significant slowdown in deposit inflows would challenge both the banks' ability to finance the government and the economy; this is the main risk to Moody's stable outlook. The Lebanese financial system maintains considerable liquidity buffers, driven by the Banque du Liban's large gross foreign reserves, to weather a period of slower financial inflows or short-term outflows and conversions into foreign currency, partially mitigating the risk of deposit flight. Moody's says that it continues to consider the banks' capital buffers to be modest, with sector-wide equity to assets at around nine per cent, in view of their heavy exposure to the sovereign and the challenging operating environment. Rated banks already meet the higher Basel III capital requirements that must be phased in by the end of 2018. Moody's expects banks to post a net income to tangible assets of around 1.0 per cent. This is below the 1.2 per cent average recorded for Lebanese banks during 2017. Subdued business generation, higher provisions costs from low levels in 2017 and higher taxes will trim banks' profitability. TROUBLE NEXT DOOR It could be said that Lebanon is a victim of its own generosity. It has taken in over a million Syrian refugees, an act the IMF says is worthy of the world’s support. The number of Syrian refugees has pushed Lebanon’s population up by almost 25 per cent. Not only has this put a kink in one of Lebanon’s major trade routes, but any financial gains will have to stretch 25 per cent further. S&P predicts that real GDP

THE IMF ESTIMATES THAT PUBLIC DEBT IS ABOVE 150 PER CENT OF GDP, WHICH COULD RISE TO 180 PER CENT IN THE NEXT FIVE YEARS.

The IMF estimates that public debt is above

150% 180%

of GDP, which could rise to

in the next five years.

per capita will remain around -1.2 per cent over 2012-2021, partly because of the heavy burden the influx of refugees has imposed on Lebanon’s already stretched resources. Indeed, the swell in population has put a strain on Lebanon’s creaky public services. The quality of Lebanon's infrastructure is amongst the poorest regionally and globally, according to the World Bank. In fact, out of 137 countries, Lebanon ranks 130 in quality of overall infrastructure. This has been induced by low public spending on infrastructure, a consequence of the county's debt burden as well as the long-term absence of a budget. Lebanon’s exports have also been severely afflicted by the regional turmoil, although a decline in their share of GDP has been in effect since 2008, when they reached a high of 78.1 per cent of GDP, according to the World Bank. By 2017, exports regressed to a low of 36 per cent of GDP. Exports of merchandise goods were especially hard hit by the closure of the last remaining Syrian route in May 2015, through which exporters were able to access the GCC and Iraqi markets. At least the Syria-Jordan Nassib border crossing has recently reopened, which is a main gateway for Lebanese exports into the GCC and Iraqi markets. Lebanon is bound to feel the benefits of this in 2019. The IMF says that early resolution of the conflict in Syria would do wonders for Lebanon’s growth prospects. However, that is not the only challenge the country is facing. While Hariri drags his heels, the US and Saudi Arabia are moving to counter Iran. In the eye of the storm, it is a wonder that Lebanon managed to have an election at all. Perhaps as Lebanon commemorates 75 years of independence among r i s i n g d e b t , p o l i t i c a l d e a d l o ck and an increasingly disillusioned public, it’s best to celebrate the small victories.

ISLAMIC FINANCE

SEIZE THE DAY Eng. Hani Salem Sonbol, Chief Executive Officer, ITFC, underlines the striking trade opportunities between the Arab world and Africa

Eng. Hani Salem Sonbol

he rationale for building powerful trade and economic ties between the Arab and African regions is relatively straightfor ward but extremely compelling. A cursory glance at the agricultural sector illustrates the point. Agriculture in Africa is the region’s l a r g e s t e m p l oye r by s e c t o r a n d contributes around 15 per cent (OECD) to the region’s entire GDP. Most Arab member countries of the Organisation of Islamic Cooperation (OIC)—including geographically close members like GCC Countries—are unable to produce very much of their own agricultural needs. Yet trade between the two regions barely impact global agricultural trade. An International Trade Center (ITC) study commissioned by the International Islamic Trade Finance Corporation (ITFC) stated that in 2016, Sub-Saharan Africa (SSA), North Africa and the Middle East together accounted for 15.1 per cent of world agricultural trade. However interregional trade between Arab and African countries accounted for only 0.3 per cent of total volume of global agricultural trade. It also shows the huge difference in export capabilities between the two regions, with Arab OIC markets exporting $1.06 trillion to the world in compared to Sub Saharan Africa’s $0.16 trillion, of which 70 per cent is oil and oil products.

The reality is that the level of trade between the two OIC regions does not reflect the existing potential between both markets and more broadly, the SSA region is falling behind the Arab world in the value of its exports. Considering the regionsâ&#x20AC;&#x2122; burgeoning youth populations and its impending needs in terms of job creation, food security and economic diversification, OIC member nations have a collective role to play in enhancing inter Arab-Africa trade now more than ever. LOW HANGING FRUITS The most apparent areas of collaboration can be found in sectors that have high potential for commercial and investment partnerships between the two regions. The ITFC-ITC study shows that Arab OIC countries have potential to export polymers, cement, iron/steel structures and prefabricated buildings, which the SSA region needs to support the high levels of infrastructure development taking place. The agro-processing industry such as sugar cane, wheat flour, milk and cream, canned sardines and non-alcoholic beverages also have high export potential to SSA markets but is not being fully tapped into at present. On the other hand, SSA countries have high and proven potential to export livestock, coffee and sesame seeds to the Arab OIC region. There is also some scope for growing exports of agroprocessing goods, like cocoa-based and fisheries products, which are currently mostly exported within the SSA region itself. What is evident is that agro-food industries, health and pharmaceutical, building materials, construction supplies, machinery and electrical equipment have high potential for greater Arab-Africa trade. Yet the inter-regional trade volumes between Arab and African OIC nations comprise of a mere fraction of trade with European, and more recently, Asian markets. In response to this, in 2017, ITFC launched a trade promotion programme called the Arab Africa Trade Bridges Program (AATB).

THE ITFC-ITC STUDY SHOWS THAT ARAB OIC COUNTRIES HAVE POTENTIAL TO EXPORT POLYMERS, CEMENT, IRON/ STEEL STRUCTURES AND PREFABRICATED BUILDINGS, WHICH THE SSA REGION NEEDS TO SUPPORT THE HIGH LEVELS OF INFRASTRUCTURE DEVELOPMENT TAKING PLACE. Eng. Hani Salem Sonbol

The programme is aimed at addressing some of the many challenges that prevent business communities in Arab and SSA OIC nations from fully taking advantage of the existing trade potential between the two regions. The programme aspires to facilitate new partnerships for trade, investment and technology transfer between the two regions. Amongst the ways in which the programme will achieve this is by improving the overall business and investment climate and strengthening public-private cooperation at a regional level and supporting inter-regional value chains in strategic economic sectors. Since its launch, the AATB has been implementing programmes that increase commercial and business exchanges between SMEs from both regions. It has also rolled out initiatives that provide opportunities for trade finance and credit insurance to exporters from both regions.

By facilitating cooperation among trade and investment support institutions and by engaging the private sector directly, the AATB programme aims to enable information sharing on a range of business-critical issues, such as markets and trade regulations. Partnerships with the private sector and public sector institutions provide technical assistance to build human and institutional capacity in trade and investment. More importantly, the programme is opening new doors to Islamic trade finance. BOOSTING INTRA ARAB-AFRICA TRADE Given that its mandate to promote intratrade among OIC member countries and that with the world, ITFC, through the AATB programme, has established partnerships with financial institutions within the Arab and SSA region to offer incentivized financing lines that support trade flows between the regions. Amongst them include the Arab Africa Trade Finance Program (AATFP) offers a wholesale approach to trade finance through the provision of risk mitigation facilities and liquidity support. It consists of short-term lines of credit and risk sharing facilities offered to financial institutions operating in SSA and Arab countries in order to facilitate their own trade finance operations. In 2017, ITFC est ablished new partnerships with Banque Centrale Populaire du Maroc (BCP), in order to support their West African subsidiary, Banque Atlantique, for an amount of EUR 40 million. It also set up a two-step Murabahah for an amount of $150 million with AFREXIMBANK, dedicated to financing commodities exports from 13 Sub Saharan Africa countries and imports of three Arab countries. Ultimately, the provision of practical solutions like finance, trade promotion, market intelligence, capacity building, and networking is opening new doors and leading the way for enterprises that want to take advantage of two neighbouring regions with huge export potential.

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ISLAMIC FINANCE

ACCESS TO ISLAMIC INVESTMENT FOR EVERYONE Wahed Invest, which is poised for an official launch in the UAE and Saudi Arabia, talks about their plan to make Shari’ah-compliant retail investment accessible across the world

o you believe that Islamic financial institutions have underserviced retail investors? They don’t bother with retail. It’s all high net worth and institutional. With people under a million dollars, it’s hard to go anywhere and get wealth management. For that, when we first started off, we looked at the product universe where people could invest. We wanted people to have a diversified portfolio. For retail clients with no access to Sukuk, no access to globally diversified ETFs, there was nothing out there. What we’ve had to do is select funds and ETFs from a very small pool and over time, to make it efficient, we have to start pushing out our own index funds. We are a passive investor—we don’t stock pick, and don’t want to be active investors. We have done this exclusively for our US clients with the S&P Shari’ah Index, with

a minimum invest of $100, which gives exposure that outperforms any of the mutual funds when you take their fees into account. We’re quite proud of that in terms of product innovation, because we see in the market that Islamic finance institutions try to compete with each other, but we’re trying to compete with conventional institutions. It’s a whole different world. There’s a huge inefficiency gap. The reason for that is that we see a big part of our market use conventional finance. Even practicing Muslims don’t care if it’s Islamic or not Islamic, because they don’t see the actual difference—it doesn’t make sense to them. As long as we can compete with conventional finance, and offer an ethical and Islamic product, we feel the market is ten times as big as people actually think it is. That’s what we’re trying to do.

Not every Islamic investment market is immature. Malaysia, for example. Malaysia is more mature in terms of everything. They have their own ETFs—they have everything—but it’s also localised. Right now we’re taking over the dollar-denominated clients, so anyone who wants to invest with us, all of our portfolios are dollar driven. Malaysia has its own local markets, similar to Indonesia or India. The GCC is still happy with the dollar, Africa is happy with the dollar, and America is happy with the dollar. The dollar market is more than big enough, but when we go east, we’re going to have to start thinking at the other currencies. When we do that, the good news is there are enough products out there in Malaysia.

Trust was the most important aspect to their clients at launch, said Wahedna. (PHOTO CREDIT: IMRANKADIR/SHUTTERSTOCK)

How did Wahed Invest begin for you? I grew up in Dubai, but I went to the US for my Masters at Columbia University studying industrial engineering and operations research with a specialisation in stochastic math, which is all financial optimisation. I worked in Wall Street Investment Banking for a bit, and set Wahed up three years ago state-side. It took around a year to get all the licensing and compliance infrastructure set up, but we are SEC regulated, which is a big deal. We launched there a little over a year ago, and it did a lot better than we thought it did. In the first three months, we crossed 1000 wealth management clients. That’s a huge number just from word of mouth. That’s three times the growth rate of the leading conventional roboadvisors in their first year. We realised that retail Muslims have no way to invest. These guys keep their money in cash or real estate—otherwise there’s absolutely nothing. So, we come out there saying, you don’t need to be a multimillionaire, if you have $100, you can try it out. We had many trying it out with $100, seeing that it works, and then investing more money.

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ISLAMIC FINANCE

There’s no substitute products— there’s no one else doing retail Islamic finance. For us, it’s all online. In America we have people from all 50 states. For the UK, the Government is very supportive. They’ve assisted us and are always there for support, so we feel very comfortable. One concern we have now is Brexit, as we set up in the UK to cater to all of Europe. We’re hoping some sort of deal will be struck, and most likely it will, as with finance you can’t just stop, but that is in the back of our mind.

Junaid Wahedna, CEO, Wahed Invest

The vast majority started enabling recurring deposits, which is not a normal thing for mutual funds. For us, you have clients who have $1000 a month deposited, which is very good for us in terms of AUM predictability. What issues did you face in making an Islamic investment proposition valuable? We ran into the obvious infrastructure issue of, how do we trade Islamic finance securities? How do we get exposure to all of the markets and make an actually diversified portfolio? The biggest issue we had was, how do we trade Sukuk? Sukuk is usually traded over the counter in $100,000 blocks, illiquid. Eventually we figured that out and manually negotiated with the funds to be able to access at fractions with no entry, no exit, and cut the price. The next problem was fractional trading. If you want exposure to everything you’ll need a minimum balance of $10,000, so we had to build infrastructure in house to be able to fractionalise ourselves. As soon as we learned how to fractionalise securities, as there’s only a handful of people in the

MALAYSIA IS MORE MATURE IN TERMS OF EVERYTHING. THEY HAVE THEIR OWN ETFS—THEY HAVE EVERYTHING—BUT IT’S ALSO LOCALISED. RIGHT NOW WE’RE TAKING OVER THE DOLLARDENOMINATED CLIENTS, SO ANYONE WHO WANTS TO INVEST WITH US, ALL OF OUR PORTFOLIOS ARE DOLLAR DRIVEN. Junaid Wahedna

world that can do this, it really changed the game, because then we could say that our minimum is $100. We took on institutional investors to go east. The UK was the next obvious market—it’s a mature regulator with passporting rights throughout Europe and ten times the number of Muslims compared to the US. It was significantly easier than the US, and we’re seeing that market is unbelievable big. We’re also seeing that it’s a much higher funding rate in the US.

What markets are your next priority? Because of our mandate to cover the world, we have an office in Dubai to figure out how to cater to the GCC region, and we have an office in India to cater to 200 million Muslims who are ignored by Islamic finance. We have an office in Malaysia and we are registering now, which should be done by the end of the year. We’re also registering in Australia and are thinking about Turkey as well. Our next main priority is the UAE and Saudi Arabia. We have a large number of preregistered clients all over the world. By pushing out in the UAE, we get to learn a lot about a very diverse client base in terms of behavioural economics of how people think, what they think about the product, and more. So far, the response has been great. We’re trying to figure out what the best legal way to do it is to make sure that everyone is happy. In case anyone is not familiar, what is roboadvisory? Roboadvisory is automated wealth management, often for people who are ignored by the wealth management divisions of banks, or people who do not have the time for physical contact with a financial advisor, who want full transparency and access 24/7. The best thing about passive investment is that it outperforms active managers, statistically speaking. In simple terms, it’s wealth management for everyone in the world.

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What are the challenges of making it Islamic in particular? It’s very different to Islamic finance because Islamic finance is a very broad term. Most of that refers to the lending institutions. When you think of Islamic finance, you think of Islamic banks. We don’t do anything with lending. As an investment platform, we have people who already have money investing in certain companies. We have to ensure that these companies and securities that we are investing in are Shari’ahcompliant. For that, we have a three person Shari’ah board run according to AAOIFI standards who make sure there is nothing impermissible. No excessive debt, no firearms or other non-Halal industries. In addition, at the end of the year, we publish a purification report that shows every single security you’ve had exposure to, and how much of the income was derived from impermissible means, because, whether you like it or not, people don’t like to admit it, but every company has issues with staying Shari’ah-compliant. Even for AAOIFI standard, there’s a threshold. We allow them to know how much has approached that threshold, and then let the clients decide what to do with that amount of the funds. I think people have really appreciated our complete transparency, because it lets them know how vigilantly we look at our investments. It’s not just investments—the company itself is run in a Shari’ahcompliant manner. So, every contract goes through the Shari’ah board, all the marketing material, everything. It’s a fully Shari’ah-compliant institution. What is important to your clients—is it about returns, or Shari’ah-compliance? Considering that we launched in the US, at first, it was all about trust, as the community has been burned in the past. Everyone, without exceptions, would deposit the minimum $100, withdraw it to

THE CLIENTS THEN OFTEN, ONCE THEY UNDERSTAND WE ARE NOT AN ISLAMIC BANK, DECIDE THEY CAN TRUST US. IT’S VERY UNFORTUNATE THAT IT IS LIKE THAT, BUT THAT IS WHERE WE ARE. WE SEE THAT A LOT OF PEOPLE DON’T TRUST ISLAMIC FINANCE INSTITUTIONS. Junaid Wahedna, CEO, Wahed Invest

see it hit their bank account, and then they decided to trust it. Then, all the questions became, what is Islamic investing, how are you different to conventional players, and what makes you special. We run surveys, and we found that the vast majority of people don’t trust Islamic finance institutions. A big part of our education is saying that Islamic finance is broad, and that we do not lend. The clients then often, once they understand we are not an Islamic bank, decide they can trust us. It’s very unfortunate that it is like that, but that is where we are. We see that a lot of people don’t trust Islamic finance institutions. From there, it’s about teaching the benefits of a diversified portfolio, what it means to be Shari’ah compliant in investing, and the roboadvisory element. We launched this project for the common man, but the majority of our clients are very educated and young. These are young people st arting off their journey who don’t want to go to a wealth manager. They are tomorrow’s millionaires, which is a very valuable segment. In the UK, it’s a whole different world. Trust is also a huge deal, as the UK Muslim community has been burned

by scams in the past. We have to push the fact that we are regulated, stable, and have credibility. Then we find that the market is very Islamic-oriented. Our marketing thus is tailor-made to a more religious audience, explaining the Islamic elements in detail. A lot of our clients are first time investors, who just keep their money in cash. But what they don’t realise is that their money is being used for loans. Once we explain that, they are more incentivised to move their money into investment, where it benefits the Islamic economy. Islamic banks don’t have products to push to retail investors. They don’t know how to fractionalise. They don’t have exposure to all that we do. We have built an international ecosystem so that we can give access and exposure to retail investors. There are more than enough people focusing only on HNWIs and Institutional clients. We want to give people a safe, efficient way to give people a place to keep their money, so efficient that it rivals Deutsche Bank and JP Morgan. Our product value is very strong. How many high net worth clients do you have now? The vast majority of our clients in the US are high net worth clients, but we do not limit ourselves to high net worth clients. The high net worth clients pick us for their liquid exposure because they don’t want to go to the manager who charges them exorbitant fees when there’s a passive, simple, transparent solution for them. Although it’s open to anyone, the vast majority of our clientele are high income. How many preregistrations do you have in the Middle East? We have around 50,000 of them last time I checked, which is a crazy number. We should be able to sign up 100 clients a day in these countries, which is also a crazy number for wealth managers or even banks.

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MERGERS & ACQUISITIONS

AMID BANKS’ CONSOLIDATION, RETAINING DOMINANCE OF FINANCIAL INTERMEDIATION IS KEY By Miklos Dietz and Hans Martin Stockmeier, Senior Partners, McKinsey & Company, share their views

anks have traditionally acted as financial intermediaries, dominating a system that stores, transfers, lends, invests, and manages risk for roughly $260 trillion in funds globally. Technological innovation and shifts in the regulatory and broader sociopolitical environment are opening this financial intermediation system to new entrants, including other large financial institutions, specialist finance providers, and large technology firms. At stake is the revenue pool associated with intermediation—the vast majority of which is captured by banks—which stood at some $5 trillion in 2017. As the banking industry in the Middle East consolidates, many institutions will be considering how best to navigate

Miklos Dietz

these dual forces of technological and regulatory change. Armed with a robust assessment of their current and future sources of competitive advantage, banks have four strategic choices when it comes to how to play in this new landscape: 1. The innovative, end-to-end ecosystem orchestrator. While few banks can compete with the likes of Tencent and Amazon to become the full owner of multi-trillion-dollar mega-ecosystems, some have real opportunities to become critical shapers of their ecosystems. They would place themselves at the centre of their customers’ journeys and aim to own the relationships with those customers—and the associated data. Such banks would expand their scope to become one-stop shops for all banking-related products and services,

focusing primarily on ‘distribution’ and in some cases also ‘manufacturing’ activities. They would deliberately move beyond the traditional banking value proposition and address broader parts of the customer journey, such as housing and home financing. Their open platforms would allow third parties to plug in via application programming interfaces (APIs) and provide additional value-added services for customers. A bank might choose to orchestrate one of several different kinds of ecosystem—from a large-scale national ecosystem to a local one. Likewise, a bank might choose to aggregate a wide variety of services and players in its ecosystem or could focus on a niche segment ecosystem. 2. The low-cost ‘manufacturer’ (and potentially partner). For some banks, the right approach in the face of disruption might be: If you can’t beat them, join them. These banks would unbundle their capabilities in areas such as market making and liquidity (in capital markets) and access to capital (in mortgages)—and offer those capabilities to new firms seeking to enter and expand in these markets. In other product areas, these banks would continue to compete with new entrants. The core of this approach would be to create a low-cost ‘manufacturing’ engine separated from distribution. Banking institutions become low-cost, highly efficient white-label manufacturing engines by consolidating volumes, mastering operational efficiency, and fully digitising and automating processes. Banks’ partners would include fintechs that have strong customer affiliation and operations in distribution. Banks choosing to become ‘manufacturers’ could also offer platforms to other banks. Banks with strong balance sheets, deep access to low-cost funds, and strong financing abilities will have the advantage here.

3. The bank focused on specific business segments. A third strategic direction would see banks defend against competition from new entrants by refocusing their priorities. Such banks would become high-touch, relationshipdriven specialists competing in narrow business segments. They would focus on niches where highly variable and specific customer needs require bespoke approaches and highly

A BANK MIGHT CONCENTRATE ON A NARROWER SET OF PRODUCTS, SUCH AS CORPORATE LOANS. IT COULD FOCUS ON A LIMITED SET OF CLIENTS, SUCH AS PROVIDING RETAIL BANKING FOR ULTRA-HIGH-NET-WORTH INDIVIDUALS.

Hans Martin Stockmeier

experienced talent, with the key value proposition centred on relationships, trust, reputation, and experience. This approach might play out in several ways. A bank might concentrate on a narrower set of products, such as corporate loans. It could focus on a limited set of clients, such as providing retail banking for ultra-highnet-worth individuals. Or it could hone a specialised set of capabilities, such as a wholesale bank focusing on client-facing activities such as investor relations and pre-trade. 4. The traditional bank, but fully optimised and digitised. An alternative approach is to remain a traditional bank but become fully digitised. Banks adopting this direction could aspire to become seamlessly digital local banks, or global-scale corporate or wholesale banks. They would continue to offer their traditional set of products, such as payments or retail banking, but would optimise cost by fully digitising and automating processes. Moreover, they would make full use of technology to boost revenues where possible. The banks that succeed with this approach will have robust core strengths, including capabilities in areas such as customer acquisition, underwriting, financing, and servicing. But they will need to build on those strengths and fundamentally optimise their operating models, including through end-to-end digitisation. The heightened M&A activity in the Middle East is already making the banking industr y stronger. Future prospects depend at least in part on banks maintaining their dominance of the financial intermediation system. There is no single strategy for success; what is certain though is that rewards will be disproportionate for those firms that are clear about their true competitive advantage and then make— and follow through on—definitive strategic choices.

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MERGERS & ACQUISITIONS

FIVE KEY SUCCESS FACTORS FOR A BESTIN-CLASS INTEGRATION By V. Ramkumar, Senior Partner, Cedar Management Consulting International

he challenges and nuances of integrating banks extends far beyond the more obvious branding and simplistic definition of people, processes and technologies integration. Having assisted more than five integrations involving 10 banks that include regional, international, conventional, Islamic banks across both large and midsize books, the resultant learnings have not only been strong, but consistently validated as the quintessential best practices for any successful integration. The Balanced Scorecard framework, extensively used in several leading global integrations including that of Chase and Chemical bank provides a holistic approach to determining the synergies of integration, and in addressing key questions that define the value proposition in a structured manner: • Financial: what synergies are attained through the integration? How are the key financial metrics defined for the end-state entity? • Customer: what is the customer portfolio and target segment of the integrated entity? How to ensure effective onboarding and minimum attrition?

• Products: how would end-state product architecture address the integrated portfolio? What products need to be retained, and which ones dropped? • Credit: what is the risk & credit policy framework of the new integrated entity? How would the overall risk exposure of integrated entity be? • Process: how would the processes and operations across banks be integrated? What is the process framework—branch, channel fulfilment and centralised operations? • Channels: what would be the branch and digital channel touchpoints be post integration? How will customers be on-boarded to the delivery channels? • Organisation: what will be the structure, grades, and titles for the new organisation? What are the changes to the compensation structure? • Technology: which systems are to be migrated and how? How will the transition phase be managed, when systems and operations need to co-exist? Even while these questions are being addressed as part of the end-state design, the typical pre-acquisition due diligence would need to validate the

strategic fitment of integrated customer and product portfolio, quality of the book and overall synergies driven through the integration. However, once the initial intent to integrate is approved, and the target ‘Legal day 1’(LD1) of the new integrated entity is declared, the series of initiatives that need to run have a set of critical factors that need to be imbibed. Here we look at the five most critical success factors: SUCCESS FACTOR ONE: STRONG GOVERNANCE WITH MEASURABLE AND RAPID EXECUTION Fast-track execution is key to any successful integration. Extended timelines not only frustrate the stakeholders but also tend to dilute the confidence of the customer, and that is risky. Typically, the integration workstreams run in parallel, in an agile approach, with defined milestones. A strong governance structure with at least two levels—a steering committee for strategic oversight that meets on a monthly basis and working committee that meets on a weekly basis for operational governance is fundamental.

Both the forums need to include key stakeholders from all entities, and across respective work-streams would be critical. An important part of this approach is to identify key merger areas, interdependencies, define timeline targets, and monitor the execution. SUCCESS FACTOR TWO: CUSTOMER ENGAGEMENT, DRIVING PRO-ACTIVE COMMUNICATION Inevitably, any integration would result in a strong overlap of a section of the customer base and therefore defining the end-state customer segments and a consolidated perspective of exposure would be important. Active communication on all frequently asked questions, at each stage of the integration—both with the active customer base and also the overall community at large, are extremely important to minimise attrition and enhance loyalty. Seeking of explicit or implicit approvals, aligned with relevant regulatory framework, for consent of customers to be on-boarded is important. Pro-active engagement and positive communication on what are the benefits for the customer, what is the experience expected to be delivered during and post integration and more importantly, ensuring of consistency in the messaging across all touchpoints— branches, contact centre, website and all other channels including physical mailers, statement inserts, emails and social media are hallmarks of a good integration exercise.

V. Ramkumar

SUCCESS FACTOR THREE: DRIVING PRODUCT SYNERGIES, KEY TO CROSS-SELL Considering that the banks that merge typically operate in the same market addressing a similar segment of customers, it is but natural that there is a strong 30-40 per cent overlap of their respective product offering, both in terms of their features and positioning. A critical factor in driving product synergies would be to determine the end-to-end product bouquet with a welldefined approach to addressing adjacencies and complimentary value proposition. The quality in envisioning of end-state product adjacencies defines the effectiveness of cross-sell capabilities, an immediate 40-50 per cent revenue impact that is available to be tapped as a synergistic benefit of any integration. This also allows for a strong competitive positioning in the market place, a critical value proposition that is fundamental to any integration. SUCCESS FACTOR FOUR: MANAGING PEOPLE INTEGRATION, CULTURAL ALIGNMENT AND CHANGE MANAGEMENT A primary factor to executing organisational integration lies in the efficacy of the merged entity structure, defined across three levels—strategic, operational and tactical, with the alignment of respective grading and titling. While there would always be a 40-50 per cent straight fit, there would invariably be an overlap of roles and functions that need to be redefined or realigned. Any integration brings at least 30-40 per cent synergies through consolidation of back-end operations and support functions, that can only be achieved through a focused and concerted exercise. Engaging with other stakeholders, including shared services units and thirdparty vendors are also important. Active employee engagement, both by way of written communication and FAQs, and an interactive mode of engagement through town-halls and training efforts helps in effective change management.

The quality of consistent customer experience, post any integration, is directly proportional to the effectiveness of training and the investment in institutional change management. SUCCESS FACTOR FIVE: INTEGRATING TECHNOLOGY PLATFORMS, WITH MINIMAL DISRUPTION Arguably, the most effort and timeconsuming aspect of any integration, is the effective consolidation of technology platform across the merged entities. Any banking merger typically involves a twostage process—pre and post LD1, where the interim and end state of the integrated entities operate in. It is but obvious that not all the legacy platforms of the merging banks will show-up in the end-state, and therefore the process framework that existed around these systems will also need to undergo a change. The end-state IT architecture, typically defined across eight layers of a bank’s IT enterprise, gets defined based on the basis of which systems lend themselves to be a better fit for the new integrated entity. A careful calibration of retaining or replacing the platform is a strong pre-requisite for giving shape to the end state application architecture and the supplier eco-system that the integrated bank would be dealing with, for the medium to long-term. Alternative approaches of big-bang and phased migration of systems would need to be decided upon, not only on the basis of the complexities of system integration, but also driven by the timeline commitments that govern the framework of the overall integration. The benefits of synergies and the value proposition that any successful integration brings, ultimately lies both in the strength and agility of the new entity. Unless the efforts in driving such integrations are focused around the key factors that matter, the true value to be driven from the merger could easily be diluted. The focus and impetus, therefore, need to be holistic. The strength of the chain, eventually, is only as good as its weakest link!

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IN DEPTH

IMPROVING THE CUSTOMER JOURNEY Subroto Som, Executive Vice President – Group Head of Retail Banking Group, Mashreq Bank, speaks to Banker Middle East

ow have you sought to improve the customer journey? Mashreq has been at the forefront of innovation for over 50 years, more recently introducing digital products and services that provide seamless, convenient, secure and cost effective banking solutions. Mashreq Neo is a great example of how we use innovation to empower our customers. It is the first digital bank in the GCC where customers can apply for credit cards, open foreign currency accounts, make investment transactions, and buy virtual commodities including gold, all from their mobile phones. No other digital bank in the country can currently offer these capabilities. During the last 12 months, Mashreq has invested heavily in digital payment technology, further simplifying the banking experience for our customers. Are there any specific innovations implemented recently that you could highlight? Over the last two years Mashreq Bank has made significant investments in the use of artificial intelligence, robotics

and other cutting edge technologies. By combining new technology, new expertise and innovative ways of banking, Mashreq represents the future of banking in the UAE. Mashreq continues to lead the way in encouraging the adoption of digital payments. We were the first bank to introduce Alipay in the region, and were among the first to embrace both Apple Pay and Samsung Pay when they launched in the UAE. In 2018, we also launched our own digital wallet, Mashreq Pay, allowing customers to ‘tap and pay’ at retail outlets making their payment experience quick, easy and more secure. We are also a part of the Emirates Digital Wallet initiative, working closely with the UBF to provide accessible cashless solutions for the unbanked and underbanked. We have plans to introduce new digital payments services that offer customers even more choice in the way they want to pay. As the oldest bank in the country, we are fully aligned to the UAE government’s vision to make all government utility services cashless by 2021.

How are you looking to acquire more customers? Our strategic focus remains squarely on empowering our customers, providing the highest quality of services through stateof-the-art technology. Today, customers are willing to switch loyalties to enjoy a superior experience. Size is not the only factor to determine the winner – speed, agility and superior customer service will get you across the finish line ahead of your peers. Our ongoing transformation program is key to maintaining our leadership position as the UAE’s most innovative digital bank.

MASHREQ CONTINUES TO LEAD THE WAY IN ENCOURAGING THE ADOPTION OF DIGITAL PAYMENTS. WE WERE THE FIRST BANK TO INTRODUCE ALIPAY IN THE REGION, AND WERE AMONG THE FIRST TO EMBRACE BOTH APPLE PAY AND SAMSUNG PAY WHEN THEY LAUNCHED IN THE UAE. Subroto Som

What role will new digital technologies play in the future of Mashreqâ&#x20AC;&#x2122;s retail banking experience? Mashreq continues to lead the way in encouraging the adoption of digital banking in the UAE and beyond. This year, we launched a program to transform our branch network, which focuses on advisory services that encourage greater human interaction between employees and customers for major financial decisions. For everyday transactions, our state-ofthe-art technology enables customers to benefit from a wide range of self-service facilities, and we have plans to expand our range of services across our network to make banking even quicker, easier and more accessible. Today, 92 per cent of Mashreq financial transactions are undertaken via automated digital channels and 65% of inquiries are made online or via mobile. We continue to invest in our digital capabilities and anticipate our financial transaction reaching close to 97% by the end of this year.

Subroto Som

Where does Mashreq fit within the broader UAE retail banking sector? The retail banking industry faces challenges as technology enables newage innovators to identify customer value ideas and propositions that will disrupt the whole industry. Within the financial sector, we keep a close eye on our competition and other banks. Our belief is that over time, banks will not be competing with not just other banks but there will be new competitors. Banks that hope to survive must urgently pursue digital simplicity. That is why at Mashreq, our focus is to invest in digital and data capabilities that radically simplify the business while dramatically improving the customer experience, specifically through greater efficiency, quality, and speed. We recognise the key to creating the best possible experience and the most engaging customer journey is building a solid foundation on insightful data.

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IN DEPTH

Faisal Al Haimus

SUPPORTING GROWTH Banker Middle East spoke with Faisal Al Haimus, Chairman & President of Trade Bank of Iraq as to the role the bank is playing in Iraq and what the future holds

hat are Trade Bank of Iraq’s key strategic goals? The Trade Bank of Iraq (TBI) is making great strides towards reaching its strategic goals both in business and in assisting the ongoing reconstruction of Iraq as it continues to define its reputation as an effective institution with access to global financial networks. TBI’s robust links with major regional and international partners, a greatly improved security situation within the country and a strong partnership with the Iraq government as it moves ahead with vital infrastructure repair and development projects are key factors in TBI’s optimistic outlook and positive forecast for the years ahead. Established in 2003, TBI has been at the vanguard of major commercial and developmental projects across Iraq. It handles approximately 80 per cent of the trade finance business in the country.

TBI’s mission is to aid in the reconstruction of Iraq by facilitating international trade and it continues to be at the forefront of large-scale infrastructure programmes as well as the expansion and upgrade of Iraq’s financial industry and services. Encouraging and securing foreign investment is one of TBI’s key goals as it promotes the country and its own services as a reliable option for investors. At the end of 2017, TBI had total assets of $19.3 billion and net profit of $362.43 million. What role does TBI play in Iraq's reconstruction efforts? TBI’s status as the go-to bank with positive approval by the world’s business and financial institutions to support Iraq’s reconstruction has seen the bank play a leading role in projects designed to rapidly transform the country on an economic, social and infrastructural level. Boosting the prospects of Iraq’s economic future, creating the foundations for businesses to grow and boost employment and making sure companies and households have access to essential services and amenities are the core of TBI’s work. So far $590 million has been secured by TBI for Phases One and Two of the nationwide ‘Power up Plan’ energy project that intends to connect homes and business across Iraq to a new and improved national electricity grid. Launched by Iraq’s Ministr y of Electricity, the ‘Power up Plan’ is a key part of the country’s rebuilding and modernisation plans. Funding for this ambitious project was made available thanks to TBI’s comprehensive financing agreements made with General Electric (GE) and Standard Chartered Bank (SCB), which each signed a financing memorandum of understanding with TBI. The MoUs included a Letter of Credit (LC) confirmation and discounting facility as part of the multi-million-dollar financing agreement.

TBI also enjoys strategic cooperation agreements with UAE-based Mashreq Bank to further boost the implementation and completion of transformative projects. Mashreq, in partnership with TBI and GE, helped finance the Khor Al Zubair power station project, which will provide power to more than 100,000 homes. TBI’s involvement in the redevelopment of Iraq goes beyond large-scale infrastructure projects. The bank plays an essential role in growing the grassroots business environment that is essential to a successful and flourishing economy.

THE SUCCESS OF THE BANK’S ENDEAVOURS ARE DIRECTLY LINKED TO THE STABILITY AND PROSPERITY OF THE COUNTRY AND HAVE A FAR-REACHING IMPACT ON IRAQI SOCIETY. Faisal Al Haimus

How has TBI sought to support the SME sector? TBI’s recent signing of a 100 million Euro Basic Loan Agreement (BLA) for financing loans with Commerzbank, the Frankfurtbased bank and financial services company, was a major boost to small and medium sized businesses and projects in Iraq. The BLA is part of the long-term strategy of TBI to create new opportunities for employment and accelerate economic growth at all levels of the national economy. What are your expansion plans? Local and regional expansion is seen as a key component in TBI’s growth. The bank operates 25 branches and 122 ATMs & CDMs across Iraq. It has established solid relationships with 400 major banks across 119 cities in 60 countries.

A representative office was opened in in Abu Dhabi in 2017 at Abu Dhabi Global Market on Al Maryah Island, boosted the bank’s international credentials and has helped to initiate positive moves in the region. The bank has also received approvals from the authorities to open a full branch in Saudi Arabia which is scheduled to open during early 2019. The Abu Dhabi representative office played a significant role in enhancing relationships with entities such as GE, SCB and Mashreq. It also aided in the launch of the first fixed income fund in Iraq, a milestone in the development of the country’s financial and economic landscape. What does the future look like for TBI? As TBI moves forward with its strategic plan that will take the bank up to 2021, it continues to play a pivotal and hugely influential role in Iraq’s ongoing recovery and regeneration. The success of the bank’s endeavours are directly linked to the stability and prosperity of the country and have a farreaching impact on Iraqi society. TBI’s track record makes for a positive outlook. TBI was recently awarded the award for Best Trade Finance Bank in Iraq by Banker Middle East. The bank has a proven track record of success in attracting leading institutions and companies from around the region and across the globe to invest in the future development of Iraq. Our reputation as a trusted and effective investment partner has seen TBI take the lead in securing the funding needed to aid in the reconstruction of the country’s key infrastructure as well as providing access to the essential financial support needed to encourage SMEs to grow and flourish. TBI will continue to play a major role in Iraq’s growth and we look forward to aiding the nation’s redevelopment with the support of our network of international institutions and forging new relationship with companies and banks across the world.

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ADVERTORIAL

Jammal Trust Bank received the awards for Best Customer Service in SME, Best Financial Inclusion Programme and Best Savings Product. (L-R) Walid Cheikha, COO, Jammal Trust Bank, Anwar Jammal, CEO, Jammal Trust Bank, Daniel Bateman, Business Development Manager, Banker Middle East.

JTB ON TOP OF ITS GAME Jammal Trust Bank was recently recognised at the Banker Middle East Lebanon Product Awards 2018 68

n recognition of its marketing strategy and adopted approach towards financial inclusion, financial literacy, and SMEs, Jammal Trust Bank s.a.l. (JTB) has received three awards, including: Best Customer Service in SME, Best Financial Inclusion Programme and Best Savings Product for 2018 from Banker Middle East. BEST CUSTOMER SERVICE IN SME JTB differentiates itself from other banks on a number of fronts including SME service, where its aim is to redefine ‘service excellence’ and ‘customer satisfaction.’ JTB has been the Bank of Choice for many individuals, with focus

on Households, Micro, Small and Medium Enterprises (SMEs) for many years. Unlike the big players in the Banking Community, JTB has developed its organisational capabilities in customer service excellence not by relying solely on technology, but rather focusing on people, knowledge and insight. The bank has developed a more balanced approach to conceiving and implementing its customer service strategic capabilities, including: • Technology that supports customer service management. • The skills, abilities and attitudes of the people who manage client relations. • The processes JTB uses to access and interact with its customers in the pursuit of new value and mutual satisfaction. • The approaches JTB uses to add value to client (qualitative & quantitative) data so that its credit teams acquire the knowledge and insight needed to deepen the relationships that matter. The scale and scope of these capabilities are affected by factors such as the key customers on which JTB has chosen to concentrate, its leadership and culture, the channels it uses for stakeholder communications, transactions, logistics and its business model, strategy and structure. BEST FINANCIAL INCLUSION PROGRAMME AND BEST SAVINGS PRODUCT In market penetration, the bank has embarked on a strategy to tap into a new market (unbanked individuals) by creating a specialised programme, tailoring a bundle of products and opening new branches to ‘come closer’ to this segment. 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, 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

JTB WAS THE FIRST BANK IN LEBANON TO COLLABORATE WITH A NON-PROFIT ORGANISATION SPECIALISED IN SUPPORTING MICRO-BUSINESSES WITH MORE THAN $96 MILLION IN LOAN GRANTS TO ALMOST 60,000 BORROWERS.

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 first and 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 a non-profit organisation specialised in supporting 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. 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 the United States Agency for International Development (USAID), to teach 8,000 young students more about the banking sector, ensuring their future´s financial acumen. JTB invests in those that need it the most because all individuals have the potential to prosper in their own way.

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TECHNOLOGY

LIMITLESS INNOVATION IN GCC’S FINANCIAL SERVICES INDUSTRY The advent of cloud as the 'new normal' in the industry has leveled the playing field for players of all sizes, writes Vinod Krishnan, Head of Commercial Sector, Middle East and North Africa at Amazon Web Services

he words 'fast', 'affordable', and 'hassle-free' are seldom used in conjunction with financial products. However, broader trends are revolutionizing how companies deliver new experiences and engage with customers across the industry. Today’s business differentiators, such as the use of chatbots to automate interactions with customers, are possible due to the advances in technology provided by cloud. By reducing barriers to innovation such as cost, time-to-market, and security, the cloud is enabling financial services providers to rethink— and transform the way the industry works, and the value that it provides. The accelerants driving the industry’s transformation are the proliferation of mobile devices for the completion of tasks that were previously driven by human-tohuman interactions, changing consumer preferences based on generational

Vinod Krishnan

demographics, and continually evolving regulatory environments. In response, established financial services providers are facing urgent pressure to adapt their business models, organizational structures, and technology infrastructure to innovate with agility while their fintech challengers grapple with common startup issues including scalability and capital constraints. The current shift underway to cloud as the 'new normal' for technology deployments for financial applications is leveling the playing field for financial services organizations of all sizes as they rush to meet the challenges and opportunities that exist in the market today. DRIVE AGILE INNOVATION WITHIN ANY ORGANISATION While large scale and significant size can provide advantages—including access to abundant customer data—they can also contribute to established organizations being less agile than newer market entrants. Established banks, insurers, and asset managers must balance their large scale with the need to react nimbly to market conditions and quickly address customer demands for faster, easier, and better services. Complicated legacy IT infrastructure and processes tend to isolate data in silos, leading organizations to miss opportunities to capitalize on data-led decision-making for trading, risk management, fraud surveillance, and even potential mergers and acquisitions. Leveraging data effectively requires resources that many organizations, both large and small, cannot afford to maintain— namely, the capacity and tools needed to effectively and efficiently collect, store, and process massive amounts of data. Using the cloud, organizations of all sizes can more easily and more effectively make evidence-based decisions regarding customer segmentation, pricing, product development, and cross-selling using analytics, visualization, storage, and other management tools. The cloud also provides the tools companies need

to develop applications and deliver new solutions to market at the speed demanded by today’s consumer.

THE OPPORTUNITIES THAT EXIST IN FINANCIAL MARKETS ARE NO LONGER ONLY AVAILABLE TO LARGE ORGANIZATIONS WITH DEEP BALANCE SHEETS WHO CAN AFFORD CAPITAL-INTENSIVE PROJECTS; RATHER, THE ADVENT OF CLOUD AS THE 'NEW NORMAL' IN THE INDUSTRY HAS LEVELED THE PLAYING FIELD FOR PLAYERS OF ALL SIZES, ENABLING THEM TO COMPETE ON THE MERITS AND VALUE PROPOSITIONS OF THEIR PRODUCTS AND SERVICES. Vinod Krishnan

MEET COMPLEX COMPLIANCE AND REGULATORY REQUIREMENTS WITH EASE The cloud is providing the answer to many regulatory issues for both incumbent financial providers and fintech startups, as all require the most robust security and compliance capabilities to meet regulatory obligations, protect themselves from threat actors, and instill confidence in stakeholders. Operating comprehensive governance, risk, and compliance programs can pose a significant challenge to financial institutions due to the need to manage risk across business lines, global regulatory regimes, and large employee populations. By providing virtually unlimited computing and storage capacity and enabling integration of disparate data sources, the cloud can mitigate many of these issues. Moreover, extensive security certifications and accreditations, data encryption, and strong physical security all contribute to a more secure IT infrastructure, while automation decreases the chances of human error and saves time and capital. CLOUD IS THE NEW NORMAL For both incumbents and fintechs, cloud is the new normal. The industry has evolved in the way it thinks about this technology, and cloud is now ingrained in daily business operations and is ushering in a new wave of innovative solutions from players of all sizes. Today, the opportunities that exist in financial markets are no longer only available to large organizations with deep balance sheets who can afford capitalintensive projects; rather, the advent of cloud as the 'new normal' in the industry has leveled the playing field for players of all sizes, enabling them to compete on the merits and value propositions of their products and services.

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EVENTS

UAE-INDIA TRADE T FORUM: TIT FOR TAT Rishi Kapoor, Co-Chief Executive Officer at Investcorp Bank, discusses the opportunities and benefits of continued bilateral trade between the two countries

he UAE stands out as a very attractive market for investment and to do business. It is in the strategic location of being at the cross roads of Asia, Europe and Africa and is Indiaâ&#x20AC;&#x2122;s largest investing country, accounting for 81 per cent. In 2017 trade relations between the two reach $35 billion, according to HH Sheikh Hasher Maktoum Juma Al Maktoum, Director General, Dubai Information Department, while delivering his keynote address at the fourth edition of the UAE-India Economic Forum. The event focused on the benefits of the increased collaboration between the two countries while moving away from the hydrocarbon sector and emphasising collaboration in the areas of investment, trade, infrastructure, ports, banking, finance, and tourism between the UAE and India.

(PHOTO CREDIT: SHUTTERSTOCK/RUSKPP)

THE UAE REALLY OUGHT TO THINK ABOUT POSITIONING ITSELF AS A GLOBAL CHAMPION. IT SHOULDN’T BE A CASE OF THE UAE SIMPLY INVESTING CAPITAL IN INDIA, IT SHOULD BE VALUE ADDED CAPITAL. Rishi Kapoor

In terms of what this increase in bilateral trade between the two countries means for the financial sector, Rishi Kapoor, Co-Chief Executive Officer, Investcorp Bank says there are significant opportunities on both fronts. “The first thing we have to accept over here, that is almost taken for granted, is that India is both a fast-growing and attractive market but also it is also a capital-starved market. There is insufficient capital being generated through organic sources to finance all of the growth needs of India, and I’m not just talking about things like infrastructure—I’m talking about basic things like providing consumer credit, providing mortgage loans at an affordable rate to the segment of the middle income group so that they can buy homes, and providing loans to students so they can pursue higher education and become more skilled for pursuit of gainful employment in the future, and so on,” said Kapoor.

Once the economy is identified as capital-starved economy, the opportunities on both the banking front and the private equity front start becoming readily apparent. Kapoor said that one of the biggest challenges facing the Indian economy at the moment is that India’s traditional credit providers—namely retail and commercial banks—are largely paralysed by the weight of non-performing assets. Consequently, the biggest opportunity in non-banking in India in is non-banking finance companies which can provide credit to a capital-starved economy both at the corporate and consumer levels in the absence of the traditional banks being able to provide that much-needed credit. Put differently, if an economy is growing at 7.5 per cent per annum it needs credit expansion by 20 per cent per annum that credit expansion cannot be tapped through the traditional bank channels,

so actually the big opportunity sits in the non-bank space at a grassroots level, he said. Kapoor added that small things like providing loans to real estate developers, so they can complete construction, is a huge opportunity on the banking side. There is an equal opportunity for private equity investment. “The two major investment trends that we see having a long-term runway ahead of them, because private equity is by definition a long-term asset class, are led by consumption which, on one hand, is driven between by the adoption of e-commerce by a young population which is very agile with the use of the internet. On the other hand, it is also driven by the adoption of large retail shopping centres which are not necessarily just brick-and-mortar retail but are also destinations for entertainment and leisure. They subscribe to the idea of ‘live, work, play’ that is pursued by the millennials.

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EVENTS

That explosion in consumption of leisure services, apparel, electronics, to basic services like health care and education will provide a lot of investment opportunities from a private equity perspective,” said Kapoor. The other, more obvious opportunities for private equity investment lies in supporting the social infrastructure of India. Kapoor gave the example of the need for providing a better platform for supply, with many reports and analysts referring to the fact that approximately 30 per cent of the food produced in India never reaches the counter—it just rots in the warehouse or in transit. Therefore, transport and logistics infrastructure offer significant opportunities. INVESTMENT AND THE GROWING MIDDLE CLASS With India’s fast-growing economy comes a fast-growing middle class, which means a vast cross-section of the population is underserved on healthcare, education, safety and security, access to basic utilities like clean water, electricity, sanitation, and pollution is a major issue. When considering the quality of life for the growing middle class, Kapoor noted that they’re not going to accept feeling half ill every day of the week. It’s simply not a sustainable proposition. “This is where we start looking at green investment and renewable energy, non-polluting renewable energy, a sharing economy, mass transport, all as part of infrastructure, but coming at it from different angles. It is still the same ecosystem and the same underlying thesis that you need to have a reliable, functional, and sustainable infrastructure platform to be able to support a large and growing economy like India’s. You cannot have one without the other,” he said. That reliable, efficient, and sustainable infrastructure spans everything from transport to healthcare to renewable energy, to provision of basic services and amenities including safety and security

THE CONTINUED BILATERAL TRADE BETWEEN INDIA AND THE UAE OFFERS THE TWO COUNTRIES THE OPPORTUNITY NOT JUST TO COLLABORATE ON A PIECE OF PAPER BUT TO MAKE A TANGIBLE DIFFERENCE THAT CAN BE FELT ON BOTH SIDES. Rishi Kapoor, Co-Chief Executive Officer, Investcorp Bank

of women, children and the elderly, none of which can be ignored, which Kapoor said summed up where opportunities for investment in India lie within the banking and private equity sectors. GIVE AND TAKE The growing bilateral trade isn’t only beneficial to India. Kapoor considers the UAE to be well-positioned as a thought leader in terms of sustainable, efficient, world-class infrastructure development along with the concept of an inclusive ‘live, work, play’ environment. He added that the UAE has, owing to its demographics, and the level of per capita income of its population, up until now at least, focussed more on the upper end of the value chain and the population segment. But the mindset of how the UAE has approached the transformation of its local economy, f r o m p r ev i o u s l y b e i n g a h e av i l y hyd r o c a r b o n - d o m i n a t e d d o m e s t i c economy to a much more diversified economy which includes tourism, retail, entertainment, ser vices, including creating a massive logistics hub in Dubai, all of that means that the UAE is probably best as being a true though leader and a global champion.

“If you consider the countries side by side—what does India need most? It needs help to develop that kind of sustainable, efficient infrastructure. What does UAE have? It has at least two decades of experience doing that very successfully; it’s possibly the most successful case study in the world, other than Singapore. But Dubai has had to achieve this world-class infrastructure a lot more quickly and a lot more efficiently, while bearing in mind the needs of the entire cross section of the population in an inclusive sense. It needed to be sustainable and to minimise the use of precious resources. The UAE really ought to think about positioning itself as a global champion. It shouldn’t be a case of the UAE simply investing capital in India, it should be value added capital,” said Kapoor. Kapoor gave the example of the China–Pakistan Economic Corridor (CPEC). Chinese companies built it, using Chinese equipment and Chinese labour, and financed it with Chinese capital, but it’s for the benefit of Pakistan. “The UAE is able to do the same thing. The UAE can approach other countries and say, ‘We have experience in developing smart cities and self-contained inclusive townships and marry all the principles of sustainability and inclusion. We will also finance it and we will help operate it before transitioning it to you.’” He added that the UAE has a golden opportunity, particularly where India is concerned—given the symbiotic link between the two—there are very strong personal relationships between the two at a government level. Those levels of engagement and affinity at the top are hard to duplicate. “The continued bilateral trade between India and the UAE offers the two countries the opportunity not just to collaborate on a piece of paper but to make a tangible difference that can be felt on both sides,” said Kapoor.

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.

dib.ae

Best Lease Finance Program in Saudi Arabia for 2018

AlAhli Bank wins the Banker Middle East Award for the Best Lease Finance Program in 2018

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