#216 - MARCH 2019 by CPI Financial

MARCH 2019 | ISSUE 216 MIDDLE EAST

MARCH 2019 | ISSUE 216

Dr. Abdullah Al Fozan, Chairman, KPMG in Saudi Arabia A CPI Financial Publication

next chapter in oil benchmarks? 16 The

BA bleed guide.indd 1

after LIBOR 40 Life

valuation 42 Aofgame

fintech boon 56 The

Dubai Technology and Media Free Zone Authority

CHAMPIONING SAUDI ARABIA Dr. Abdullah Al Fozan, Chairman, KPMG in Saudi Arabia

CHAMPIONING SAUDI ARABIA

31/03/2019 17:26

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EDITOR’S NOTE

lobal growth momentum has slowed down in the last couple of years and this is expected to continue into 2020. According to IMF estimates, global growth for 2018 was at 3.7 per cent, with the global economy projected to grow at 3.5 per cent in 2019 and 3.6 per cent in 2020. Market participants, economists and industry players alike have indicated an expectation of a rather glum future ahead. Talks of a debt crisis, a recession, an economic downturn, etc. have started to become hot on the lips of financial executives. On a global level, geopolitical issues, trade tensions, protectionism measures in developed countries and uncertainties in Europe—all amidst a low interest rate environment—signal potential contagion risks across the board for emerging markets and developing countries. Additionally, in the last 18 months, rating actions on issuers and sovereigns has seen a noticeable downtrend. IMF expects growth in the MENA, Afghanistan, and Pakistan region, to remain subdued at 2.4 per cent in 2019 before recovering to about three per cent in 2020. Multiple factors weigh on the region’s outlook, including weak oil output growth, which offsets an expected pickup in non-oil activity in Saudi Arabia; tightening financing conditions in Pakistan; US sanctions in Iran; and, across several economies, geopolitical tensions. Notwithstanding these predicaments, there is still a lot to be optimistic about. Within the region, our home markets are on track in implementing their respective

reform measures. Bond and Sukuk markets are seeing an uptick with regular issuances, contributing to building that long-desired yield curve. On the equity front, although slightly bleak outside MENA, sentiments are more positive within the region. Consolidation trends within the banking sector and acquisitions in other market segments bode well to creating scalable institutions in the Middle East. Investment bankers are particularly excited about Egypt and Saudi Arabia, on the back of solid reform agendas. Additionally, apart from markets such as Bahrain, Oman and Lebanon, countries within the region are still wellpositioned with sufficient liquidity and healthy reserves. Our cover interview in this issue will provide you with a neutral perspective on Saudi Arabia, while our country focus dives into a private economy—Kuwait. Additionally, the pages herein also tackle all that I have mentioned above, the lag in global growth, a forecast on oil production trends, how markets would look like without a LIBOR benchmark, an insight into equity valuations, and not to forget, the very fabric that is changing our everyday lives—technology. The first quarter of 2019 has proved itself to be reasonably interesting, and we aim to continue to be your information partner on the banking and finance front in the region. As usual, we wish you a productive read.

Nabilah Annuar EDITOR, BANKER MIDDLE EAST

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CONTENTS

MARCH 2019 | ISSUE 216

CONTENTS 8 Shifting economic trends drive M&A across the Gulf 12 News highlights

THE MARKETS 16 The next chapter in oil benchmarks? 18 Global growth momentum subsiding

COVER INTERVIEW 24 Championing Saudi Arabia

COUNTRY FOCUS: KUWAIT 32 The new black

WEALTH MANAGEMENT 38 Words into action: investing for impact

INVESTMENTS 40 Life after LIBOR

PRIVATE EQUITY 42 A game of valuation

BUSINESS BANKING 44 Can banks do more to support SMEs in the UAE?

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CONTENTS

MARCH 2019 | ISSUE 216

HUMAN CAPITAL 48 Managing the risk of a bad hire

IN DEPTH

GET THE DIGITAL EDITION OF BANKER MIDDLE EAST ONLINE.

P.O. Box 502491, Dubai Media City, UAE Tel: +971 4 391 4681 Fax: +971 4 390 9576

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52 Serving the wealthy

MARCH 2019 | ISSUE 216

56 The fintech boon

CHIEF EXECUTIVE OFFICER STEVE LEE steve.lee@cpifinancial.net Tel: +971 4 391 4681

COMMITTED TO A CAUSE Tareq Muhmood, Acting Chief Executive Officer, Ahli United Bank Kuwait

disruption

MARCH 2019 | ISSUE 216

54 How GCC banks can prepare for digital

CHAIRMAN Saleh Al Akrabi

MIDDLE EAST

TECHNOLOGY

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

security awareness into a waste of A CPI Financial Publication

money

CHAMPIONING SAUDI ARABIA

Dr. Abdullah Al Fozan, Chairman, KPMG Saudi Arabia

62 Digital-human interplay

the answer to overbanked market? 16 anMergers:

IFRS 16 and its 24 consequences

Saudi Arabia: from to modernity 34 here

US Federal Reserve: biggest risk factor for 2019 58 the

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Dubai Technology and Media Free Zone Authority

60 Five mistakes that turn corporate

MIDDLE EAST

FEBRUARY 2019 | ISSUE 215

BUSINESS DEVELOPMENT MANAGERS NEEMA SAJNANI neema.sajnani@cpifinancial.net Tel: +971 4 391 3717

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

A CPI Financial Publication

Tareq Muhmood, Acting Chief Executive Officer, Ahli United Bank Kuwait

the answer to overbanked market? 16 anMergers:

IFRS 16 and its 24 consequences

Saudi Arabia: from to modernity 34 here

US Federal Reserve: biggest risk factor for 2019 58 the

JANUARY 2019 | ISSUE 214 MIDDLE EAST

JANUARY 2010 | ISSUE 214

DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING Philippe Ghanem, CEO and Vice-Chairman, ADSS

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

ASSOCIATE PUBLISHER JAMIE O’LOANE jamie.o’loane@cpifinancial.net Tel: +971 4 433 5321

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

A CPI Financial Publication

Philippe Ghanem, CEO and Vice-Chairman, ADSS

for business: How Kuwait transforming itself to attract FDI 20 isOpen

Present tense, perfect? 30 future

inclusion and the future fintech in the Middle East 40 ofFinancial

the digital CFO 46 Introducing

Dubai Technology and Media Free Zone Authority

EVENTS MANAGER SHAIK MANSOOR shaik.mansoor@cpifinancial.net Tel: +971 4 3651 4538 DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING

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

EDITORIAL editorial@cpifinancial.net Dubai Technology and Media Free Zone Authority

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COMMITTED TO A CAUSE Tareq Muhmood, Acting Chief Executive Officer, Ahli United Bank Kuwait

64 Unbound Bahrain

BUSINESS DEVELOPMENT DIRECTOR DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526

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FEBRUARY 2019 | ISSUE 215

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The National Commercial Bank Realize Tomorrow

www.alahli.com |

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| 9 2000 1000

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ANALYSIS

SHIFTING ECONOMIC TRENDS DRIVE M&A ACROSS THE GULF Growth in banking assets is linked to regional GDP and moves largely in tandem with oil prices

CONOMIC TRENDS GCC sovereigns are still reliant on oil which accounts for three-quarters of the six-nation bloc’s spending, the instability associated with oil prices, lower crude oil output as well as tighter financial conditions pose a challenge for the region’s banking sector. Growth in banking assets is linked to regional GDP, which moves largely in tandem with oil prices. Since 2014, the Arabian Gulf countries have been struggling with low crude prices, a situation that has caused governments to calibrate budgets and dip into state deposits. Moody’s expects GCC sovereigns’ fiscal deficits to widen by 6.9 per cent of GDP in Kuwait, 3.7 per cent in Oman and one per cent in Saudi Arabia this year, compared to the rating agency’s 2018 estimates. Additionally, the rating agency also expects a small fiscal deficit in the

UAE, where it had previously projected budgetary surpluses in 2019. In Bahrain, fiscal deterioration on account of more moderate oil prices is expected to be balanced by financial aid from the Kingdom’s wealthier Gulf allies. PROPERTY SLUMP WOES UAE lenders are also struggling with problem loans owing to the property and retail slump. According to S&P Global, a supply glut has built up even as demand faltered, feeding what the rating agency is calling the market’s long decline that has seen prices and rents drop by as much as a third since peaking in 2014. The property sector contributes around 14 per cent to Dubai’s economic output, S&P said that it expects a negative outlook for the industries that are exposed to the real estate sector ranging from banks to insurance.

Meanwhile, the situation is different in Saudi Arabia where banks are set to benefit from the economic reform programme which incorporates real estate and infrastructure development. Crown Prince Mohammed bin Salman’s Vision 2030, a grand vision to diversify the economy, include the futuristic city the NEOM which is expected to start taking shape in the first quarter of 2019, with the main city opening five years later. The $500 billion-Red Sea coast planned city revolves around artificial intelligence (AI) and is one of Saudi Arabia’s megaprojects that is projected to attract billions of foreign investors. Additionally, state-owned Saudi Real Estate Refinance Company recently issued SAR 750 million ($200 million) Sukuk, the real estate giant seeks to refinance 20 per cent of the Kingdom’s primar y home loans market, which

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Most GCC banks have stable rating outlooks

MOST GCC BANKS HAVE STABLE RATING OUTLOOKS

GCC bank deposit ratings and outlooksas of 11 March 2019

Source: Moody's Investors Service *RatingInvestors and outlook distribution is asset -weighted Source: Moody's Service

GCC banks’ rating outlooks

Sources: Moody's Investors Service, central banks

Islamic Finance Outlook, 13 March 2019

authorities hope to expand to SAR 500 billion by 2020 and SAR 800 billion by 2028. The sovereign wealth fundowned firm plans to accelerate housing construction by injecting liquidity into the real estate market. However, regional lenders are coming up with new business models to protect them from the impact of slowing economic growth in the region. There is a growing wave of lenders exploring mergers to stay competitive as well to be leaner and efficient in tough conditions. According to Moody’s, in 2019, the GCC bloc will face weaker oil output than in 2018, due to the production cuts agreed by OPEC+ in December 2018 and together with lower oil prices, this will put pressure on fiscal deficits, weakening external positions as well as impacting the credit profile of lenders in the region.

MERGERS AND ACQUISITIONS Slower economic conditions, fragmented banking systems and competition are driving mergers and acquisitions across the Gulf region, Moody’said. The UAE and Saudi Arabia based lenders are expected to benefit from their respective government’s increased spending which will see an increase in lending growth in 2019. Moody’s said that lending will range from five per cent in Saudi Arabia and Kuwait and six to seven per cent for remaining Gulf countries due to the increase in construction and realestate activities. Several mergers and acquisitions are underway in both Saudi Arabia and the UAE – the two main overbanked territories in the GCC. Similarly, across the entire region banks are rapidly consolidating with more than a dozen tie-ups projected to be closed this year

alone, a move which is expected to boost the sector’s capacity to finance projects and businesses at the same time supporting economic growth. Compared to Saudi Arabia which has 28 lenders catering for 33 million people, the UAE has around 60 banks serving a population of about nine million and competition has intensified in recent years between banks—as lending opportunities have dropped due to a slowing economy as well as a struggling real estate industry. UAE Moody’s said 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. The merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) in 2017—which resulted in the formation

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ANALYSIS

Regional credit drivers largely show stability REGIONAL CREDIT DRIVERS LARGELY SHOW STABILITY UAE

Saudi Arabia

Qatar

Kuwait

Oman

Bahrain

Overall outlook

Stable

Negative

Operating environment

Stable

Deteriorating

Asset risk

Stable

Deteriorating

Capital

Stable

Profitability & efficiency

Stable

Deteriorating

Funding & liquidity

Stable

Deteriorating

Government support Source: Moody's Investors Service

Source: Moody’s Investors Service

First Abu Dhabi Bank (FAB), the largest bank in the UAE and one of the largest after Qatar National Bank in GCC region, marked the beginning of synergies in the UAE banking industry. Additionally, Abu Dhabi Islamic Bank (ADIB) is reportedly weighing strategic options for its business, including a potential merger. The lender is said to be planning to acquire another banking entity rather than being taken over—although a formal process has not started. Similarly, in Januar y Abu Dhabi Commercial Bank (ADCB) and United National Bank (UNB) agreed to merge and together acquire Al Hilal Bank. The tie-up will create the third largest bank in the UAE, with total assets of AED 420 billion and the third largest Islamic banking franchise in the country. The merged entity will carry the ADCB identity and Al Hilal Bank will retain its existing name, brand as well as operate as a separate Islamic banking entity within the group. The Government of Sharjah came to the rescue of Invest Bank in January by proposing to buy shares for AED 0.70 ($0.19) each, against the last traded price

Similarly, Saudi Arabia’s National of AED 2.40, after the Central Bank of the Commercial Bank (NCB) and Riyad Bank UAE (CBUAE) ordered it to take losses that have reached an advanced stage on the wiped out its capital base. The central bank proposed merger that will create the had asked the lender to book provisions Gulf’s third-largest lender worth AED 2.2 billion ($599 million), which Islamic Finance Outlook, 13 March 2019with $182 billion 7 in assets. would have wiped off its equity of AED NCB hired JPMorgan Chase and Riyad 2.15 billion. Bank said that it is working with Goldman According to Fitch Ratings, smaller and Sachs to advise on the potential tie-up. The mostly family-owned lenders in the UAE, Kingdom’s sovereign wealth fund owns a have lost market share to the top four 44 per cent stake in NCB and about 22 per lenders, which now control around 65 per cent of Riyad Bank, which is likely to make cent of banking sector loans. the consolidation process easier. SAUDI ARABIA KUWAIT In Saudi, the Saudi British Bank (SABB) Kuwait Finance House (KFH) is also pursuing and Alawwal agreed to enter into a binding a potential merger with Bahrain’s Ahli United merger agreement in the second half of Bank (AUB), reviving earlier talks for a deal 2018 having started discussions on a that will create a new Islamic lender worth potential merger in April 2017. $92 billion in combined assets. KFH and AUB Alawwal bank and SABB merger will formalised the deal in January and the tie-up create the Kingdom’s third-largest bank, is going to be the first major cross-border a top-tier retail and corporate bank with merger in the Gulf region in recent years. SAR 271 billion in assets. On completion The lenders have been in merger talks of the merger, SABB will continue to exist since mid-2018, agreed on a preliminary and Alawwal bank will cease to exist as a exchange ratio of one KFH share for every legal entity and its shares will be cancelled 2.326 AUB shares but they have not revealed and new shares in SABB will be issued to the share prices for the exchange ratio. shareholders of Alawwal bank.

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CONSOLIDATION AMONG BANKS CONTINUE Slower economic conditions, fragmented banking systems and competition are driving mergers and acquisitions across Gulf countries COUNTRY

TRANSACTION

SIZE OF TRANSACTION

STATUS

UAE

National Bank of Abu Dhabi PSJC and First Gulf Bank PSJC merge to form First Abu Dhabi Bank (Aa3/stable, a3)

$188 billion

Completed in April 2017

UAE-TURKEY

Emirates NBD PJSC (A3/stable, ba1) agree to buy Turkey's Denizbank AS (B2/negative, $42.8 billion b3) for $3.2 billion

Definitive agreement signed

UAE

Three-way merger talks between Abu Dhabi Commercial Bank (A1/stable, baa3), Union National Bank PJSC (A1/stable, baa3) and Al Hilal Bank PJSC (A2/stable, ba1)

$114 billion

Due Diligence

KUWAIT-BAHRAIN

Kuwait Finance House KSCP (A1/stable, ba1) merger talks with Bahrain's Ahli United Bank BSC (unrated)

$92.6 billion

Due Diligence

SAUDI ARABIA

Saudi British Bank (A1/stable, a3) to take over Alawwal Bank (A3/positive, baa2) in a $5 billion stock deal

$72.5 billion

To be completed in H1

SAUDI ARABIA

National Commercial Bank (A1 stable, baa1) and Riyad Bank (A2 stable, baa1) made public announcements in December 2018 that both banks have approved the commencement of merger discussions.

$179 billion

Due Diligence

QATAR

Barwa Bank (A2/stable, baa3) and International Bank of Qatar (A2/stable, baa3) in talks to merge

$22 billion

To be completed in April 2019

OMAN

Oman Arab Bank SAOC (Ba1/negative, ba2) exploring merger with Alizz Islamic Bank SAOG (ubrated)

$7 billion

Due Diligence

Note: The bank ratings shown in this table are the banks' deposit/issuer ratings and their Baseline Credit Assessments Source: Bloomberg, Moody's Investors Service

OMAN In Oman, Alizz Islamic Bank and Oman Arab Bank (OAB) announced that they were exploring the possibility of a strategic collaboration that may lead to an eventual merger in May 2018. Moody’s said that the possible tie-up between the two Muscatlisted lenders would be credit positive for OAB and it will form an Islamic banking entity with around $7.6 billion in assets. The merger is expected to help the banks capitalise on the fast-growing Islamic banking segment in Oman, despite the rating agencies’ negative outlook on the Sultanate’s banking system. According to Moody’s OAB has a seven per cent market share in terms of total

assets (conventional and Islamic), while Alizz has a larger share of the Islamic assets market at 15 per cent as of the end of 2017 compared with two per cent for OAB. However, another tie-up which was expected in Oman between the National Bank of Oman (NBO) and Bank Dhofar was cancelled after seven months of talks. NBO and Bank Dhofar announced that they have decided to discontinue the merger discussions after the parties could not agree on terms for the possible merger transaction, without offering details on issues that have caused the merger talks to fail. GCC countries are committed to economic diversification programmes

which are expected to create more opportunities for Gulf lenders. The oil and property slump in 2014 was a wakeup call for the GCC region as well as its lenders. Bahrain is maintaining a leading role in fintech industry, promoting opportunities while revising regulations and collaborating with other regulators. Saudi Arabia and the UAE restructured their legal frameworks in a bid to increase foreign direct investments (FDI) and do away with reliance on oil. Saudi Arabia’s new debt law, as well as the UAE’s federal debt law, were lauded by international banks operating in the region such as Deutsche Bank and Standard Chartered, who are expecting more business opportunities this year.

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NEWS HIGHLIGHTS

Moody’s project a stable outlook on Lebanese banks

Moody’s has affirmed a stable outlook for Lebanon’s banking system reflecting the rating agency’s expectation that economic growth will pick up slightly and deposit growth will be sufficient to allow banks to finance the government as well as the economy, despite a recent slowdown in deposit inflows. The next 12-18 months remain challenging for Lebanese lenders and banks dependent on the new government’s ability to fully implement highly anticipated fiscal and economic reforms. In a recent report, Moody’s stated that it expects annual deposit inflows to pick up to around $6.5 billion in 2019, from $5.6 billion in 2018, provided the new government is able to implement reforms to shore up confidence. Capital flight remains a key risk for banks and the sovereign. However, the Lebanese financial system maintains substantial foreign liquidity against this risk, which has been centralised at the central bank. Lebanese banks’ profitability will be under pressure, higher funding costs, subdued new business and higher provisions will challenge profits. Additionally, large banks will seek to mitigate these factors through cost control supported by digitalisation and growth abroad. Lebanon’s fiscal deficit is expected to narrow to 9.5 per cent of GDP in 2019 and nine per cent by 2020, but it will remain large with the government relying on local banks to finance the gap. However, according to Moody’s, the banks’ high and growing exposure to the sovereign remains the main source of financial risk, including Banque du Liban (BdL) certificates of deposit and nonreserve deposits which amounted to 55 per cent of the banks’ total assets.

Fitch downgrades four Omani banks

Fitch Ratings has downgraded National Bank of Oman (NBO), Sohar International Bank (SIB) and Bank Dhofar’s long-term issuer default rating (IDR) to BB from BB+ with a stable outlook. The rating action follows the impact of the sovereign downgrade on the Omani banking sector operating environment. In a statement, Fitch said that some of the factors behind the sovereign downgrade also negatively impacted their assessment of the operating environment, which implies that it will be more challenging for the banks to execute their strategies. Oman’s ability to provide support to banks has also diminished, hence the downward revision of the support rating floor. The Sultanate’s undiversified and narrow economy is correlated with government spending and initiatives, this will reflect on the bank’s intrinsic strength through lack of lending opportunities, corporate balance sheets’ weakening, and consumer vulnerability. Oman is delaying the implementation of reforms and rating agencies are saying that the government is facing challenges to introducing new non-oil revenue measures as well as controlling expenditure, especially in a weak growth environment, given the Sultanate’s social stability objectives and the desire to preserve the current level of living standards for citizens.

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Mubadala explores Asian prospects

Abu Dhabi’s Mubadala Investment Company, which has committed $15 billion to SoftBank Group’s Vision Fund, is exploring investments and new partnerships in Asia. Mubadala’s Deputy Group Chief Executive Officer said that the fund is looking at sectors including hi-tech industries, artificial intelligence as well as health care, real estate and traditional private equity. Mubadala merged with International Petroleum Investment Company in 2017 and absorbed Abu Dhabi Investment Council last year, making it the world’s 14th-largest fund with about $250 billion of assets.

Shuaa Capital explores merger with Abu Dhabi Financial Group

Network International confirms plans for London IPO

UAE-based Network International has confirmed plans to go ahead with an initial public offering (IPO) on the London Stock Exchange (LSE). In a statement, the company stated that it intends to float of at least 25 per cent of the itss issued share capital. Emirates NBD holds 51 per cent while Warburg Pincus and General Atlantic jointly own the remaining 49 per cent stake in Network International. Emirates NBD Bank, as well as Warburg Pincus and General Atlantic, will provide an over-allotment option of up to 15 per cent of the base offering size. The payments provider expects admission to the official list of the Financial Conduct Authority to trade on LSE to take place in April 2019, after admission the company also expects to be eligible for inclusion in the FTSE UK indices. Additionally, Network International said that the price range of the offer, along with the maximum number of shares to be sold in the offer, will be determined in due course and contained in the prospectus expected to be published by the company in the coming weeks.

Dubai’s Shuaa Capital has commenced merger talks with an Abu Dhabi Financial Group (ADFG), joining a stream of mergers in the Gulf’s financial industry. In a bourse filing, Shuaa Capital stated that each firm has formed a working group made up of senior executive management to review the commercial potential along with any legal as well as structural aspects of the transaction. Shuaa has a market value of about $207 million and had assets of $575 million at the end of last year. ADFG, together with its controlled entities manages more than $20 billion in assets. The Dubai-based financial firm said that currently there is no certainty that discussions will result in a transaction.

UBF urges banks to accelerate digital transformation in 2019

The global banking industry has seen tremendous change in the past decade ranging from meeting capital requirements to the rise of ecosystemled business models as well as the emergence of new devices, channels and technologies. The Director General of UAE Banks Federation (UBF) said that UAE lenders should be extremely responsive in the face of increased technological disruption and they must accelerate their digital transformation in order to thrive, according to local newswire, WAM. By connecting lenders and borrowers around the globe, decentralised lending drives down global interest rates, increases global financial market participation and enables economic opportunity to the billions of people who are about to come online.

Abu Dhabi launches tech hub for start-ups Abu Dhabi has partnered with Microsoft and SoftBank Group to launch the AED 520 million Hub71 initiative, a new platform to support high tech start-ups. HH Sheikh Khalid bin Mohamed bin Zayed Al Nahyan, Member of the Abu Dhabi Executive Council also announced a new AED 535 million fund, to invest in technology businesses established in Hub71, which raises the total government investment in the Abu Dhabi tech sector to more than AED 1 billion. US-based Microsoft will be a strategic partner, providing technology

and cloud services to the businesses that join the hub as Abu Dhabi continues its push to reduce reliance on oil revenue. Additionally, Softbank will be active in the hub and support the expansion of companies in which it has invested, while Mubadala, a big investor in tech companies will act as the driver of the hub. Hub71 will offer fully subsidised housing, office space and health insurance for seed-stage tech companies. The new initiative is linked to Ghadan will also involve the launch of an AED 500 million fund to invest in start-ups.

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NEWS HIGHLIGHTS

Saudi banking system outlook remains stable

Moody’s has announced that the Saudi Arabia banking system outlook remains stable, owing to the Government plans to increase spending for 2019 and stability in funding as modest credit growth partially mitigates sluggish deposit growth, which is expected to support the economy, although growth will remain well below historical averages. Ashraf Madani, Moody’s Vice President-Senior Analyst, said, “After rising for several years, Saudi lenders’ non-performing loans will stabilise at two per cent to 2.25 per cent in 2019, although the lingering effects of the recent economic downturn mean construction and commerce loan performance will stay under pressure.” The banks’ profitability is expected to remain solid at 2.2 per cent and their liquidity ample, with liquid assets making up 25 per cent to 30 per cent of banking assets over the next 12 to 18 months. The Kingdom’s planned spending increase will support economic growth, with non-oil GDP growth expected to strengthen to 2.7 per cent in 2019, from an estimated 2.2 per cent last year as the government increases capital spending. The rating agency said that extra spending is expected to be used to support objectives set out in Saudi Arabia’s economic diversification plan, Vision 2030. The recovery in the construction sector, which was severely hit by the 2016/17 economic slowdown, will also drive corporate lending with manufacturing, construction and mining sectors expected to be the largest beneficiaries of the increased government capital spending.

Three Egyptian companies to float IPO by year-end The Chairman of Egyptian Stock Exchange (EGX) said that three private companies are aiming to finalise initial public offerings (IPOs) by the end of the year, reported Reuters. Mohamed Farid, the Chairman EGX, said that two of the three companies have a combined market value of around EGP 14 billion ($807.8 million) and the third is yet to be valued, without naming the companies or giving the expected value of the IPOs. Egypt delayed a series of expected share sales of private and public companies last year amid emerging global market turbulence. All the three expected to complete the listing process by the end of 2019.

Saudi Aramco’s board to approve SABIC bond

Saudi Aramco’s board is set to meet this week in Saudi Arabia where it will approve a bond issuance plan that will likely help finance a potential acquisition of a strategic stake in SABIC. Khalid al-Falih, the Saudi Energy Minister, said that Aramco plans to issue its first international bonds in the second quarter of 2019 and the planned issuance will probably be around $10 billion. The acquisition is expected to involve the purchase of the Public Investment Fund’s 70 per cent stake in SABIC, which implies a deal value of around $70 billion although the price has not been made public yet. The state-owned oil giant’s representatives are expected to meet fixed-income investors in a bond roadshow in April.

Foreigners buys more Saudi shares amidst FTSE upgrade

Foreign investors increased purchases of Saudi equities last week to the highest value on record as they positioned for the Kingdom’s inclusion in major benchmarks. Foreigners were net buyers of about SAR 1.6 billion ($427 million) of stocks in the second week of March, more than any other week since the data were first disclosed in 2015. Saudi Arabia’s full inclusion in FTSE’s emerging-market category will be phased in over five tranches and completed by March 2020, while an upgrade by index compiler MSCI will happen in two stages later this year. The inflows picked up as FTSE Russell begins to include the country in its emerging-market category on Monday, attracting fund managers that follow the indexes passively. Khalid Al Hussan, Tadawul’s Chief Executive, expects to receive $5 billion from passive investors once the Kingdom is fully included in FTSE’s benchmarks by March 2020.”

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Dana Gas repurchases $133 million Sukuk under restructuring agreement Due diligence on KFH-AUB deal to take a few months

The Chairman of Kuwait Financial House (KFH) said that the due diligence process on the lender’s move to buy Bahrain’s Ahli United Bank (AUB) may take two to three months, reported Reuters. The KFH-AUB merger deal was formalised in January and it is going to be the first major crossborder tie-up in the Gulf region in recent years. KFH and AUB, which have been in merger talks since mid-2018, agreed on a preliminary exchange ratio of one KFH share for every 2.326 AUB shares but they have not revealed the share prices for the exchange ratio. The merger will create the largest banking entity in Kuwait with assets of about $94 billion and the sixth largest bank in the Gulf region.

Sharjah-based Dana Gas has bought back $133 million (AED 488 million) of its outstanding Islamic bond, fulfilling the restructure commitment of its Sukuk. In a statement, Dana Gas stated that it has now satisfied the commitment to buyback circa $100 million of Sukuk following the consensual restructuring of the Sukuk in 2018 and has also met the threshold amount of outstanding Sukuk which allows the company to continue to pay the Sukuk profit rate at four per cent per annum rather than increase to six per annum. The buyback of Dana Gas’ Nile Delta Sukuk has reduced the size of the outstanding Islamic bond to $397 million from $530 million and it has enabled the company to achieve an average price of 92.1 cents. Dana Gas will save $21 million by buying back the total of $133 million of its Sukuk in the market below par and by future profit rates savings on those bought back Sukuk.

SOVEREIGN RATINGS AS OF 1 MARCH 2019 Issuer

Foreign Currency Rating

Last CreditWatch/Outlook Update

1 Bahrain

B+/Stable/B

01-Dec-2017

2 Central Bank of Bahrain

B+/Stable/B

02-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-/Negative/B

04-Mar-2019

8 Morocco

BBB-/Negative/A-3

06-Oct-2018

9 Oman

BB/Stable/B

11-Oct-2017

10 Qatar

AA-/Stable/A-1+

08-Dec-2018

11 Saudi Arabia

A-/Stable/A-2

17-Feb-2016

12 Abu Dhabi

AA/Stable/A-1+

02-Jul-2007

13 Ras Al Khaimah

A/Stable/A-1

05-Dec-2018

14 Sharjah

BBB+/Stable/A-2

27-Jan-2017

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THE MARKETS

THE NEXT CHAPTER IN OIL BENCHMARKS? By Dan Colover, Middle East Market Development, S&P Global Platts

hat can be guaranteed looking at well-trodden mountain range paths? All are interconnected. Consider that the range represents the global oil market and that each path is an oil price benchmark. No benchmark works in isolation, each act as a ‘guide’ to offer market participants the necessary transparency to trek the summits of success in trading ecosystems. The robustness of these symbiotic relationships—in the Middle East and beyond—has a major bearing on the black gold market. Three benchmark markets largely define global crude oil trading— Brent, WTI and Dubai—with Brent having the widest and deepest global reach of the three. SHIFTING SANDS Change is constant but the next 12 months will be particularly busy for the global oil community. The implementation of International Maritime Organisation’s (IMO) new sulphur limit of 0.5 per cent for marine fuels, down from 3.5 per cent, from the first day of 2020 will have ramifications for refiners around the world, which in

turn affects the producers of different grades of crude. The economics of sourer and heavier grades—predominantly associated with the Dubai benchmark— and the relationship with lighter grades, which go into the Dated Brent benchmark, are expected to vary considerably in the years ahead due to the IMO sulphur limit. Looking to meet the continuously growing demand for crude in Asia, traders are increasingly arbitraging the grades that go into Dated Brent moving them from North West Europe to Asia. Flows of Middle Eastern crude to Asia are also rising with vessels travelling from the Middle East

US crude oil exports is currently around

2.4 4

million b/d and is forecast to rise to million b/d by 2020

— S&P Global Platts Analytics

to Asia often stopping for bunkers at the UAE’s Port of Fujairah—the world’s second largest bunkering port. IMO 2020 may also change the balances of bunker sales at the world’s leading bunker ports. The staggering growth rate of US crude oil exports which S&P Global Platts Analytics estimates is currently around 2.4 million b/d and forecasts to rise to almost four million b/d by 2020 has dramatically altered global crude flows, with many newer Chinese refiners seeking the light, sweet grades ear-marked for export. It is the rise of crude exports from the US that has also re-established West Texas Intermediate’s (WTI) credentials as a major benchmark. Since the 1980s, Platts Dubai has been the primary pricing reference for crude oil delivered to Asian refineries from supplies coming from the Middle East Gulf. With deep financial markets available for hedging and an unrivalled track record as the sour crude benchmark of choice East of Suez, Dubai’s influence and importance has seen remarkable growth through the years. It is the spread between the different crude benchmarks that drive trader behaviours and their value is reflective

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(PHOTO CREDIT: RACHENSTOCKER/SHUTTERSTOCK)

of the characteristics of the different grades of crude that make up the basket of crude that can be delivered into each benchmark. GLOBAL INFLUENCE Dated Brent is the most widely used and robust benchmark for physical crude oil, which means changes to it have importance worldwide. Ensuring the benchmark evolves to remain robust and well supplied to all market participants for the next decade and beyond is critical to the global oil community. As markets evolve, so too must benchmarks. Relevance and transparency are essential. A key part of S&P Global Platts active stewardship of Dated Brent is to continue to engage extensively with market participants. We recently proposed to reflect competitive offers of the five North Sea BFOE grades that comprise Dated Brent (Brent, Forties, Oseberg, Ekofisk or Troll) on a CIF (Cost Insurance & Freight) basis delivered into the major hub of Rotterdam as well as the current FOB loading basis effective November 2019-loading cargoes.

THE IMPLEMENTATION OF INTERNATIONAL MARITIME ORGANISATION’S (IMO) NEW SULPHUR LIMIT OF 0.5 PER CENT FOR MARINE FUELS, DOWN FROM 3.5 PER CENT, FROM THE FIRST DAY OF 2020 WILL HAVE RAMIFICATIONS FOR REFINERS AROUND THE WORLD, WHICH IN TURN AFFECTS THE PRODUCERS OF DIFFERENT GRADES OF CRUDE.

The potential inclusion of the BFOE crudes on a delivered Rotterdam CIF basis, would ensure that every barrel of the grades currently reflected in Dated Brent is able to play the fullest possible role in establishing the value of North Sea crude. We believe these changes will strengthen Dated Brent as a global

benchmark to ensure it remains relevant for participants to value term contracts and exploit arbitrage opportunities (including in the Middle East). Feedback is requested from market participants by 14 February 2019, ahead of IP Week in London in February. In addition, Platts continues to consult with market participants on the potential inclusion of other grades beyond the current five in Dated Brent. While we observe regular trade flow into the Northwest European region, trade practises are still evolving and becoming more transparent, and we will continue the consultation with stakeholders. Clear communication ensures that the relevance and transparency of a benchmark are widely and fully understood—vital in this multifaceted market. Therein lies the value of consultations that focus on listening— rather than just transmitting—with a varied group of stakeholders that encompasses producers, refiners, trading houses and many others. The more feedback, the better the pathways will be for those traversing the mountain range in search of energy security and economic prosperity.

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THE MARKETS

GLOBAL GROWTH MOMENTUM SUBSIDING By Bryan Stirewalt, Chief Executive Officer, Dubai Financial Services Authority

ccording to recent IMF forecasts, global economic activity is projected to grow 3.7 per cent in 2018. Yet despite a solid outcome in aggregate, further upside to global growth appears limited and it appears that the global economy is near the peak of the current cycle. This is exacerbated by tightening global liquidity as well as increasing geopolitical and trade tensions, which are likely to act as a speed limit on growth over the coming years. This is highlighted by recent data flow, which is indicative of slowing growth across most large advanced economies, while aggregate emerging market growth is currently being held up by India.

As a consequence, the narrative of synchronous global growth has now made way for more divergent outcomes between countries. Among the advanced economies, growth momentum in the United States has continued to hold up. Annualised GDP through June and September remained solid, supported by a sizeable contribution from household spending. This is in part due to recently enacted tax cuts as well as monetary policy remains accommodative, albeit tightening. The outlook for investment growth remains robust though is likely to slow due to softening mining investment. This was evident through the September quarter statistics and further weakness in oil prices is likely to weigh further

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(PHOTO CREDIT: MONALIZA0024/SHUTTERSTOCK)

on mining investment in subsequent quarters. Capacity constraints in the US economy persist, with the labour market continuing to tighten while wage pressures are continuing to build. Core inflation has largely tracked the Federal Open Market Committees’ (FOMCs) two per cent target in recent months and with wage pressures building, the risk to inflation is on the upside. Unsurprisingly then, monetar y policy continues to be tightened while further tightening is likely in 2019, with the FOMC expecting to raise interest rates twice this year. In the other major advanced economies, the pace of growth evident through late 2017

has eased, though growth remains sufficiently strong to facilitate ongoing tightening of the labour market. EUROPE AND JAPAN In Europe, a softer first quarter in 2018—in part related to the weather—has persisted throughout the year. High-frequency indicators such as industrial production, business surveys and retail sales data are indicative of a broad-based slowdown in economic growth across the continent. This is also reflective of weaker growth in trade volumes relative to the start of the year. While aggregate growth has slowed, it is more a reflection of growth rates easing from a recent peak, rather than a reflection of a deeper slowdown.

This is evident in further reductions in unemployment while measures of labour market costs have accelerated. This has yet to flow through to higher core inflation, with the increase in headline inflation largely attributable to rising energy costs. As a result of slower growth, and inflation remaining stubbornly below the European Central Banks’ target, monetary policy continues to be highly accommodative and is likely to remain so. Echoing Europe, high-frequency indicators of the Japanese economy also suggest an easing in growth, with some downside risk to growth evident through the third quarter of 2018. This reflects a series of extreme weather events

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THE MARKETS

Bryan Stirewalt, Chief Executive Officer, Dubai Financial Services Authority

such as flooding, typhoons and a major earthquake, which is likely to impact measures of economic activity in the short-term. Despite this, the underlying strength of the Japanese economy remains robust and this is reflected in improving labour market outcomes, represented by a solid rebound in wages growth over recent months. This should be supportive of household spending going forward. As with Europe, core inflation remains low with headline inflation accelerating on rising energy costs. The absence of any acceleration in inflation means that easy monetary conditions are likely to persist for the foreseeable future. EMERGING MARKETS Following a stellar year, emerging markets appear to have turned a corner in 2018, with measures of economic activity exhibiting signs of a slowdown and prospects softening somewhat.

TAILWINDS TO EMERGING MARKET GROWTH—SUCH AS AMPLE US DOLLAR LIQUIDITY, ACCELERATING GLOBAL GROWTH AND TRADE, AND LOW VOLATILITY IN FINANCIAL MARKETS ARE FADING. — Bryan Stirewalt

Tailwinds to emerging market growth— such as ample US dollar liquidity, accelerating global growth and trade, and low volatility in financial markets are fading. This has taken its toll on emerging markets as a whole, as evidenced by recent sell-offs in emerging market assets. In addition, those economies which had relied too heavily on external debt to fund growth have become especially vulnerable. Yet, despite a softer profile for emerging market growth, an emerging markets crisis appears unlikely. With the exception of a few weak links, emerging market economies appear sufficiently resilient to withstand ongoing tightening o f m o n e t a r y c o n d i t i o n s . Fa c t o r s typically associated with episodes of emerging market crises—such as low foreign exchange reserves, high foreign currency debt and high inflation—are localised to only a few economies with limited spillover potential.

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THE MARKETS

In addition, those economies which had relied too heavily on external debt to fund growth have become especially vulnerable. Yet, despite a softer profile for emerging market growth, an emerging markets crisis appears unlikely. With the exception of a few weak links, emerging market economies appear sufficiently resilient to withstand ongoing tightening of monetary conditions. Factors typically associated with episodes of emerging market crises— such as low foreign exchange reserves, high foreign currency debt and high inflation—are localised to only a few economies with limited spillover potential. As with advanced economies, the slowdown in emerging markets is fairly broad-based, though there are some exceptions. One such exception to softening emerging market growth in 2018 had been India, with solid growth rates evident through both June and September. INDIA AND CHINA More recently, however, the Indian economy has not been immune to the broader slowdown. Measures of economic activity, such as industrial production and business sur veys, indicate a slowdown in activity and high oil prices coupled with a sharp deterioration in currency is likely to weigh on household disposable incomes. Much hinges on the outcome of the recent monsoon season, which had recorded lower-than-average rainfall. This could result in slower GDP growth in the December quarter given the sizeable contribution of agriculture to GDP. Chinese growth has also slowed, as authorities have taken steps to contain the build-up of risks in the Chinese financial system. This is notable in the sharp pull-back in fixed asset investment by state-owned enterprises, which had been a stimulus to growth in recent years. At the same time, activity in the industrial sector has been subdued,

a technical recession due in large part to a large decline in agricultural production.

IN THE FOURTH INDUSTRIAL REVOLUTION—AS POST-CRUNCH ENTERPRISES, INCLUDING THOSE IN THE MIDDLE EAST, HAVE TRIED DOING MORE WITH LESS—THE ROLE OF THE CHIEF FINANCIAL OFFICER HAS MORPHED FROM ACCOUNTING OVERSEER TO BUSINESS-DEVELOPMENT INNOVATOR. — Bryan Stirewalt, Chief Executive Officer, Dubai Financial Services Authority

reflective of weak industrial production elsewhere. In contrast, services activity growth has held up reasonably well, which Chinese authorities attribute to ongoing growth in the information technology sector. In response to slowing aggregate growth and potential threats from an escalating trade war, Chinese authorities have announced a series of policies to ease the pace of slowing. These included a targeted easing offiscal policy, a reduction in reserve requirement ratios for Chinese banks and liquidity injections into the banking system. Further slowing of Chinese growth is expected, though growth should remain relatively high by global standards. In the other large emerging markets, conditions have softened considerably, particularly in the large Latin American economies, Turkey remains under external pressure and South Africa has recently emerged from

WORDS OF CAUTION With a number of emerging markets slowing, it is unsurprising that capital flows have slowed, adding further pressure to such markets. However, in aggregate the outlook for emerging markets as a whole remains solid and this should support global growth in the coming years. Slowing growth in China is likely to be offset by India and other East Asian economies while some recovery is anticipated in Latin America. However, one should be cautious of downside risks to growth. With global trade tensions ratcheting up and tighter US dollar liquidity, the potential for a sharper slowdown and policy mistakes are ever present, which could result in slower-than-expected growth, even if a crisis appears unlikely. Closer to home, higher oil price through the third quarter helped to boost confidence across the GCC and also provided some respite for regional fiscal balances. At the same time, rising oil production also provided a boost to aggregate GDP growth across the region. Some of this is likely to unwind, however, given the fall in global oil prices through the December quarter. Nonetheless, for non-oil output, regional growth should remain fairly solid. This is due to plans for expansionary fiscal policy across the region, with GCC governments having increased spending over the past year. This implies that the impact of fiscal drag on growth should slowly fade over time, though further fiscal reform will be required in the coming years. A heavy emphasis across the region on expanding the SME sector, and the role new financial technologies may play in facilitating this, provide opportunities for growth of the financial services sector, following relatively soft credit growth in recent years.

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COVER INTERVIEW

Dr. Abdullah Al Fozan

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CHAMPIONING SAUDI ARABIA Dr. Abdullah Al Fozan, Chairman of KPMG in Saudi Arabia shares his views on the Kingdom's burgeoning economy

hare your views on the progress of Saudi Arabia’s economy. Saudi Arabia has launched an ambitious reform programme with Vision 2030—a long-term strategy to bolster the country’s fiscal position and diversify its economy in a world of low oil prices. The strategy provides international firms with the opportunity to invest in the country, particularly in its non-oil sectors. There is no doubt that the Government of Saudi Arabia is moving forward, driven by its ambitious vision to diversify the economy away from oil. The government has succeeded in keeping the reform implementation on track, in terms of fiscal consolidation, growth stimulation, improving the investment environment and increasing the private sector’s participation in the economy. We expect political support for this trend to be maintained. The government has maintained its expansionary fiscal policy for 2019, with an expenditure budget of SAR 1,106 billion, supported by the recent trends in oil prices and production. We, at KPMG, view Saudi

Arabia’s all-time largest budget as a reflection of the leadership’s commitment to continue the implementation of Vision 2030 programmes to achieve fiscal, social and economic targets. Although the Saudi economy, as well as most of the regional economies, face challenges due to oil price fluctuation, there is still a positive view that the government would launch several programmes and initiatives to diversify the economy and reduce oil dependence. Such optimism— though somewhat wary—emphasises that Saudi Arabia is currently the most growing, competitive and diversified economy in the region, given the continuous efforts exerted for economic diversification and reduction of the size of activities relevant depending on the oil sector. In fact, the World Bank expects the local economy to grow by 2.1 per cent in 2019 and 2.2 per cent in 2020. Consequently, it is important in this phase to continue the execution of reforms without being hesitant after the improvement in oil prices in certain specific periods and to work

upon making the most precise use of savings and human resources. Furthermore, companies that have not entered transformation paths yet will have to be swift in adapting to changes. Transformation becomes an inevitable necessity that would lead many of the businesses that do not have transformation plans to exit the markets. In this stage, the focus shall not be on returns on investments but on linking those investments with long-term plans. Finally, we are optimistic that the Kingdom’s economy will continue to gain momentum thanks to the latest strategic procedures and decisions that aim to stimulate economic activity, facilitate investment procedures and reduce redtape in a way that would contribute to an increase in trust levels of the national economy. How does KPMG fit into Saudi Arabia’s transformation initiative? The Kingdom is currently undergoing a major economic and structural

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transformation within the context of Vision 2030 and its realisation programmes. This puts the Kingdom at the centre of the world’s attention because of what is possibly described as the region’s most significant public sector transformation journey. KPMG seeks to play an active role in achieving the objectives of the Kingdom’s Vision 2030 by developing impact-driven relationships with its clients in government institutions to capitalise on the best international practises and adapt them to the Saudi context. Our main driver for prioritising our efforts and investments stems from our belief in the criticality of achieving Vision 2030 and our

national commitment as a firm to support its objectives at this critical stage. We plan to do so by building a long-term partnership with the public sector, and adopting what suits the Kingdom in terms of successful international experiences. What distinguishes KPMG in Saudi Arabia is our team mix of talented professionals and experienced functional consultants in the Saudi market. The team also includes global experts in most of the priority sectors. Both local and global teams, have passion and reliance on innovative solutions based on global best practises to help improve the efficiency, effectiveness, and meet the demands of our clients who are aspiring

THE CAPITAL MARKET AUTHORITY (CMA) AND SAUDI STOCK EXCHANGE (TADAWUL) ARE ESTIMATING PASSIVE INFLOWS OF $45 BILLION ON MSCI INCLUSION, WHICH WILL TAKE PLACE IN TWO TRANCHES (MAY AND AUGUST) THIS YEAR. — Dr. Abdullah Al Fozan, Chairman of KPMG, Saudi Arabia

The primary challenges for the government are to sustain the implementation of reforms, improve the efficiency of government services, strengthen the participation of youth and women in the labour market and achieve the fiscal targets it has set, and resist the temptation to re-expand government spending in line with higher oil prices.”

Dr. Abdullah Al Fozan

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COVER INTERVIEW

for transformation and growth in such a dynamic environment. KPMG holds a leading position among consulting firms operating in the Kingdom of Saudi Arabia and is a highly trusted advisor for governmental bodies ranging from ministries and authorities to private sector organisations. In light of the above, where do you foresee challenges and how would you address them? There is no doubt that the Kingdom was demonstrating great mobility as it rapidly develops and modernises the countryâ&#x20AC;&#x2122;s

Saudi Arabia's total inflow reached

SAR 5.9 SAR 7

billion in 2018 and has crossed

in 2019 YTD

billion

investment systems and procedures, a process that will enhance its position on the international investment map and increase the competitiveness of the Saudi economy. The reforms had also advanced the countryâ&#x20AC;&#x2122;s investment environment and generated positive expectations by the International Monetary Fund on the Saudi economy and its growth rates over the next few years. The primar y challenges for the government are to sust ain the implementation of reforms, improve the efficiency of government services, strengthen the participation of youth and

KPMG plans to create more than 700 jobs over the next five years for Saudi nationals in line with the governmentâ&#x20AC;&#x2122;s Saudization policy.

Dr. Abdullah Al Fozan

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women in the labour market and achieve the fiscal targets it has set, and resist the temptation to re-expand government spending in line with higher oil prices. How do you see the kingdom’s MSCI upgrade and inclusion into the JP Morgan emerging market bond index boosting the domestic market? Such upgrade will greatly benefit the Kingdom in many aspects. The most direct benefit is increased capital inflows. The MSCI EM Index has $1.9 trillion worth of assets benchmarked against it. Inclusion in the index would not only increase the exposure of Saudi stocks to international investors, but also will lead to passive inflows from funds that follow its progress. Capital inflows with an MSCI listing will substantially boost liquidity in the economy. Moreover, the inclusion will increase trading volumes by reducing the equity risk premium and so draw in new investors from around the world. Total inflow reached SAR 5.9 billion in 2018 and has crossed over SAR 7 billion in 2019 YTD. That said, the Capital Market Authority (CMA) and Saudi Stock Exchange (Tadawul) are estimating passive inflows of $45 billion on MSCI inclusion, which will take place in two tranches (May and August) this year. The inclusion represents a major milestone not just for the Kingdom, but for the entire Middle East and one that demands a great deal of attention from institutional investors globally. Inclusion in the index helps to reduce financing costs and opens up Saudi Arabia to a much bigger pool of investors. This upgrade is a quantum leap forward in the Kingdom’s position in the global capital markets, and enhances confidence in the Saudi economy and its financial position, within the framework of the strategy of the Financial Sector Development programme, one of the Kingdom’s Vision 2030 programmes, with a main concern over increasing

liquidity and access to capital in the global markets. In terms of investment opportunities, in which sectors do you see the most potential? Saudi Arabia has some ambitious economic goals which, if realised, would create spectacular business opportunities and propel the Kingdom to become one of the fastest growing and dynamic economies. But to take advantage of

and financial fundamentals. As the Saudi economy is expected to growth further this year and after, we see a lot of interest and activity in the marketplace in the recent months, particularly in the IPO space. It is essentially encouraging to witness that private businesses across various sectors including information technology, engineering, finance, and logistic are pursuing their initial public listings in the near future. The successful listings of these businesses, I believe, will motivate

KPMG SEEKS TO PLAY AN ACTIVE ROLE IN ACHIEVING THE OBJECTIVES OF THE KINGDOM’S VISION 2030 BY DEVELOPING IMPACT-DRIVEN RELATIONSHIPS WITH ITS CLIENTS IN GOVERNMENT INSTITUTIONS TO CAPITALISE ON THE BEST INTERNATIONAL PRACTISES AND ADAPT THEM TO THE SAUDI CONTEXT. — Dr. Abdullah Al Fozan, Chairman of KPMG, Saudi Arabia

these opportunities, businesses will have to closely monitor the reforms being put in place and adapt their business plans to the changing economic and social landscape. The Kingdom of Saudi Arabia has identified the primary priority sectors based on their high potential for development and their alignment with Vision 2030’s objectives. These include healthcare, transportation, tourism, entertainment, housing, ICT, energy and renewable energy as well as manufacturing, are amongst the top sectors which have some huge potential for attracting investors.

a large number of other private businesses for their potential public listings in the future. Likewise, we expect initial public offering of state-owned enterprises (SoEs) on the domestic stock market as part of privatisation and capital market development initiatives in line with Vision 2030 in the coming times. In my view, listing of large SoEs, in particular, will be a huge boost to domestic stock market. For instance, stock market capitalisation will increase immensely that in turn will place it in the league of leading stock markets of the world.

Do you expect to see more capital market transactions throughout the year? The local capital market offers huge growth potential given strong economic

What are your views on the wave of merger and consolidation announcements within the Gulf? A flurry of merger and acquisition activity across the Gulf region has emerged in

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COVER INTERVIEW

recent months, and this is credit positive for the region’s banks. Despite integration challenges in the early stages, merged banks will gain market share and benefit from greater pricing power and cost synergies. It will also contribute to stronger capital positions, reducing costs, transferring knowledge, more strategic investment in risk management and increasing competitiveness. For the wider economy, the benefit should come through greater capacity to finance large projects. In February this month, Saudi Arabian Monetary Authority Governor Ahmed Al-Kholifey, said he does not see more bank mergers for now other than those already announced. Last March, Saudi British Bank and Alawwal Bank announced their merger to create Saudi Arabia’s third-biggest lender with assets of SAR 268 billion followed by the National Commercial Bank initiating talks with Riyad Bank for a possible merger, creating the Kingdom’s largest lender with SAR 685 billion in assets. In Saudi Arabia, we toe the same line and we do not see more bank mergers for the time being beyond those already announced. Even in cases where mergers appear to make sense, negotiations can be protracted and difficult. Are you looking at local expansion and hiring more Saudi talent? At KPMG, we plan to create more than 700 jobs over the next five years for Saudi nationals in line with the government’s Saudization policy. That said, we have moved into our new, spacious offices in Jeddah and Khobar and have signed a lease agreement for a new office complex in Riyadh. The new headquarters at the Business Front project was chosen to fulfil KPMG’s future needs in the medium- and long-term and provide the appropriate mechanism for future expansion. The new headquarters, covering an expanse of more than 11,000 square

metres, will contribute to the creation of a unique work environment with the purpose of improving performance as well as enhance the level of customer experience. We expect to move to the new headquarters during the second quarter of this year. Our employee strength in Riyadh currently stands at around 800 and we aim to increase this number to 1,500 employees over the next five years. Total staff strength in the first quarter of this year reached around 1,200 employees, which includes 500 Saudis, who provide a number of services in the fields of auditing, advisory, Zakat and tax. What is your outlook on the Kingdom for the rest of the year? The economy of Saudi Arabia is characterised by a number of special features, the most important of which is that it is the biggest economy in the Middle East. In my opinion, the initial expectations of the Saudi economy for upcoming years are optimistic due to several factors, mainly, the leadership’s determination to implement the announced vision realisation programmes that include the restructuring of many economic sectors. An important proof of the serious will to implement the programme is the latest appointments over leadership positions in critical finance and administration roles. That comes in addition to the issuance of austerity decisions that further assure to transform the economy into an organised structural one. Authorities, such as the General Authority of Zakat & Tax, will also have a key role and will give impetus to find resources to the State treasury department, such as VAT, seen here as an important part of the restructuring process. Another growth driver we see here is the increasing attention given to other economic sectors as well as the development of partnerships with worldclass partners in major sectors such as

WE SEE A LOT OF INTEREST AND ACTIVITY IN THE MARKETPLACE IN THE RECENT MONTHS, PARTICULARLY IN THE IPO SPACE. — Dr. Abdullah Al Fozan, Chairman of KPMG, Saudi Arabia

energy, gas and mining, among others, which will all contribute to raising the level of economic performance and most importantly, increasing the role of the private sector by means of privatisation of projects and promoting ‘public private partnerships’. The private sector is seen to definitely have a major role in re-pumping a portion of the money into projects and bring in more confidence. SME’s are also to contribute particularly after the establishment of the General Authority of Small and Medium Enterprises to guide and help structure overall businesses. The considerable progress was being made to improve the business climate. Recent efforts had focused on the legal system and business licencing and regulation. Saudi Arabia’s “ambitious” reform programme is set to accelerate the Kingdom’s economic growth during upcoming years. The introduction of value-added tax was a “milestone achievement” in strengthening the tax culture and tax administration of the country. Energy price reforms and the introduction of citizens’ accounts to compensate the less welloff for higher energy/VAT costs were also welcomed. Reforms to strengthen the budget process and the fiscal framework, increase fiscal transparency, and develop macro-fiscal analysis are making good progress.

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CMY

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COUNTRY FOCUS

THE NEW BLACK Kuwait has made some savvy investments – now it must spend the returns wisely

hen Kuwait commemorated its 58th year of independence in February, it had a lot to celebrate. With its ample assets, low debt and stable banking sector, Kuwait is a posterchild for sound savings and financial contentment. However, the recent fluctuation in oil prices served as a timely reminder that the good times won’t last forever. Despite baby steps towards diversity, Kuwait’s economy remains tightly bound to oil. Kuwait continues to derive around 55 per cent of GDP, more than 90 per cent of exports, and about 90 per cent of fiscal receipts from hydrocarbon products.

CRUDE BEHAVIOUR As of 2017, Kuwait was the world’s ninth-largest crude oil producer, with the seventh-largest oil reserves. As such, it is hardly surprising that Kuwait’s economic performance will remain largely determined by oil industry trends. This worked in its favour when oil prices were higher in 2017–18, lifting growth and bettering fiscal and external balances. However, 2019 is likely to be different story. “We assume oil prices will average $55 per barrel over 2019-2022, which is lower than our previous oil price projections for these years,” S&P said. “This is also lower than the average 2018 Brent price of $72 per barrel.”

“According to high frequency official data, output grew by 0.6 per cent over the first nine months of 2018 year-on-year. We have accordingly revised our growth estimate for the year down to one per cent from two per cent previously.” Although Kuwait has always paid lip service towards diversifying its economy, thanks to its mammoth reserves it always assumed it could take its time. The country has long enjoyed the trappings of the world’s first Sovereign Wealth Fund, which Sheikh Abdullah Al-Salem set up in 1953. The exact sum of the fund is shrouded in secrecy, as its assets are not disclosed

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(PHOTO CREDIT: IBRAHIM MUHAMED/SHUTTERSTOCK)

Kuwait continues to derive around

55% 90% 90%

of GDP more than

of exports and about

of fiscal receipts from hydrocarbon products and there is even a law against the Kuwaiti Investment Authority (KIA) discussing the size of its holdings. H oweve r, t h a t h a s n’t s t o p p e d international observers trying to guess. S&P relies on IMF data, which it has used to make an estimation of 420% of GDP at the end of 2018—the largest sovereign wealth fund of all sovereigns that it rates. This affords Kuwait significant buffers to respond to any potential future shocks. Although it is likely that the Government will want to draw down reserves in the future, new legislation would need to be put in place before it could touch a dinar.

Kuwait’s other financial cushion is its Reserve for Future Generations Fund (RFFG), created in 1976 to provide financial security for when Kuwait’s oil reserves finally dry up. The Government has never wavered on its promise to deposit 10 per cent of all oil revenues into the fund, which is now thought to be worth $420 billion. However, this has come at a price. While Kuwait’s overall fiscal balance has improved, its financing needs remain large. Higher oil revenues and investment income has bestowed an eight per cent surplus on Kuwait’s budget. The IMF expects the surplus to reach almost 12

per cent of GDP by the end of 2019. However, fiscal financing needs—the overall balance excluding investment income and compulsory transfers to the RFFG—remained large at 12.5 per cent of GDP at the end of 2018. The General Reserve Fund holds the accumulated government surpluses after transfers to the RFFG, and the government has had to draw on its assets for financing, including to pay for maturing debt. Its value is thought to have fallen for the fourth year in a row, according to Fitch. Fitch estimates that the GRF could sustain the country for five years before it runs out.

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COUNTRY FOCUS

S&P forecasts that as oil prices reduce from 2018 levels, Kuwait’s central government deficit will rise from 6.5 per cent of GDP last year to an average of 19.5 per cent over the next four years. This mostly reflects investment returns from managing the KIA. Despite the surplus general government budget, the authorities still plan to borrow to cover deficits at the central government level. “We estimate that future central government deficits will be financed via both asset drawdowns from the GRF as well as debt issuance,” S&P said. “Accordingly, we project general government debt will rise above 50 per cent of GDP in 2022 from less than 20 per cent in 2017 reflecting a combination of both domestic and international issuance.” TIRED OF FIGHTING However, to make any progress Kuwait will need to rise above domestic bickering. The squabbles that have delayed Kuwait’s fiscal reforms have left the country economically paralysed. The parliament delayed the passing of a new debt law after the previous one expired in October 2017, blocking any debt issuance in 2018. Sadly, the relationship between the government and parliament has always been volatile, resulting in frequent government reshuffles. The latest round took place in December 2018 when four government officials resigned. The parliament has also blocked some crucial reforms, such as the introduction of VAT and excise taxes in Kuwait.

Kuwait’s fiscal surplus is expected to reach almost

12%

of GDP by the end of 2019 As far as the IMF is concerned, delays to economic reforms pose one of the largest risks to the economy, second only to lower oil prices. “Delays in fiscal and structural reforms could slow growth and increase fiscal deficits at a time when the global environment is becoming more challenging and financial conditions have tightened,” it said. “Should investors’ appetite for exposure to Kuwait wane under these conditions, the government and banks could face higher funding costs and rollover risks.” However, Kuwait’s most critical challenge is to sculpt a vibrant private sector that will tempt its nationals away from the bloated public sector and create enough jobs for future generations. Kuwait’s citizens have enjoyed a generous welfare state and a prominent public sector that employs 80 per cent of the national workforce. H oweve r, w i t h h i g h wa g e s a n d comparatively low productivity, this is a luxury Kuwait will soon struggle to afford. The authorities have taken welcome steps to pull in the government purse strings, fire up private sector growth and generate jobs. Now, it faces taming its

DELAYS IN FISCAL AND STRUCTURAL REFORMS COULD SLOW GROWTH AND INCREASE FISCAL DEFICITS AT A TIME WHEN THE GLOBAL ENVIRONMENT IS BECOMING MORE CHALLENGING AND FINANCIAL CONDITIONS HAVE TIGHTENED. — IMF

high public wage bill, slashing subsidies and cultivating non-oil revenue. “ Pr o m o t i n g p r i va t e s e c t o r- l e d growth and job creation for nationals requires lowering the high publicprivate wage premia, reducing the role of the public sector in the economy through privatisation and public-private partnerships, and improving the business environment,” the IMF said. PRIVATE CONVERSATIONS Privatisation is a large part of this strategy. By privatising Government assets, Kuwait is handing the private sector a stake in the country’s future. The government has plans to 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 and the Ministry of Electricity and Water Central Workshop. In February, it announced that its stock exchange—the oldest in the Gulf world and one of the top performers in the region—would be its trailblazer for privatisation. Kuwait made history when it sold a 44 per cent stake in Boursa Kuwait to a consortium of firms including National Investments Company, Boursa Athens, Al Oula Investment and Arzan Financial Group. The CMA is planning to offer a further 50 per cent as an IPO. According to Kuwait’s Minister of Commerce and Industry, Khaled AlRoudhan, the move is a “reflection of the huge strides Kuwait is taking to raise its global copetitive index, improve its business climate and develop its efficiency in attracting foreign capital.” According to KUNA, Kuwait’s state news agency, the minister added that the changes will give the private sector a larger role in developing the national economy. Kuwait is also planning to create a $10 billion fund with China, Bloomberg reported in February. China and Kuwait would each be responsible for raising around $5 billion for the fund. This follows

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last year’s unveiling of Kuwait’s 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 knowledgebased 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. On the global stage, Kuwait’s currency carries a clot of clout, and credit is recovering after a slow start in 2018. As the US Federal Reserve raised its policy rate, the Central Bank of Kuwait has skilfully deployed various monetary policy instruments to maintain the dinar’s attractiveness while helping support lending to the economy. For example, the CBK raised its repo rate several times, but kept the policy lending rate at three per cent. Private credit grew three per cent year-on-year in November, supported by lending to households and the oil sector, the IMF reported. Government debt redemption in 2018 meant ample dinar liquidity, though some banks raised funding in international markets to boost foreign currency holdings. Kuwait’s exchange rate continues to be pegged to an undisclosed basket of currencies. This basket is dominated by the US dollar, the currency in which the majority of Kuwaiti exports are priced and transacted. The Kuwaiti dinar is the world’s most valuable currency, and thanks to some nimble monetary policies, it is likely to remain so. “In our view, Kuwait’s regime is somewhat more flexible than the foreign exchange regimes in most other GCC

EVEN IF IMPLEMENTED FULLY AND ON TIME, THE MEASURES UNDER CONSIDERATION WOULD NOT CLOSE THE INTERGENERATIONAL EQUITY GAP. — IMF

countries that maintain a peg to the dollar alone,” S&P said. “This is evident, for instance, in CBK’s decision to hike the key interest rate only once, compared to four recent US Fed hikes. In our view, some degree of monetary-policy divergence between the Fed and CBK is possible, in part due to the limited amount of portfolio flows between Kuwait and the rest of the world.” This has all helped Kuwait’s banks stay in tiptop shape. The Kuwaiti banking sector remains resilient with stable profitability and improved asset quality, the IMF said. Banks report high capitalisation (CAR of 18 per cent) and a rising return on assets (1.3 per cent in September 2018). Asset quality has improved, with NPLs net of specific provisions falling to a historical low of 1.4 per cent of gross loans. Islamic banking windows are not allowed in Kuwait, which has helped the country’s Islamic banks claim a 38 per cent market share. With new guidelines in place and more in the works, their prominence is likely to grow. In 2018, the

Kuwait’s central government deficit will rise from

6.5% 19.5%

of GDP last year to an average of

over the next four years

CBK Shariah Supervisory Governance instructions became effective, introducing best practice for Islamic banks. The CBK is now working on a draft law to create a centralised Shari’ah board to oversee Islamic banks. “This is likely to increase standardisation and lead to greater market confidence,” Fitch said. “CBK regulations take account of Islamic banks’ specificities, such as the Alpha factor and direct investment in real-estate.” Fitch expects financing growth to remain above that of conventional banks in the mid-single digits, as Islamic banks build their franchises and as Islamic banking gains momentum in Kuwait, particularly with retail customers. While Kuwait has taken significant steps towards future-proofing its economy, the IMF has warned that even if implemented fully and on time, the measures under consideration would not close the intergenerational equity gap. The Government’s non-oil balance would fall well short of levels needed to ensure equally high living standards for future generations—a gap of 13.5 per cent of non-oil GDP by 2024. “Additional fiscal consolidation will therefore be needed to close this gap, which would also reduce financing needs and preserve liquid buffers,” it said. Quite simply, Kuwait needs deeper reforms if its future generations are to enjoy the same standard of living that is currently enjoyed, and Kuwait can’t afford to implement these at its current leisurely pace. Unfortunately, the powers that be may have some difficulty seeing past Kuwait’s mountainous reserves to a day when oil has dried up—along with a world of opportunities.

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COUNTRY FOCUS

KUWAIT in numbers POPULATION

MEDIAN AGE

4.2

3.5

million

Source: Worldometers (2019)

REAL OIL GDP (annual percentage change)

Source: Worldometers (2019)

GDP

3.9 (2016) -7.2 (2017)

NOMINAL GDP

1.2 (2018) 2.0 (projected 2019)

$109 billion (2016) $120 billion (2017) REAL NON-OIL GDP DEBT (annual percentage change) (as a percentage of GDP) $141 billion (2018) $129 billion (projected 2019) 1.4 (2016) 9.9% (2016) 2.1 (2017) 19.8% (2017) REAL GDP GROWTH 2.5 (2018) 16.9% (2018) 2.9% (2016) 2.5 (2017) 28.5% (projected 2019) -3.5% (2017) 3.0 (projected 2019) 1% 2018 (2018) 1% (projected 2019) OIL AND GAS SECTOR Source: IMF

Source: Standard & Poor’s

Source: IMF

Source: Standard & Poor’s

GDP PER CAPITA

TOTAL OIL AND GAS EXPORTS (billions of US$)

AVERAGE OIL EXPORT PRICE (US$/barrel)

$24,800 (2016) $26,60 (2017) $30,600 (2018) $27,500 (projected 2019)

41.5 (2016) 49.6 (2017) 65.7 (2018) 53.4 (projected 2019)

41.0 (2016) 53.4 (2017) 70.6 (2018) 56.14 (projected 2019)

Source: Standard & Poor’s

Source: IMF

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WEALTH MANAGEMENT

WORDS INTO ACTION: INVESTING FOR IMPACT Didier von Daeniken, Global Head of Private Banking and Wealth Management at Standard Chartered Bank, tells us why it’s time to join the growing global band of sustainable investors

ne of the most exciting trends to come out of wealth management in the last couple of years is the growing interest among clients to invest sustainably and create a positive social and economic impact. This was hugely evident at Davos this year where sustainability was one of the biggest topics brought up by our clients as well as business and political leaders. It was also clear that the interest spans across all ages, with the children of our clients—brought to Davos by us for our Future Global Leaders Alumni Programme—being as engaged as many of their parents.

It’s something I see every day as a private banker: affluent and high net worth individuals are increasingly thinking about their role as responsible global citizens. With the risks from major challenges, such as climate change and lack of access to healthcare and education, becoming ever clearer, our clients are looking actively for opportunities to effect positive change.

Didier von Daeniken

BRIDGING THE SDG FINANCING GAP While governments and multi-lateral initiatives work to provide scalable solutions to the major issues of our time, these efforts are unfortunately

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(PHOTO CREDIT: INGEHOGENBIJL4/SHUTTERSTOCK)

The UN estimates that

$5-7

trillion is needed annually to achieve the SDGs with a financing gap of an estimated

$2.5

trillion per year in developing countries alone not enough to eliminate them. The United Nations estimates that $5-7 trillion is needed annually to achieve the Sustainable Development Goals (SDGs), with a significant and persistent financing gap of an estimated $2.5 trillion per year in developing countries alone. I believe financial institutions and investors have a critical role to play in raising and directing new capital towards the SDGs. One example is access to healthcare, which is so fundamental to the prosperity of individuals and communities. At a global level, huge strides have been made globally to eradicate polio, reduce child mortality and tackling HIV. However, the global health market is still subject to substantial failings, and overcoming them requires continued innovation and participation from the private sector. Financial services firms have been eager to front-run the opportunity, developing instruments to direct funds towards healthcare initiatives in underserved markets. An investor looking to help improve healthcare in a certain country can invest his money

COMMONLY-HELD MYTHS SUCH AS AN UNAVOIDABLE TRADE-OFF BETWEEN FINANCIAL GAIN AND POSITIVE IMPACT CAN BE DEBUNKED BY THE STRONG PERFORMANCE OF MANY SUSTAINABLE INVESTING SOLUTIONS. for a financial return and at the same time, help to bridge a gap for positive social impact. Beyond healthcare, sust ainable and impact investing solutions now cover a range of sectors from infrastructure financing to initiatives to tackle climate change. More broadly, companies are rapidly incorporating E S G ( E nv i r o n m e n t a l , S o c i a l a n d Governance) criteria in their business models, to signal the long-term viability of their business models to investors and consumers.

THE POWER OF INFORMATION SHARING As wealth managers, we connect our clients to opportunities and equip them with the information they need to make good decisions. Our Asia Sustainable Investing Review 2018 showed that 86 per cent of investors lack a clear understanding of the impact and returns that sustainable investing can deliver. That is why we also have a responsibility to educate and inform. For instance, commonlyheld myths such as an unavoidable trade-off between financial gain and positive impact can be debunked by the strong performance of many sustainable investing solutions. Itâ&#x20AC;&#x2122;s important for us to collaborate, to share information and experiences, and harness data and insights, so that together, we can shape the future of sustainable investing. Our clear aim should be to turn this from a niche investment avenue into a core part of investor portfolios, helping to drive private funds towards the success of the SDGs.

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INVESTMENTS

LIFE AFTER LIBOR Rod Paris, Chief Investment Officer, Aberdeen Standard Investments, paints a picture of a world without this benchmark (PHOTO CREDIT: T VECTOR ICONS/SHUTTERSTOCK)

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hat happens when the “the world’s most important number” disappears? That is the scenario that the financial industry faces in the coming years as the London Interbank Offered Rate (LIBOR) is phased out. The LIBOR ecosystem of interest rates has been a mainstay of the financial industry since the 1960s. Essentially, LIBOR is what some of the world’s biggest banks estimate they would charge to lend money to their peers. At present, these interbank rates provide the benchmarks for global transactions running into the hundreds of trillions of dollars. But there are problems with LIBOR. Since the global financial crisis, there is not nearly so much interbank lending as there was before. So the banks’ LIBOR estimates are based more on judgement than actual transactions. As a result, and as successive scandals have shown, interbank offered rates have been open to manipulation by unscrupulous traders. Several have been jailed, and various banks have been heavily fined. LIBOR, then, has been deemed no longer fit for purpose. Banks have been increasingly reluctant to publish their LIBOR submissions because of the conduct risks involved. The UK’s Financial Conduct Authority has announced that they will not be required to do this from the end of 2021. So we will find ourselves in a completely different environment where some LIBOR rates will not be sufficiently supported. The LIBOR benchmarks will be replaced by a whole host of new riskfree rates (RFRs). In the UK, the new benchmark will be SONIA, the Sterling Overnight Index Average. This RFR has been around for 20 years, but it has been administered by the Bank of England (BoE) since April 2016. The BoE implemented a reformed version in April 2018.

THE LIBOR BENCHMARKS WILL BE REPLACED BY A WHOLE HOST OF NEW RISK-FREE RATES.

As SONIA is based on actual transactions rather than estimates, it’s much more robust. In the US, the Federal Reserve now publishes the Secured Overnight Financing Rate (SOFR) so it can be considered robust and a sound reference point. In the Euro zone, the picture is less clear; one possibility is that ESTER, the Euro Short-Term Rate, will replace interbank rates. Meanwhile, other regional RFRs will thicken the acronym soup. So far, so simple. But the actual process of switching from the LIBOR ecosystem to the new RFRs entails considerable challenges. It is not simply a matter of using RFRs for new contracts. While there has been significant growth in the number of transactions benchmarked to SONIA and SOFR, existing contracts still pose problems. Given the myriads of contracts that depend on LIBOR, with more created every day, there is much work to be done by just about every financial institution on the planet. Fallback clauses are crucial here. Many contracts contain provisions for the event of LIBOR becoming unavailable. But this was generally envisaged as a temporary disruption, not a permanent retirement. Therefore, the consequences of relying on those clauses could be undesirable, with the possibility of unintended transfers of value between the parties involved. There is a risk of instability in the financial system if a vast number of contracts are suddenly benchmarked at a different rate. Accordingly, the

International Swaps and Derivatives Association is reviewing choices for more appropriate fallback clauses. With all this in play, 2019 will be an important year. All financial institutions must ensure that their preparations for the end of LIBOR are well on track. This is not a task that anyone should underestimate. We are well advanced in our planning of this process. So what will we be doing in 2019? Well, we are already actively participating in the official consultations on the subject. And we have representatives in working groups at all levels of the industry, engaging with the Bank of England, the Investment Association and other industry bodies. In the year ahead, we will be monitoring and leading market developments to ensure that both our teams and our clients are fully prepared. As part of this, we are already undertaking a thorough assessment of the impact on the industry. This will be a key focus in 2019. In the case of contracts that mature beyond 2021, we will be making provisions for transitions that entail only minimal disturbance of the assets under management. Meanwhile, we will be developing our capabilities to adapt to the new RFR environment so that we can continue to meet our clients’ requirements without disruption. There is little doubt that the switch to RFRs is needed for the long-term health of the financial industry. The RFRs should prove more robust and reliable, and threaten the LIBOR ecosystem. Nevertheless, their adoption is one of the biggest shakeups that markets have faced in a lifetime. We will therefore be using 2019 to ensure that our clients experience a seamless transition to life after LIBOR. It is certain that all of us involved in the financial industry will be forced to adapt to this new environment over the coming years.

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PRIVATE EQUITY AND VENTURE CAPITAL

A GAME OF VALUATION

Alessandro Scortecci, Principal at Boston Consulting Group Middle East, highlights that there is an increase of cash in the region, but this has added more pressure on firms to deliver on value on exit 42 page 42-43 private equity & venture capital.indd 42

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ell us about your views on private equity investments globally and within the region. Investment trends have seen a steady expansion since mid-2016, with global growth forecast to remain at 3.7 per cent. Oil and natural gas prices will continue to rise, which will improve the public finances of producing nations. The rise that began in the second half of 2017 has gained momentum, with the price of Brent barrel rising to 17 per cent between the end of March and September of 2018, to reach $83 per barrel. Globally, there is a significant increase of investments in the market, with dry powder reaching $1.9 trillion by December of 2018. As a result, the average size of private equity funds is increasing, having reached about $430 million in 2018 from $240 million in 2010. This also reflects on the pressure of assets valuations (i.e. the average ticket size increased from $360 million in 2010 to $640 million in 2018). The Middle Eastern private equity (PE) and venture capital (VC) market has slowed down over the last few years, with 14 PE deals in 2015 and only six in 2018. This has been primarily driven by the United Arab Emirates and the Kingdom of Saudi Arabia (based on publicly available data from Preqin). Given the market situation, the challenges faced for the region are on the fund-raising front and the overall economic slowdown. We do not expect significant changes in the short term. However, a different trend is shaping in VC, with an increasing number of deals, doubling from 88 in 2015 to 166 in 2018, of which about 25 per cent were directed to Middle Eastern based companies.

The average size of private equity funds is increasing reaching about

$430 $240 from

We expect this positive trend to continue in the coming years, driven by significant efforts across the board to attract start-ups to the region. What is the key trend and how will this impact deals across the Middle East and North Africa? One of the key trends in global PE is the increasing amount of available cash in markets. The result of this is a “chase” for the same number of deals, which in turn pushes prices up and increases the pressure on PE firms to deliver value on exit. We expect to see a global shift in value creation of PE, from the traditional leveraged-buyout model where value was being created through financial engineering, to one where value is being created by enhancing and optimising the assets operations. This shift is especially relevant, given the liquidity in the market and the resulting high valuations. PE funds in the Middle East are aligning accordingly and getting more involved in the operational

A DIFFERENT TREND IS SHAPING IN VC, WITH AN INCREASING NUMBER OF DEALS, DOUBLING FROM 88 IN 2015 TO 166 IN 2018, OF WHICH ABOUT 25 PER CENT WERE DIRECTED TO MIDDLE EASTERN BASED COMPANIES.

million in

2018 2010

aspects of their assets (which will require them to invest in new capabilities and specialised profiles). PE funds globally are levering digital and technologies ranging from enhancing assets to maximising value creation and the assets’ profitability during the holding period. We expect this trend to become more relevant for PE players in the region in the coming months and years. What kind of opportunities do you see in the market at the moment? From a sector perspective, we have observed a continued interest in the region for businesses that is supported by demographic driven trends—such as healthcare, diagnostics and food. Investors are also considering the GCC as the door to the wider North Africa and East Africa. This is an important point to note, as Africa is likely to become the new frontier of investments with an increased focus from global and local investors alike, having a presence near its shores should prove valuable. The directive from GCC governments on nurturing start-ups and SMEs, together with the appetite for technology in the region will likely generate a new wave of opportunities for investors with the right risk/return profile.

bankerme.net

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BUSINESS BANKING

CAN BANKS DO MORE TO SUPPORT SMES IN THE UAE? SMEs need help beyond just financing, explains Dhiraj Kunwar Managing Director Business Banking at RAKBANK

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(PHOTO CREDIT: GAJUS/SHUTTERSTOCK)

SMEs account for around

94% 4%

of businesses in the UAE however loans to SMEs account for only

of total bank credit

gainst a backdrop of geopolitical and economic instability, the financial services industry has a crucial role to play in helping SMEs navigate a challenging climate. Beyond simple financing products, banks can support SMEs by providing a broader range of tools to enable them to flourish. ACCELERATION IN SIGHT, BUT VOLATILITY REMAINS In the UAE, economic momentum took a hit in the final quarter of 2018 as oil price volatility returned. Nevertheless, growth in the non-oil sector remained steady in Q4, as reflected by PMI data, which suggests annual non-oil GDP growth in 2018 broadly matched the preceding year. Dubai’s stock market posted its worst annual performance since 2008 with a 25 per cent fall in value, owing to oversupply and falling prices in the critical real estate market. By contrast, Abu Dhabi’s equities index performed fairly robustly. With a view to 2019, Dubai unveiled its annual budget on 1 January, which was broadly aligned with 2018’s record spending,

with a continued focus on infrastructure investment ahead of Expo 2020. This spending will supplement the largest federal budget in the history of the UAE. Despite prevailing uncertainty for the global oil market, the local economy would benefit from the implementation of VAT, fiscal stimulus both at federal and emirate level and the Expo 2020 infrastructure push—which is likely to buoy construction and tourism—the UAE should benefit from FDI inflows driven by investment reforms and businessfriendly laws designed to ease the cost of doing business. Nevertheless, a global growth slowdown, driven in part by the ongoing US-China trade war, may continue to weigh on oil prices, while increasing volatility in financial markets could mar an otherwise rosy outlook. SME FINANCING CAN BOOST ECONOMIC GROWTH SMEs are the backbone of the UAE’s economy, accounting for around 94 per cent of businesses in the country. The International Monetary Fund (IMF)

estimates that improving access to finance for small and medium-sized businesses in the MENA region could boost regional economic growth by up to one per cent per year, while stimulating job creation. In fact, increasing the contribution of SMEs to the economy is a key pillar of the UAE’s economic growth plans. The Dubai SME 2021 Strategic Plan aims to increase the contribution of SMEs to the country’s GDP from under 40 per cent to more than 45 per cent by 2021. In short, they’re part of the national agenda, but they will need to receive the financial support that is required for growth. A CHANGING REGULATORY ENVIRONMENT The UAE government has in the recent past implemented policies to boost economic growth by enabling businesses and entrepreneurs. Last year was a landmark year for the introduction of new policies, including granting long-term visas for expatriates, allowing residents to stay in the UAE for ten years or more

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BUSINESS BANKING

lower payment defaults on auto loans, RAKfinance, SME lending, and in the commercial segment. There are tangible results to show that the efforts RAKBANK have made to de-risk certain parts of the business over the last few years have allowed the Bank to reduce provisions and improve the quality of its loan book, a result of both more cautious lending and a better understanding of the tools that SMEs require.

and linking their residency status to businesses in the country. Changes to foreign ownership regulations are also set to attract business owners, as recent legislative revisions allow full foreign business ownership outside of free zones. The government has taken a close look at the cost of doing business, reassessing business fees and other requirements such as a reduction in the cost of business insurance. Furthermore, the recent implementation of bankruptcy laws has implications for banks and other institutions financing SMEs, mitigating the risk of lending to local businesses— mainly due to the reduced likelihood of skips and legal mechanisms for recovering loans. FINANCING SMES AND MANAGING RISK Banks play a vital role in providing SMEs with the funding they require to grow and develop. But in the UAE, loans to SMEs account for only four per cent of total bank credit. By contrast, RAKBANK’s total SME loan book accounts for around 20 per cent of its lending portfolio, in light of a long-term strategic plan for supporting the SME ecosystem. A commitment to the SME sector, during good and bad times, is essential in realising the economic potential that SME growth promises. Beyond simply lending, banks must strive to understand the businesses they finance and in doing so, develop products and services that suit their needs and minimise risk. This can be achieved by, firstly, taking a more selective approach to customer acquisition and, secondly, by providing advice and support on issues that may create challenges for businesses, for example, the introduction of tax. In 2018, defaults among SMEs in the UAE reduced significantly in comparison to previous years. RAKBANK’s provision for impairment in loans and advances decreased by AED 131.8 million due to

Dhiraj Kunwar

BEYOND SIMPLY LENDING, BANKS MUST STRIVE TO UNDERSTAND THE BUSINESSES THEY FINANCE AND IN DOING SO, DEVELOP PRODUCTS AND SERVICES THAT SUIT THEIR NEEDS AND MINIMISE RISK. — Dhiraj Kunwar Managing Director Business Banking, RAKBANK

FINTECH CAN ENABLE SME GROWTH Both education and technology are well-known stimulants for SME growth, improving competition and driving economic participation. In this regard, banks have a role to play by working with business customers to develop technology that will support ease of doing business operations. By adopting and applying financial technology (fintech), while aligning their interests with those of SMEs, banks can move away from simply being lenders, to becoming business enablers that help customers to grow via a range of products and platforms. Online banking is among the most obvious areas that allow busy ownersmanagers to save time wasted in a bank branch, thereby improving their operating efficiency. The more that can be achieved on a smartphone, the better. In the application of technology, a bank’s SME customers need to be front of mind, with access to a more seamless banking experience. But banks need to go beyond online transaction options, to deliver cash management facilities, digital payments, receivable management solutions, and payment gateway solutions. If there is one thing that SME lenders should strive to achieve in 2019, it is to maintain momentum in the adoption of technology and fintech by working with the right technology partners to deliver services that go beyond the basics of business banking.

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28/03/2019 16:59

HUMAN CAPITAL

MANAGING THE RISK OF A BAD HIRE Steve Girdler, Managing Director for EMEA & APAC at HireRight, highlights the importance of acquiring the right talent

(PHOTO CREDIT:VLAD ENCULES/SHUTTERSTOCK)

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hether you’re opening a new office due to rapid growth or replenishing your core workforce, getting the hiring process right is essential. The cost of getting it wrong cannot be overstated, particularly for businesses operating in highly scrutinised sectors such as financial services. Whereas a good employee can stay with your company for years, progressing through the ranks and adding great value to your business, a bad hire can be a drain on your resources, time and energy—so it’s important to give yourself the best chance of getting it right. B a ck g r o u n d s c r e e n i n g c a n n o t guarantee that your next hire will be a high flyer, but it can help to ensure that your next hire is who they say they are and that they have the qualifications and experience they claim. THE REAL COST OF A BAD HIRE A r e p o r t f r o m t h e R e c r u i t m e n t a n d E m p l o y m e n t C o n fe d e r a t i o n (REC) reveals that 33 per cent believe that a hiring mistake costs their business nothing, when in reality, a bad hire with an annual salary of AED 213,734 can cost a business three times this (more than AED 671,735), due to the money wasted on training, lost productivity and increased staff turnover. The consequences of a bad hire can also include reputational damage, additional recruitment costs and a low staff morale, all of which can have a lasting effect on the bottom line. Fortunately, there are steps that you can take to help mitigate the risk posed by a bad hire.

Across Europe, Middle East and Africa

85%

of employers have seen candidates misrepresent information in their applications

RISKY BUSINESS We’ve seen an increase in background screening in the Middle East in recent years, as more and more businesses are seeing it as a crucial part of the recruitment process. Many large multinationals already have

a consistent company-wide background screening policy in place. This means that any new employees joining the company in the Middle East will go through an equivalent level of screening to their American or British counterparts. Others, however, may only be screening domestic candidates in the region, which could be leaving their businesses open to risk. SMEs in the Middle East are also seeing the benefits of having an international screening policy in place, not least because of the high population of expats working in the region. Figures released at the end of 2018 found that 91 per cent of the UAE workforce is made up of expats, as well as 75 per cent of the workers across the wider Gulf Cooperation Council (GCC). A multinational workforce can offer many benefits, such as additional language skills, international experience and cultural diversity, but it also has its risks. You can help to mitigate these risks by screening all of your new hires consistently and proportionately before they start working for your company (and rescreening them periodically once they’ve joined). Having a robust background screening programme in place for your entire workforce (including remote workers, contractors and interns) shows that as a business you are treating your candidates fairly and not discriminating based on where they are from or where they have previously worked or lived. EARLY ADOPTERS OF BACKGROUND SCREENING The background screening market in the Middle East is still developing, particularly when compared to countries like the US, where candidates expect to have a background cheque as part of the recruitment process. From our experience, the sectors which have been adopting background screening the most in the Middle East (and the wider EMEA region) are banking and finance, technology and healthcare.

bankerme.net

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HUMAN CAPITAL

Steve Girdler

Something that these industries have in common is that they all potentially carry a higher level of risk than most. For example, employees working in banking and finance organisations often have access to large amounts of sensitive personal and financial data and/or money which may be at a greater risk of fraud, or theft. The fallout from the financial crisis means that financial institutions across the world are now expected to accept a level of accountability and responsibility for their hiring decisions. As a consequence, an increasing number are now implementing background screening as a way to reassure the public and mitigate their own business risk, even when it is not yet required by law. BACKGROUND SCREENING IN THE FINANCIAL SERVICES In the UK, many roles in the financial services sector are regulated by the Financial Conduct Authority (FCA). This means that individuals applying for one of these regulated roles must undergo a thorough screening process including employment and education verifications,

THE CONSEQUENCES OF A BAD HIRE CAN ALSO INCLUDE REPUTATIONAL DAMAGE, ADDITIONAL RECRUITMENT COSTS AND A LOW STAFF MORALE, ALL OF WHICH CAN HAVE A LASTING EFFECT ON THE BOTTOM LINE. — Steve Girdler, Managing Director for EMEA & APAC, HireRight

a criminal record check of, character references, a credit check, an identity check, and a regulated reference. Whilst background screening within financial services isn’t yet regulated in the Middle East, the 2018 HireRight EMEA Financial Services Employment Screening Benchmark Report suggests that these companies could be missing out on some of the key benefits of background screening. The report shows that the respondents from the finance and banking sectors consistently saw the benefits of background screening, with improved regulatory compliance (72 per cent), and more consistent safety and security (61 per cent) listed as the top perks of their screening programme. Other benefits listed include a better quality of hire (24 per cent) and a better company reputation (22 per cent). It also found that across the Europe, Middle East and Africa (EMEA) region, 85 per cent of employers have seen candidates misrepresent information on their CVs or applications. Furthermore, 31 per cent of financial ser vices businesses have uncovered issues with senior-level screens—an area which can often go overlooked when it comes to pre-employment screening. SUMMARY Recruitment at all job levels in the financial services sector in the Middle East can pose more risks than others in the region. With the cost of a bad hire being too high to ignore, it can be useful to ask yourself “what could a bad hire cost my business?” and “am I doing everything I can to mitigate my employment risk?” Background screening can help businesses to minimise the risk that each new hire can bring by verifying their credentials, experience and qualifications, to help make sure your next hire is an informed one, rather than a risky one.

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Not your copy? Banker Midle East is a controlled circulation magazine delivered to specific, named individuals in board level and the very top management positions within the banking and financial services sector and to CFOs and Treasury heads in large, listed corporates in the MENA region. Others may subscribe to receive the magazine regularly through the subscription form below. Institutions may also arrange bulk purchase orders of the magazine and its supplements to circulate among internal and external stakeholders. If you wish to arrange regular bulk deliveries, please contact subscriptions@cpifinancial.net for terms. Annual individual subscription (12 issues/year) US$120

CPI Financial, PO Box 502491, 1209 Shatha Tower,

To subscribe, the order Dubaisimply Media fill City,inDubai, UAE. form and return it, with your cheque for US$120 to: CPI Financial, PO Box 502491, 1209 Shatha Tower, Dubai Media City, Dubai, UAE. NAME POSITION COMPANY ADDRESS LINE 1 ADDRESS LINE 2 ADDRESS LINE 3 PO BOX ZIP/POSTAL CODE COUNTRY

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

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28/03/2019 16:56

IN DEPTH

Ishrat Kiyani

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SERVING THE WEALTHY Ishrat Kiyani, Head of Mashreq Gold, discusses how the bank caters to its affluent customers

hat led to the launch of Mashreq Gold? And why is it important for a bank to have such an offering? IK: In today’s environment, an innovative bank must have a superior value proposition which is relationship driven to compete in a dynamic world. The affluent segment in the GCC has been the fastest growing market and requires a focused approach. Moreover, our affluent clients in the region expect and deserve worldclass service and solutions for their banking needs. A proposition such as Mashreq Gold, which prioritises client centricity, does exactly that; it creates a brand association and loyalty while promoting client longevity. In our experience, clients, over time, treat us as their primary bank for both their transactional banking and holistic financial planning needs. We are of the view that Mashreq Gold’s proposition is a key driving force to the bank’s overall strategy. How is Mashreq Gold different from other similar offerings in the market? IK: We at Mashreq believe that culture is the most important intangible of all, hence in Mashreq Gold we continuously drive a culture of ‘client first’. We have created a tailor-made proposition to suit our client’s everchanging needs.

IN OUR EXPERIENCE, CLIENTS, OVER TIME, TREAT US AS THEIR PRIMARY BANK FOR BOTH THEIR TRANSACTIONAL BANKING AND HOLISTIC FINANCIAL PLANNING NEEDS.

Each Mashreq Gold client is assisted by a qualified relationship manager who promises to deliver a superior service. We follow a simple yet rigorous set of steps in identifying our client’s needs and goals. We go through their life goals and their financial priorities, as each client is unique and requires a bespoke

solution. We pride ourselves on our wide array of wealth management offerings, preferential pricing on retail products, and our ever-evolving online and mobile banking capabilities. How relevant are offerings like Mashreq Gold to the MENA market? IK: Mashreq has been an instrumental player in the region and celebrated its 50th anniversary in 2017. Given our historical footprint in the region, we understand our clients better. We appreciate that our clients demand world-class service along with enhanced life style experiences. At Mashreq Gold, we offer our clients a wide range of lifestyle privileges including our best in class Salaam reward programme, complimentary access to golf courses, discounts on dining at exclusive restaurants, preferential treatment at airport lounges and valet services. Our competitive mortgage solutions are also available to MENA clients even if they do not reside in the UAE. Moreover, Mashreq Gold clients can access MENAbased securities via our trading and asset management arm. What is the development/growth potential of Mashreq Gold? IK: Our aim is to provide seamless and consistent interaction between us and our clients across multiple channels. We are focusing more on meaningful interactions as opposed to transactions. Therefore, we have invested heavily into our digital platforms to reach out to our clients and provide them an omnichannel experience. Trust is a thread that binds us to our clients. In certain cases, we have served our clients through generations. We are there for our clients at every stage of their life cycle and especially when they need us the most. Mashreq Gold has been a key driver towards the bank achieving its revenue and profitability aspirations.

bankerme.net

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TECHNOLOGY

HOW GCC BANKS CAN PREPARE FOR DIGITAL DISRUPTION By Jorge Camarate, partner with Strategy&, part of the PwC network

he banking sectors in the six GCC countries must prepare for inevitable digital disruption. The region’s financial services industry region differs by country, with some markets saturated, different reporting standards, and a wide variety of products and offerings. While digital banks and offerings are not widespread, experience from other markets demonstrate that eventually they will have an impact. Rather than waiting, GCC banks can prepare for the future and shape it. The most significant feature of GCC financial services is that cash remains dominant in personal transactions. In Saudi Arabia, cash use in 2016 was equivalent to 38 per cent of GDP, compared to 24 per cent in Turkey. There is, however, progress towards reducing the prevalence of cash. A MasterCard survey of 33 countries and their move towards cashless payments had the UAE in 28th place and Saudi Arabia at 31st.

Despite the importance of cash, GCC banks are moving gradually toward digital transformation. Already, there has been substantial growth in electronic commerce. GCC consumers are enthusiastic technology adopters, with high levels of smartphone penetration, while fast and reliable data connections are more widespread. GCC consumers are interested in digital finance. According to a 2016 survey by Payfort, 53 per cent of Saudi consumers expressed an interest in mobile wallets and mobile payments. In line with consumer interest, a few banks, such as Emirates NBD, are offering digital products. There has been rapid growth in the financial technology sector, known as fintech, which offers digital solutions for finance. GCC fintech companies raised around $100 million from 2010 to 2017. Already, some telecom operators are offering digital finance products. Saudi Telecom Company (STC) has launched STC Pay, a mobile wallet that allows users to transfer money to each other and to banks. Leading technology

companies—Google, Apple, Facebook, and Amazon—are exploring GCC digital payments, with Facebook having already established a financial services team in Dubai since the end of 2017. As they confront these changes, GCC banks can learn from other countries with more experience. They should examine how digital banks have operated and their leading practises. Successful digital finance providers have tended to have a clear segmentation approach and value proposition, they have concentrated on value-added services and customer engagement rather than the nature of the product. These digital banks also started with minimum viable products, which are favoured by digital natives, and then they tested them to learn about product development—an approach used by Revolut Bank in the United Kingdom. Finally, they focused on customer data and used creative marketing, such as through social media and by fostering online communities. For example,

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SUCCESSFUL DIGITAL FINANCE PROVIDERS HAVE TENDED TO HAVE A CLEAR SEGMENTATION APPROACH AND VALUE PROPOSITION, THEY HAVE CONCENTRATED ON VALUE-ADDED SERVICES AND CUSTOMER ENGAGEMENT RATHER THAN THE NATURE OF THE PRODUCT.

Monzo, a UK bank, reached one million transactions within a year of launching without investing in traditional marketing. Instead, Monzo developed unrivalled customer insights to market its services and to differentiate itself in the market. This should lead GCC banks to ask three questions about how to address this impending threat. First, what is their vision? This is the most important question as it influences the next two questions about the scope of digitisation and how they will develop its digital capabilities. Banks can become entirely digital, which means end-to-end digitisation in a separate organisation. Alternatively, they can retain the full range of face-to-face contacts with its clients by connecting with them through new channels and digitising the back office. Or, they can become a digital-human interaction hybrid. Second, what is the scope of digitisation? Digital banks or banks that stress human interactions have different digitisation needs. However, digital-human

interaction hybrid banks would connect with customers through new digital channels and digitise their front offices. Third, based on the vision and the scope, banks should determine their digital capabilities. To pursue innovation, banks could change from within, although the corporate culture of most banks does not support innovation, nor are banks attractive places for digitally-skilled individuals. Alternatively, banks could create an autonomous organisation to pursue digitisation, or buy digital banks. Such separate digital subsidiaries would service those customers who care about their digital user experience and who do not need to speak to staff face-to-face. The difficulty would be getting banks culturally to accept these new organisation and their culture of innovation. Or, banks could take a mixed approach, starting separate teams and infrastructure in their main organisation to deal with digitisation, or they could form alliances with FinTech companies.

Jorge Camarate

GCC banks that act quickly and boldly will come to the market with a robust value proposition that will attract the unmet demand for digital banking. These first movers are likely to reap the largest rewards.

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TECHNOLOGY

THE FINTECH BOON

Wissam Khoury, Managing Director, Middle East and Africa at Finastra, shares his views on the growing potential of fintechs in the region

umulatively, what is the current value of fintech companies in the MENA. How has this grown and how do you see this developing over the next decade? The financial ser vices industr y is undergoing a transformation in the recent years and this is particularly noticeable in the Middle East and Africa. The region has one of the world’s fastest growing banking sectors, driven by the adoption of mobile applications by younger, tech-hungry consumers and the need to overhaul core banking systems in response to tighter regulations and governance standards. Research firm Gartner estimates that IT spending in MENA this year will top $155 billion, with banking and securities firms leading spending growth (+3.6 per cent),

followed by insurance (+2.9 per cent) and investments into analytics, blockchain, artificial intelligence and software applications. The Middle East and North Africa region’s financial technology market, where the number of start-ups is expected to top 250 by 2020 (versus 46 in 2013), will grow by up to $125 million a year to reach $2.5 billion in 2022, according to forecasts. But whilst internet penetration in MENA is one of the highest globally, sitting at 64.5 per cent versus 55.1 per cent global average, a staggering 86 per cent of adults do not have a bank account. For many that means not having access to small loans or credit lines, not being able to securely save money, and having no way of receiving

and making payments. This leaves a huge opportunity for banks and fintechs alike to develop services and products for the unbanked. Which areas do most of these fintechs generally cater to and why? For the reason mentioned above, new payment services are regularly being launched by mobile operators as well as e-wallet services such as “Mada Atheer”, governed by the Saudi Arabian Monetary Authority (SAMA). The most mature sector, payments, includes start-ups offering bill payment, mobile and online

WE MIGHT EXPECT TO SEE REGULATIONS SIMILAR TO EUROPE’S GDPR AND PSD2 SEE LIGHT AS THE APPETITE FOR OPEN BANKING IN THE MIDDLE EAST IS BIG.

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payment solutions as well as wallets. According to research by Wamda, the second most mature sector in fintech is international money transfer, wealth management, insurance solutions and blockchain-based services. In retail banking, many banks are starting to offer off-shore on-boarding and the opportunity to open retail accounts remotely, using latest technologies and authorisation platform and services provided by government to enhance digital experience. Based on the above, would you say that the market is saturated? W h i ch m a rke t s e g m e n t wo u l d you say needs more sophisticated technological capabilities? Customers are asking for more digital solutions to suit greater convenience. Fintechs are proving fierce competitors to traditional banks amongst millennials. Banks can either replicate what fintechs do by responding with equally innovative solutions, or partner with them. There is an appetite for this in the region.

MENAâ&#x20AC;&#x2122;s fintech market, where the number of startups is expected to top

250 $125 $2.5

by 2020 (versus will grow by up to

a year to reach

in 2022

in 2013)

million

billion

Fintech innovations are being adopted by the banking sector and we are seeing increased collaboration between incumbent banks and fintechs. Innovation hubs are popping up throughout the region. Bahrain Fintech Bay launched earlier this year, gathering 50 partners including banks, corporates, government bodies, universities and fintechs. Its mission is to bring together the ecosystem to collaborate to develop new applications at low cost and speed.

Dubaiâ&#x20AC;&#x2122;s International Finance Centre launched last year Fintech Hive, the first financial technology accelerator in the region. This collaboration will bring a new wave of innovative products, in response to customersâ&#x20AC;&#x2122; needs. Emirates NBD (ENBD), one of the largest banks in the GCC, has committed no less than AED 1 billion for digital transformation. Large-scale digital banking initiatives in the region are focused on creating digital-only platforms;

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TECHNOLOGY

banking economy that will enable them to broaden their reach and benefit from the innovation taking place around them. Partnering with fintechs means that banks can offer new and attractive innovations to their customers. They can provide the technology that augments a bank’s existing structure. They are nimble and able to experiment rapidly with new customer service propositions. Fintechs are all about the mobile-first customer experience and they are now actively seeking the banks’ customers to engage with. Technology moves quickly in today’s world and no single company can be expected to offer everything to everyone. We believe that the future of finance is open and collaborative.

Wissam Khoury

rationalising branch networks; automating back office functions; and increasing mobile banking services as retail online buying activity is set to soar in the region in the years ahead. Research estimates that the combined e-commerce sales of the Gulf countries will more than double between 2017 and 2020. Additionally the volume of e-commerce is set quadruple over five years but SME lending stands at half of the global average, meaning there is huge potential there.

THE SECOND MOST MATURE SECTOR IN FINTECH IS INTERNATIONAL MONEY TRANSFER, WEALTH MANAGEMENT, INSURANCE SOLUTIONS AND BLOCKCHAINBASED SERVICES.

With an expectation that fintechs would grow exponentially over the next decade, how do you see this impacting the banking and financial services sector? How would it shape the future of both banks and consumers? Whilst traditional banks have the benefit of large and trusted client partnership, new challenger banks and fintechs are agile and often at the cutting edge of new technology, being able to experiment fast with leading innovations. In today’s digital-first economy, challenger banks are in a great position to gain market

share. Traditional banks legacy systems lack the agility to support the delivery of customer-centric products and services. Whilst traditional banks are modernising their core systems, it is still no match compared to agile fintechs. Until recently, fintechs posed a big threat to banks, weakening the loyalty of many long-standing customers with more personalised, transparent offers. The reality is that if banks do not act fast, they risk becoming irrelevant. Instead of shutting down new entrants, banks need to focus on creating an open

— Wissam Khoury, Managing Director, Middle East and Africa, Finastra

Looking at how rapidly technology evolves in this space, how do you foresee MENA governments responding to this? What do you think is the best way to embrace this? Regulatory government bodies like SAMA in Saudi Arabia and the Government of Dubai are helping drive fintechs in the region and the Middle East is now a highly lucrative space for investors as well as solution providers. In Kingdom Saudi Arabia, government programmes Vision 2030 and Financial Sector Development programme aim to create an environment where the most innovative technologies and initiatives can prosper such as e-government; smart cities; the internet of Things (IoT); blockchain or fintech hubs for Islamic banking, position the Kingdom as an industry leader in the region and globally. Governments like Saudi Arabia are issuing fintech licences which shows that governments are getting involved the race to becoming one of the top players in fintech in the region. We might expect to see regulations similar to Europe’s GDPR and PSD2 see light as the appetite for open banking in the Middle East is big.

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The business of banking www.bankerme.net

TECHNOLOGY

FIVE MISTAKES THAT TURN CORPORATE SECURITY AWARENESS INTO A WASTE OF MONEY Kaspersky sheds light on the inefficiencies of non-strategic cybersecurity training

ore than half of businesses consider their employees to be the weakest link in corporate cybersecurity, as their actions may put company data and systems at risk. That is why companies invest heavily in educating them on basic IT security skills. In fact, leading analysts predict the security awareness training market will evolve to be worth $10 billion by 2027. Despite this, some businesses may be sceptical about training staff on cybersecurity. Some may think that people, aware of the potential threats or not, will always make mistakes. Isn’t it a waste of company’s money to invest in courses that do not generate the desired results? The true purpose of security awareness training is—surprisingly—not to raise awareness. It should change an employee’s behaviour online—not just inform them about the threats and measures.

Based on more than 20 years of researching cyberthreats and providing cybersecurity services to eliminate ‘the human factor’ in cybersecurity, we realised that the following five educational pitfalls can make cybersecurity training ineffective. INEFFICIENT FORMAT Corporate learning and development may come in different forms: a lecture by a member of the company, a talk by an external speaker, or a computer-based course. One training course format that suits one business may not necessarily work for another, so companies should choose a format which is proven to be effective for achieving a particular skillset. In our practise, a tedious lecture is not suitable for a training course aimed to improve employees’ practical cybersecurity skills. By using an online format, you can combine a range of

content (video, text, tests) and add gamification elements that transform a lesson from a boring obligation to something much more amusing. Such interactivity makes a cybersecurity course more attractive and engaging for employees. Moreover, an online course allows workers to progress at their own pace and spend more time on especially complicated topics. This is nearly impossible when employees attend traditional lectures. THE SAME QUALIFICATION FOR ALL JOB ROLES There is a belief that the responsibility of a company’s cybersecurity is everyone’s job, as the actions of each person may affect security. So, the tempting idea for businesses is to introduce security awareness training with the objective of transforming every employee into a

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COMPANIES SHOULD THEREFORE IMPLEMENT COURSES THAT MAKE TOPICS EASY TO REMEMBER, EMPHASISING THE MOST CRITICAL ASPECT SEVERAL TIMES. cybersecurity pro—and make it obligatory for everybody, for ultimate peace of mind. Nonetheless, the curriculum of a security awareness training course, which would be useful for certain employees, depends on what systems and information they have access to. Teaching employees things they never deal with in their life (especially at work) is not cost-effective. Simply put, to avoid mass attacks, everyone should know how to identify obviously malicious websites, for example, like ones which ask to update software. Personnel with access to sensitive information and businesscritical systems should then be given a more advanced course and be able to even recognise personalised fake emails. INFORMATION OVERLOAD Often, security awareness training is designed to cover all important topics at once. However, this type of format hardly facilitates changing behaviour, as it is unlikely that all the information will be absorbed. It is believed humans are able to remember only up to a limit of seven chunks of new information. You may know from your own experience that it is hard to perceive lots of facts and rules all at once. Content is best remembered when it is delivered in bite-sized modules, as it is less likely to blur into one piece of

information or fade away. If a short lesson (which will not consume a lot of precious working time) is devoted to a single topic and offers a reasonable number of takeaways, it’s more likely that people will be able to keep in mind how they should react for a particular threat. LACK OF PRACTISE AND REPETITION Sometimes there is good content in the training but it’s not memorised as it should be—just because of a lack of repetition. However, it is the cornerstone of translating awareness into actions. Security training courses are often taken by uninspired audiences who might listen to instructions but are unmotivated to learn and commit them to memory. Companies should therefore implement courses that make topics easy to remember, emphasising the most critical aspect several times. For example, to highlight the importance of strong passwords, this topic should be reinforced and mentioned several times throughout the course: in lessons about sensitive information protection, social media, email, etc. LACK OF REAL-LIFE RELEVANCE The way to solve the issue of employees lacking awareness may seem obvious— increase awareness and tell employees

general cybersecurity rules and policies. Unfortunately, this strategy will hardly work when the aim should be to change behaviour for the better. Most employees simply do not have a security, or even a general IT, background. They may not understand what they should do if you simply advise them to keep their applications updated and be careful when opening suspicious attachments. To overcome t h i s c o m m u n i c a t i o n b a r r i e r, t h e learning content should be carried out by simulating potential situations an employee could face—like working with emails or surfing the internet looking for a site to download their favourite series. IN A NUTSHELL To be successful, training needs to be conducted in a way that not only covers all the essential topics, but makes them easy to understand and memorise. When employees are forced to spend hours of their time in lengthy training sessions, on a topic which is not part of their job responsibilities, it can be difficult t o ensure they take the advice on board. However, if the training does not take much time to complete and is easy to understand, it is much more likely for this to result in less mistakes and stronger overall security.

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TECHNOLOGY

DIGITAL-HUMAN INTERPLAY Rajashekara V. Maiya, Vice President & Head – Business Consulting Group at Infosys Finacle, highlights four key workforce trends for 2019 and beyond

anks have been known to be inherently risk-averse traditionally. In a 2018 Global Innovation ranking by PWC, less than 10 financial services companies found a place in the top 1000. Against the backdrop of game-changing regulations, the dazzling pace of digital change, evolving customer expectations and intensifying competition, is that reality about to change? Banking is one of the few industries where the regulatory mandate is driving API-led collaboration and ecosystem-driven innovation in most countries. In 2019 and beyond, the uptake of emerging business models and technologies will transform the banking business dramatically. New realities will demand organisation and business strategies that use digital technologies to empower every application, individual, internal team and external partner to deliver to their peak potential. As banks ready themselves to tap into the fresh opportunities of the digital world, they are beginning to navigate the challenges of new skill sets and culture shifts. What are some of these challenges and trends we are talking about? • The war for talent A recent ISACA study revealed that on an average about one-third security positions

remain unfilled in Europe for six months or longer. The demand for cybersecurity and digital security professionals will continue to increase in 2019. The second crucial skillset will be a breed of experienced data scientists and AI specialists who can take use cases and proofs-of-concept into production. Over the past couple of years, banks have made considerable investments in the form of joint ventures, centres of excellence and collaborative innovation with industry and academia for a variety of advanced use cases. In 2019, banks and enterprises will evolve their hiring and recruitment practices to win the war for talent that can see them through successful live implementations for tangible business results. Thirdly, extensive automation will be a crucial building block of digital transformation at banks in 2019. Banks will hire automation experts and consultants who can design a roadmap for organisation-wide automation a n d i m p l e m e n t s u ch l a r g e - s c a l e programmes successfully. • Market and business expectations vs. banking talent It is typical for organisations to set aside funds for training university talent to make them productive. Given the

pace of digitisation and change in the industry, this gap between fresh talent and productive talent will continue to grow if business and academia do not join hands to align student curriculum with market expectations and integrate live projects to expose students to realworld industry challenges. In 2019, we expect enhanced industry-academia collaboration in banking. In addition to new fresh talent that understands the business of banking, banks are likely to grapple with the challenge of scarcity of experienced professionals who understand the customers, the organisation, and the interest of various stakeholders. • Diversity and inclusion A recent study by PEW estimates millennials to hit the 73 million mark in 2019 to outnumber the baby boomers. The number of people between the age of sixty-five and above is projected to triple by mid-century. Banks will accelerate their efforts to attract and retain this diverse talent mix this year. 2019 is also the year when a generation that has grown up using digital technologies and social media enters the workforce. Banks will have to redesign their engagement practices to tap into this digital-savvy generation.

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An important aspect of diversity and inclusion in 2019 and beyond will be ensuring digital accessibility for employees with disability. In times where manual labour is on a steep decline at workplaces, digital accessibility for all will not only be a compliance mandate but crucial to harness the full potential of the workforce. The 2018 WHO study reports that about 15 per cent of the global population suffers from some form of disability. The credo of a truly digital organisation does not stop at being digital in systems, IT, and processes to ensure enhanced and immersive customer experience. It goes above and beyond that. Digital accessibility for all in the workforce, including visually impaired, colour blind, or patients of palsy, will be essential, and banks will ensure this by using emerging digital technologies such as virtual assistants and AI. Diversity in the workforce will expand to dimensions beyond age and gender to include talent from industries outside of banking and disciplines beyond banking and commerce, as banks embrace the greatly expanded definition of banking. To do away with old practices of extensive documentation and timeconsuming approval processes that deter

IN 2019, BANKS AND ENTERPRISES WILL EVOLVE THEIR HIRING AND RECRUITMENT PRACTICES TO WIN THE WAR FOR TALENT THAT CAN SEE THEM THROUGH SUCCESSFUL LIVE IMPLEMENTATIONS FOR TANGIBLE BUSINESS RESULTS.

millennials from using a service, banks will discard hierarchies and adopt flat organisational structures. • Culture shift Banks will need to align their organisational practices and culture for the new trend of short-term and part-time employment—short-term employees that are not on the payroll of a bank but work with more than one bank at a time. A bank’s culture will need to ensure that these employees can deliver what is expected efficiently and work with the rest of the workforce without any IP infringement or loss of confidential information. Banks will need to design suitable practices for infrastructure use, appraisal, feedback and recognition for this workforce.

Continuous learning and customercentricity will continue to be integral to success. Banks will make learning programmes available on mobile devices and use digital technologies to ensure real-time customer feedback reaches relevant departments and employees. Digital technologies are changing the face of banking. They are presenting new challenges, but at the same time introducing new opportunities for businesses to create value and flourish. However, what’s required on the part of organisations including banks is optimal digital-human interplay that allows harnessing these technologies for higher efficiency gains and customer-centricity while empowering humans to perform higher value tasks with creativity and empathy. Banks that train their talent for new market realities, engage the new generation of workforce, inculcate diverse practices including learnings from outside of banking, and adapt their cultural and organisational practices to tap into the full potential of human capital available will emerge winners in the digital world. Read Infosys Finacle’s report about the 12 Trends that will reshape banking in 2019. https://www.edgeverve.com/finacle/ trends-2019/

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Unbound is a global innovation platform, with festivals in Bahrain, London, Singapore and Miami.

UNBOUND BAHRAIN Cementing its position in the region as one of the leading technology and innovation hubs, Bahrain hosts MENA’s leading innovation festival for the second year in a row with participation from over 3,000 start-ups, investors and businesses, in AI, blockchain, digital wellbeing, energy, investment, sustainability and fintech

n its second year, Unbound Bahrain was its biggest yet and composed of 35 per cent corporates and brand executives, 35 per cent founders and entrepreneurs, 15 per cent digital and media agencies, five per cent government and trade agencies, five per cent investors and five per cent journalists. Day one saw contributions on the culture of innovation from Amazon, the challenges of managing passenger experience in an age of disruption from Bahrain Airport Company and opening remarks from HE Khalid Al Rumaihi, Chief Executive of the Bahrain Economic Development Board (EDB) highlighting Bahrain’s maturing start-up culture. Over 100 start-ups from across the world exhibited at this year’s Unbound Bahrain event with large delegations from UK, India, Hong Kong and the wider MENA region. Major international and regional corporate tech players such as Amazon Web Services (AWS), Zain and CrediMax partnered with the event to meet with and hopefully build relationships with early emerging market players.

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Trust was the most important aspect to their clients at launch, said Wahedna

In an exclusive interview with Banker Middle East, Daniel Seal, Founder and CEO of Unbound shared his thoughts on the fintech ecosystem in the region. What are your views on the fintech sector in the Middle East? The Middle East presents an exciting opportunity for the world of fintech as it has huge untapped potential to be global leaders in the finance sector. They have already made several innovative developments in boosting financial inclusion and empowering the unbanked by creating new payment methods. Not only this but the region is dedicated to nurturing new fintechs. So, in my view, in the next two to three years the fintech sector in the Middle East will boom with more payments, cashless economies and will disrupt the financial sector. As a successful entrepreneur yourself, from your experience, what do you think appeals most to corporations and governments about fintech companies? The big thing in the industry now is finding innovative solutions to help the unbanked, progress towards a cashless economy, make mobile payments mainstream and find ways for the practical application of blockchain. I think what appeals to corporates and governments in the Middle East, is that you’ve got a huge opportunity and a huge area of potential, which gives entrepreneurs the ability to see what happens elsewhere in the world and build products relevant to that marketplace, not even including looking at Islamic finance and other opportunities available. Looking at the banking and finance sector in this region, where do you see opportunities for fintech’s? There is huge potential for the growth in regulatory tech with the demand for innovative AI and quantum computing solutions. Large corporates are looking to

Daniel Seal, Founder and CEO, Unbound

invest in start-ups that can streamline the compliance process and reduce costs due to regulation breaches and there is a lot of opportunities there for start-ups. The region should also take use of sandbox and mentorship programmes that are popping up in the region as this will be great incubators for growth. Then of course, there is endless opportunity in blockchain, payments, mobile application and developing a cashless economy across the middle east. From your point of view, what are the major challenges faced by fintech companies? It’s regulation—it’s if you’re dealing with mobile payments, with bandwidth and with data. I think the whole Middle East is undergoing an interesting digital transformation from an oil-based economy to a knowledge-based economy. This is an important time for fintechs as they need to ensure the infrastructure is there with the telcos and ensure the banks are willing to accept new ideas and new technologies. Secondly, make sure that they have the bandwidth and the talent to be able to develop those and

lastly, have the entrepreneurial mindset. Some of these challenges have already started to be addressed with Vision 2021 of the UAE who are championing entrepreneurship and you’re seeing this as well as in Bahrain. Harbouring an environment that n u r tu r e s e n t r e p r e n e u r s h i p a n d encourages experimenting with new technologies for banks, corporates and governments to embrace change and to give the right regulatory framework through sound boxes, the right corporate framework through acceptance and protection of IP and the ability for investment and funds to flow through to the growing economy. There has always been a debate about banks and fintechs. What are your views on this? And how do you imagine a symbiotic ecosystem between the two? I’m a big believer that collaboration is the key to any business, whether it’s in banking and fintech or it’s in the media sector, across industries and across vertical. Doing something alone, may give you more ownership but all the challenges that affect one company affect the other. Collaboration is the key. If you see across the whole digital economy the concept of sharing economy, sharing knowledge helps, because if your business is good and my business is good, both our businesses benefit. Only if you’re a direct competitor is there concern but the banks need fintech, otherwise you’ll see what happened with, for example, TransferWise where people are now stopping their banks transferring money because they can do it cheaper with TransferWise and what you want to make sure is that the banks do not lose out by missed opportunities. It reminds me of Blockbuster who were

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offered to buy Netflix a few years ago, they declined, and now Netflix is more valuable than Disney and Blockbuster is bankrupt, so sometimes the older institutions need to embrace and engage the younger more dynamic technology. In terms of pace and development in this area, how would you compare this region to the rest of the world? You’re seeing the Bahrain Fintech Bay with Abu Dhabi Global Markets, with others, that there is growth and speed developing in fintech in the Middle East and GCC. It is taking time, but again as you’ve got a region that is not really used to

Key elements to building the next great fintech are: plugging a gap, customer centricity, simplicity and cost-efficiency.

Unbound Bahrain provided regional and international entrepreneurs with unique networking opportunities, workshops and speaker sessions that gave unique insights into the latest in tech innovation.

taxes, the concept of financial reporting, financial inclusion hasn’t really been there because people have kept their monies to themselves so, obviously, there is a culture change for the individuals and for international companies. Everyone thinks that the GCC and the Middle East is an exciting place for fintech, so I think in the coming years we’re going to see it speeding up and getting more excited. In your role as Founder and CEO of Unbound, what would you say is the most challenging aspect of your work? I think the challenge for any Founder and CEO, is making sure

that your business is growing rapidly and making sure that you have the infrastructure, the team and the capacity around you to deliver. I think that is what’s very important for any entrepreneur—dream big, be bold, be ambitious and you’ll figure out how to deliver and make it all happen. It’s all about fulfilling your dreams and creating exciting opportunities. It’s about impacting society and doing some cool stuff in the tech s e c t o r. S o , t o s u m m a r i s e , i t ’s about dreaming big, working hard, delivering, having fun and not taking yourself too seriously.

Commenting on Bahrain’s commitment to building a strong start-up ecosystem, Al Rumaihi said, “The region has woken up to start-up potential. Bahrain is going to become a leading hub for start-ups, already start-ups can pilot their product and scale it beyond Bahrain. You have a Government here who is willing and able to help startups succeed.” Complimenting that point, Sheikh Abdulla Al-Khalifa, Director of Communications, Zain Bahrain, explained, “Corporations are recognising the power and influence of regional start-ups, your Careem, Fetchr, Talabat are all disrupting traditional business models so corporations are adopting one of two solutions: find skills and resources to compliment them or find ambitious start-ups to partner with and help them develop.” “Corporates need to partner with start-ups. Corporates are looking to transform recruitment and develop their existing employees. start-ups provide that linkage for them to solve problems. Culture, values, needs and skills make high performers; imagine what this could do to businesses,” said Sahiqa Bennett, Co-Founder of Searchie, an Ai powered talent solution, who was also a finalist in the AWS Battle of the Startups competition at Unbound Bahrain.

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