BUILDING THE TALENT POOL Jamal Al Jassmi, General Manager, Emirates Institute of Banking and Financial Studies
9: A clear view of GCC banks’ asset quality 26 IFRS
of the future: Liv. 42 Bank
about transactions, 62 It’sbut notalsojustrelationships
digital native 66 Retaining
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MAY 2019 | ISSUE 218
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EDITOR’S NOTE
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amadan kicked off with much anticipation of the predicted slowdown in activity—this however was not the case. Business seems to have gone on as usual and this is a positive indication for Middle East markets. Sentiments across the board seems to be optimistic thus far in spite the ongoing geopolitical rifts and economic pressures. The banking sector has always had their foot in the ground across the GCC, being a cornerstone of their domestic economies. The consolidation activity across this landscape—although a positive for the industry—is believed to be coming to an end. Six of the eight mergers that have transpired since 2014 have benefited from having the same shareholders on both sides of the table, whereas the remaining banks do not share this commonality which makes future deals more difficult, unless economic pressures force shareholders to reconsider. Another heightening development is the rapid uptake of technology—over the last few months financial institutions are becoming more aggressive in acquiring technological capabilities. Over the next few years, analysts have suggested that mobile banking, cloud computing, artificial intelligence and blockchain are the main technologies that will change the global retail banking sector in the region.
Within these pages we take deep dive into Emirates NBD and Mashreq’s approach on digitisation in their retail banking business. In the last part of the book we have also provided a more focused and comprehensive section on technology which covers a wider range of topics in much further detail—a staple feature of our magazine going forward. This issue will also provide you insights on the oil and gas market in the GCC, an update on the Saudi Arabian economy, the impact of IFRS 9 on banks a year on, as well as a guide for your African investments in light of elections across the continent. We always strive to provide you with a well-rounded outlook on the region. Wishing you a rewarding read, and Eid Mubarak in advance.
Nabilah Annuar EDITOR, BANKER MIDDLE EAST
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CONTENTS
MAY 2019 | ISSUE 218
ANALYSIS
10 Balancing act
NEWS
28
14 News highlights
THE MARKETS
18 An outlook on gas in GCC
LEGAL PERSPECTIVE
22 Court of the blockchain 26 IFRS 9: A clear view of GCC banks’ asset quality
COVER INTERVIEW
28 Building the talent pool
COUNTRY FOCUS: BAHRAIN 34 Crude awakening
22
26 6
34
For generations, the better way to bank. Over 40 years ago, Dubai Islamic Bank pioneered a way of banking that was truly better: Islamic banking. Since then, many generations of customers continue to enjoy world class products and services backed by the very latest in banking technology. For them as for you, this is still the better way to bank.
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CONTENTS
MAY 2019 | ISSUE 218
RETAIL BANKING
42 Bank of the future: Liv. 48 Digital simplicity
INVESTMENT
52 In year of elections, will African countries get the investor vote? 56 The future of Islamic finance
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MAY 2019 | ISSUE 218 MIDDLE EAST
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BUILDING THE TALENT POOL Jamal Al Jassmi, General Manager, Emirates Institute of Banking and Financial Studies
CHIEF EXECUTIVE OFFICER NIGEL RODRIGUES nigelr@cpifinancial.net Tel: +971 4 391 4681
BUILDING THE TALENT POOL A CPI Financial Publication
A new perspective: IFRS 9 data shows view of GCC banks asset quality 26 clear
Bank of the Liv. 42 future:
It’s not just about transactions, also relationships 62 but
digital native 66 Retaining
APRIL 2019 | ISSUE 217 MIDDLE EAST
APRIL 2019 | ISSUE 217
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PATIENCE AND OPTIMISM: KEY TO UNLOCKING INVESTMENTS IN THE MIDDLE EAST Dhafer Sahmi Al Ahbabi, Chairman of Al Ramz Capital
EDITORIAL ASSISTANT KUDA MUZORIWA kuda.muzoriwa@cpifinancial.net Tel: +971 4 391 3729 PATIENCE AND OPTIMISM: KEY TO UNLOCKING INVESTMENTS IN THE MIDDLE EAST
A CPI Financial Publication
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of play 18 State
Managing operational effectively 20 risk
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Opportunistic optimism: the investment cycle 54 riding
Driving innovation in banking 58 corporate
ISSUE 01
A Banker Middle East Supplement
TECHNOLOGY
A Banker Middle East Supplement
62 It’s not just about transactions, but also relationships 66 Retaining the digital native 70 Data digitalisation — driving economic growth in the UAE 72 Preparing for a digital future
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Jamal Al Jassmi, General Manager, Emirates Institute of Banking and Financial Studies
Dubai Technology and Media Free Zone Authority
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THE TRANSFORMATION OF TITANS Standard Chartered’s Stuart Beaumont
on the company’s newly announced CX
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8
ANALYSIS
BALANCING ACT In its annual credit analysis, Moody’s concluded that Saudi Arabia’s balance sheet remains robust—for now
T
he reasons why Moody’s recently affirmed Saudi Arabia’s A1 credit rating are pretty clear: Saudi Arabia’s money may be running out, but it still has plenty to spare. In its annual credit analysis on the Kingdom, Moody’s listed Saudi Arabia’s credit strengths as a strong but deteriorating fiscal position; substantial external liquidity buffers; a large stock of proved oil reserves with low extraction costs; and prudent financial system regulation. FISCALLY FIT Moody’s assesses Saudi Arabia’s fiscal strength as “Very High”, based on the Government’s famously large financial
10
resources, low but rising debt levels and high debt affordability. It expects Saudi Arabia’s debt trend to improve over the next two years to three years, and the debt level to remain below 30 per cent of GDP. However, lower oil prices since 2014 have turned previously large fiscal surpluses into deficits. This has nibbled at the government’s fiscal strength through a rapid increase in government debt, reaching around 19 per cent of GDP in 2018, and a simultaneous drawdown of foreign currency assets which shrank by an amount equivalent to 28.5 per cent of 2018 GDP during 2015-18. Nevertheless, the Government’s fiscal buffers still fully cover the entire stock
of government debt. This is likely to decline in the next few years as debt edges upward toward 30 per cent of GDP. Still, the Government’s broad foreigncurrency buffers will likely continue to substantially exceed Government debt in the foreseeable future. For now, its finances are immunised against shocks. BLACK OUT? Despite Saudi Arabia’s efforts to wean itself off the black stuff, oil remains the lifeblood of its economy. Oil and gas output continues to account for about 43 per cent of Saudi Arabia’s real GDP, Moody’s noted, making economic growth extremely slippery.
WITH OIL PRICES CONSTRAINED AND LIMITED SPACE TO INCREASE PRODUCTION, SAUDI ARABIA WILL LACK THE MEANS TO PROVIDE LARGE AND STEADY FISCAL STIMULUS. — Moody’s
OPEC+ agreed to another coordinated production cut in December 2018 in response to the sharp drop in oil prices during the last quarter of 2018. This latest output cut, equivalent to around three per cent of the group’s total production, became effective in January 2019 and is due to last until the end of June 2019. Such strategic oil production shifts over the past two years have been the main driver of volatility in real GDP growth, according to Moody’s, causing the economy to contract in 2017 after growing 1.7 per cent in 2016 before contributing to the 2.2 per cent recovery in 2018. In 2019, Moody’s expects that flat crude oil production will dampen an expected
acceleration in non-oil growth and a boost to the hydrocarbon sector from the scheduled ramp-up of the new Jazan oil refinery and the Fadhili Gas Plant. The latter is expected to increase Saudi Arabia’s natural gas-processing capacity by around 16 per cent over the next two years. GROWING PAINS Over the next five years, Moody’s expects that Saudi Arabia’s economy will grow at a rate of between two per cent and 2.5 per cent per year – markedly lower than the 4.6 per cent growth rate recorded during the boom years of 2011-16. With oil prices constrained and limited space to increase production, Saudi Arabia will lack the means to provide large and steady fiscal stimulus. However, beyond the oil fields there are ambitious plans which will shape Saudi Arabia’s future. The Kingdom’s efforts to diversify its economy are critical to long-term growth, with Moody’s suggesting that Saudi Arabia’s credit rating could be upgraded if the country moves away from oil faster than planned. Despite Saudi Arabia’s enthusiasm, Moody’s warned that structural reforms and diversification will take time to have a noticeable impact, especially given the Kingdom’s relatively limited set of natural comparative advantages and high labour costs. On the plus side, political and popular support for the Government’s ambitious reform momentum remains very high and the ownership of the reform programme has deepened beyond the Council for Economic and Development Affairs led by Crown Prince Mohammad bin Salman.
Oil and gas output continues to account for
43%
of Saudi Arabia’s real GDP
The Government is also pinning its hopes on several giga projects focused on the underdeveloped tourist and entertainment sectors to fire up the economic diversification drive. These projects are expected to be mostly financed by private sector investors with some contribution from the budget and the Public Investment Fund. Privatisation of state-owned and operated enterprises is another key channel for implementing structural reforms, hence the establishment of the National Centre for Privatisation to develop the legal framework for public-private partnerships. Most famously, the much-anticipated initial public offering (IPO) of national oil company Saudi Aramco is slated for 2021. BUDGET BLUES Just as in 2017, the improvement in the fiscal position in 2018 was driven by revenue growth. Despite a near doubling of tax revenue due to the introduction of VAT, Moody’s reported that more than 80 per cent of the revenue increase came from higher oil revenue. Higher revenues were also the reason for 2018’s fiscal outperformance relative to the budget. The 2018 deficit came in lower than budgeted, as revenue exceeded budget assumptions by 16 per cent even though spending exceeded budget targets by more than 10 per cent. Although lower than historical averages, Moody’s said that budget overspending in 2018 was still very significant. About a third of the increase over the budgeted amount was due to the extension of social spending announced by a royal decree after the budget had been passed, while the rest materialised as the Government took advantage of higher oil prices to accelerate some payments toward the end of the year. SIZING UP When it comes to economy, size matters. Saudi Arabia weighs in with a nominal GDP of $689 billion in 2017, making it more than three times the size of the median for A-rated countries.
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ANALYSIS
SAUDI ARABIA HAS VERY SIZABLE OIL RESERVES Years of oil production at the current rate (2017) 90 80 70 60 50 40 30 20 10 0
Kuwait, Aa2
UAE, Aa2
Saudi Arabia, A1 Kazakhstan, Baa3
Qatar, Aa3
Russia, Baa3
Azerbaijan, Ba2
Kuwait, Ba1
Source: BP Statistical Review of WorldEnergy 2018, Moody's Investors Service
FISCAL METRICS HAVE DETERIORATED BUT FROM A VERY STRONG STARTING LEVEL %of GDP Government foreign currency reserves *^
120
Other foreign currency reserves *
Government debt
100 80 60 40 20 0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
* Part of foreign-currency reserves managed by Saudi Arabian Monetary Authority (SAMA) Includes the government's reserve and current account with SAMA Source: Haver, IMF, Moody's Investors Service
However, size isn’t everything. For now, the Kingdom’s capacity has been constrained by the economy’s relatively low level of diversification away from hydrocarbons. Nonetheless, the large size of the Kingdom’s economy and its large and fast-growing population relative to the other GCC peers hold promise for future economic diversification. Moody’s also considered Saudi Arabia’s income per capita, measured as per capita GDP in purchasing power parity (PPP) terms. At $54,595 in 2017, according to IMF
12
estimates, Saudi Arabia’s GDP income per capita is above many rating peers.This is good news, as high per capita income typically reflects high capacity to absorb external shocks that may put negative pressure on economic growth and employment. GUIDING GOVERNANCE Saudi Arabia generally scores modestly well on Worldwide Governance indicators, however Moody’s warned that in most cases its scores are below those of its peers. On a scale of 1 to 100, with 100
the most effective, the Kingdom ranks 55 for government effectiveness, 54 for rule of law and 64 for control of corruption. Government effectiveness measures perceptions of the quality of public services, the bureaucracy, policymaking and government credibility. Saudi Arabia’s percentile rank on this indicator was 51 in 2015 and 34 in 2011, indicating an improving trend. This improvement reflects streamlining of bureaucracy, including through the restructuring of the council ministers into two subcabinets.
FISCAL BALANCE PROGRAMME REVISIONS INCREASED SPENDING TARGETS Additional government expenditure, % of GDP FBP Revision - Dec 2017
90
Original FBP
FBP Revision - Dec 2018
FBP Revision - Dec 2017
FBP Revision - Dec 2018
30
80
25
70
20
60 50
15
40
10
30 20
5
10 0
GOVERNMENT EXPECTS THE DEBT BURDEN TO PEAK AT AROUND 25% Government debt, % of GDP
2017
2018
2019F
2020F
2021F
2022F
2023F
Source: Ministry of Finance and Moody's Investors Service
BORROWED TIME As Saudi Arabia’s debts creep up, the Kingdom will have to be careful about how they are managed. With sizeable fiscal deficits expected over the rating horizon, Moody’s highlighted how Saudi Arabia’s gross funding requirements will also increase. To limit the risk of crowding out domestic, private sector borrowing and the erosion of the Central Bank’s foreign exchange reserves, the Government’s borrowing has been skewed toward international capital markets during 2016-18, leading to a buildup in external Government debt. Moody’s foresees a shift back towards domestic borrowing over the coming years. The Government has already started monthly domestic Sukuk issuance. Furthermore, to improve secondary market liquidity in these securities, primarily held by domestic financial institutions, domestic Sukuk have been listed on the local bourse. Domestic Sukuk issued under this new programme constituted around 19 per cent of total Government debt at the end of 2018. Although the Kingdom’s fiscal deficits will inevitably grow, the country is spoilt for choice about how it will plug the gaps in its finances. Moody’s scores Saudi Arabia’s Government liquidity risk
0 2014
2015
2016
2017
2018
2019F 2020F 2021F 2022F 2023F
Source: Ministry of Finance and Moody's Investors Service
ALTHOUGH THE KINGDOM’S FISCAL DEFICITS WILL INEVITABLY GROW, THE COUNTRY IS SPOILT FOR CHOICE ABOUT HOW IT WILL PLUG THE GAPS IN ITS FINANCES. — Moody’s
at “Very Low”. The Government has access to ample sources of liquidity both from domestic and international capital markets and is unlikely to encounter difficulties in financing fiscal deficits. Beyond annual Eurobond and international Sukuk issuance, as well the monthly domestic Sukuk issuances, the Government has also been able to tap syndicated loans, borrowing $10 billion for five years in August 2016, which was then upsized to $16 billion and refinanced with extended maturities and on better terms in March 2018. During the first three months of 2019, the Government issued $7.5 billion of Eurobonds and $6 billion equivalent of domestic Sukuk. While Saudi Arabia’s balance sheet remains the envy of the GCC, it seems money isn’t everything. Oil price volatility and socio-economic challenges posed by strong population growth and elevated unemployment are conspiring to jeopardise its rating. Its stable outlook reflects Moody’s view that the risks to Saudi Arabia’s credit profile are broadly balanced. There remain many factors—including rising debts levels and maintaining the momentum for reform—which could tip its rating either way.
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NEWS HIGHLIGHTS
Lebanon finalises 2019 budget, targets 7.5 per cent deficit The Lebanese government finalised its 2019 draft budget but stopped short of officially passing it, a crucial step that could unlock billions of dollars in aid and revive the economy. The budget targets lowering the deficit to 7.5 per cent of gross domestic product (GDP), from the current 11.5 per cent, through a combination of spending cuts and increases in some taxes. Jamal Al-Jarrah, the Lebanese Communications Minister, said that the repeatedly delayed proposals will be approved in a future cabinet session. Some top officials, led by Foreign Minister Gebran Bassil, have urged the government to be bolder this year in a bid to attract investors and secure $11 billion in funding pledged by international donors who are waiting for evidence that Lebanon is committed to reducing the deficit and combating corruption.
Egypt expects bank mergers as higher capital requirements loom Egypt’s new banking law is expected to raise the minimum capital requirements for lenders tenfold, in a move that could pave the way for mergers among the country’s smaller lenders. A draft of the law raises the amount of capital needed to EGP 5 billion ($294 million) from EGP 500 million. Additionally, branches of foreign banks will require at least $150 million up from $50 million.
Saudi commercial court accepts AHAB’s bankruptcy filing Saudi Arabia’s Dammam Commercial Court accepted a filing by AHAB to have its decade-long dispute with creditors resolved under the Kingdom’s new bankruptcy law, rejecting a demand to liquidate the company filed by HSBC and Raiffeisen Bank. The financial restructuring is one of the procedures envisaged by Saudi Arabia’s bankruptcy law which was introduced last year. AHAB’s bankruptcy filing was seen as a key test of the new law for handling insolvency disputes, which became effective last year as part of reforms aimed at making the country more investor-friendly. Creditors have been pursuing Ahmad Hamad Algosaibi and Brothers (AHAB) as well as Saad Group since the duo defaulted on about $22 billion in combined debt in 2009.
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SAMA fines 16 financial institutions for violating principles of responsible finance The Saudi Arabian Monetary Authority (SAMA) fined 16 financial institutions for violating principles of responsible finance, the regulator has instructed these institutions to correct the violations. SAMA stated that the fines were imposed in order to implement principles of justice and transparency and to ensure that institutions comply with responsible finance that should meet with the actual needs of all segments of the society, without providing details of the fines. The central bank fined some of the Kingdom’s major financial institutions such as Al-Rajhi Bank, Al-Ahli Bank, Saudi Fransi Bank as well as Al-Riyad Bank, Al-Jazira Bank and Dubai-based Emirates NBD Bank.
DIB hires HSBC to advise on merger talks with Noor Bank Dubai Islamic Bank hired HSBC Holdings to advise on its possible acquisition of Noor Bank, a tie-up which will create a lender with AED 278 billion ($76 billion) in assets. Following reports that the companies had held initial talks, the Chief Executive Officer of Dubai Islamic Bank said that the lender can see a lot of synergies with the acquisition of Noor Bank. The Middle East’s financial-services industry is witnessing a wave of consolidation as banks seek ways to improve competitiveness and boost capital amid slowing economic growth. Dubai Islamic Bank had assets of AED 227 billion at the end of March compared with Noor Bank’s AED 51 billion in December.
Saudi Cabinet approves special residency scheme for expats
UAE unveils golden card permanent residency scheme The UAE launched a golden card permanent residency programme, granting 6,800 permits to foreigners who together have invested AED 100 billion ($27 billion). The new golden card permanent residency visa scheme is intended to generate foreign direct investment (FDI) and encourage entrepreneurship as well as to attract top engineers, scientists and students. Sheikh Mohammed bin Rashid, Vice President, Prime Minister and Ruler of Dubai, said, “While the residencies announced on were given to investors, people with exceptional skills in medicine, engineering as well as science and arts can also be eligible.”
Citigroup plans to expand Saudi Arabian team on MSCI trading bet Citigroup plans to hire about five more bankers in Saudi Arabia as it prepares for an expected increase in foreign investment in the Kingdom’s stock exchange. Carmen Haddad, the Citigroup’s Chief Country Officer, said that the lender is expanding its team in Riyadh after getting regulatory approval last month to start cashequities trading and custody services. Citigroup’s Chief Country Officer stated that MSCI’s move to include Saudi stocks in emerging-market indexes will boost trading and the lender wants to be ready.
The Saudi Cabinet approved a special residency scheme, Privileged Iqama, similar to the green card systems applicable in other countries and it is aimed at attracting wealthy and high-skilled expats, according to local newswire. Privileged Iqama will allow wealthy and high-skilled foreign expats to choose between defined and renewable residency or permanent stay in return for a high, one-off fee. The program will not abolish the sponsorship system, it will only exempt certain privileged foreigners from it, they will be allowed to invest and buy residential, commercial as well as industrial property. Additionally, it will also allow them free movement, ability to own properties and to do business in the Kingdom. The cabinet also agreed that service centres will be opened within 90 days to process applications against certain fees, no specific fees amounts yet were mentioned in the announcement.
IMF expects Saudi budget deficit to reach seven per cent of GDP in 2019 The International Monetary Fund (IMF) said that higher public spending will push Saudi Arabia’s budget deficit to seven per cent of gross domestic product this year. The Kingdom had projected a budget deficit of 4.2 per cent of GDP this year, compared to 4.6 per cent in 2018 The IMF stated that its projection is based on an assumption that Saudi oil output will average 10.2 million barrels a day and oil prices will average $65.5 a barrel in 2019. However, the IMF lauded the Kingdom’s economic reforms which have started to yield positive results.
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NEWS HIGHLIGHTS Turkish central bank temporarily tightens policy to bolster lira Turkish central bank stepped in to tighten the supply of liras earlier in May by raising borrowing costs for lenders and making a series of changes to reserve requirements in an attempt to bolster the country’s battered currency. The move effectively raised the cost of funding by 150 basis points without an official increase in the benchmark interest rate. In a statement, the Central Bank of the Republic of Turkey (CBRT) said that it lowered the amount of foreign currency commercial lenders are required to park at the regulator as part of their mandatory lira reserves, which will soak up TRL 7.2 billion ($1.2 billion) from the system. At the same time, the monetary authority increased reserve requirements for foreign-currency liabilities by 100 basis points. The lira, already among the worst-performing currencies in emerging markets this year, has come under renewed pressure this week amid concerns over the central bank’s commitment to raising rates if needed to curb inflation.
MSCI adds Saudi stocks to emerging-market index MSCI announced that it will include the MSCI Saudi Arabia index in its closely watched and widely duplicated emerging-markets index, in a move that is expected to draw billions of dollars of investor inflows. Thirty securities from Saudi Arabia are set to join the MSCI’s emerging-market stocks benchmarks and all changes will be implemented as of the close of trading on 28 May. In a statement, MSCI said that Saudi Arabia will account for 1.42 per cent of the MSCI emerging markets index, a second and final batch of Saudi stocks will be published in August. However, Kuwait stocks, which had been on the firm’s watch list for a potential upgrade, weren’t included.
APICORP signs $75 million Murabahah financing facility with Alfanar The Arab Petroleum Investments Corporation (APICORP) signed a five year $75 million Murabahah financing facility with Alfanar Global Development, in support of Alfanar’s renewables energy projects including the wind project in Spain. Saudi Arabia’s Alfanar aims to tap into the growing demand of renewable energy in various countries around the globe. The company has leveraged its expertise in electrical equipment manufacturing and in the engineering, procurement as well as construction of power transmission and distribution projects in the Kingdom to develop and operate renewable energy projects globally.
16
Bahrain to receive $2.3 billion from Gulf allies in 2019 Bahrain said that it will receive about $2.3 billion this year from a five-year support package provided by its Gulf Arab allies as the island-Kingdom seeks to reduce its budget deficit and debt. The $10 billion package was made available by Saudi Arabia, the UAE and Kuwait in 2018 to help avert a currency devaluation that could have reverberated across the region. The ministry of finance’s announcement is the first that offers details about the aid package, which has helped slash Bahrain’s borrowing costs and restore investor confidence. After struggling to tap international debt markets at some point last year, Bahrain is now planning to sell bonds in the second half of 2019. Bahrain will receive $1.76 billion in 2020, $1.85 billion in 2021 as well as $1.42 billion in 2022 and $650 million in 2023.
TAQA plans to acquire two North American oilfield services companies Saudi Arabia’s Industrialisation and Energy Services Company (TAQA) plans to acquire two companies in the North American oilfield services technology and manufacturing sectors by the end of the year, as part of the company’s 2021 strategy to become a leading oilfield services and equipment (OFSE) provider. The company plans to invest over $1.2 billion in new investments and acquisitions over the next three years across the wider MENA region and North America. The oilfield services and equipment provider is also reviewing a number of further investment and acquisition opportunities in the wider Middle East region, as part of its goal to become a leading regional player.
CBK rejects Warba Bank merger with KMEFIC Kuwait’s Warba Bank said that the Central Bank of Kuwait (CBK) has rejected its proposed acquisition of a controlling stake in KMEFIC. In February, Warba Bank announced that it had signed a share purchase agreement with Ahli United Bank (AUB) and its subsidiary to acquire their collective 75.7 per cent stake in Kuwait & Middle East Financial Investment Company (KMEFIC). In a bourse filing, the lender stated that the central bank dismissed Warba Bank proposal to acquire a 75.7 per cent stake in KFMEIC from Ahli United Bank and subsidiaries. CBK said that Warba Bank acquisition of AUB’s stake in KMEFIC will not have a significant effect on the financial position of the lender.
Abu Dhabi launches AED 535 million venture capital, start-up fund
Majid Al Futtaim lists $600 million green Sukuk on Nasdaq Dubai
The Abu Dhabi Investment Office (ADIO) launched the AED 535 million Ghadan Ventures Fund to grow Abu Dhabi’s venture capital and start-up ecosystem, according to local newswire. The fund is part of the government’s Ghadan 21 programme that is working to accelerate Abu Dhabi’s economy and build a dynamic as well as a thriving entrepreneurial culture. The Ghadan Ventures Fund seeks to increase the availability of capital to start-ups based in Abu Dhabi and to attract fund managers to set up in the capital, the office said in a statement. The fund has two key programmes, Start-up Matching Fund and New Managers Fund, that are designed to increase the availability of capital for Abu Dhabi based start-ups as well as serve as a catalyst for new fund managers seeking to establish themselves in the capital.
The UAE’s Majid Al Futtaim (MAF) listed its $600 million green Sukuk on Nasdaq Dubai, marking the listing of the world’s first benchmark corporate and the first green Sukuk issued by a corporate in the region. The proceeds will be used to finance and refinance MAF existing and future green projects such as green buildings, renewable energy as well as sustainable water management and energy efficiency. The recently placed Sukuk, which was priced at 4.6 per cent, will mature in May 2029 and the proceeds from the issuance will be used to finance or refinance a portfolio of eligible green projects. S&P Global Rating as well as Fitch Ratings assigned their BBB ratings of MAF’s $600 million green Sukuk which was issued under the company’s $1.5 billion trust certificate issuance programme.
SOVEREIGN RATINGS AS OF 1 MAY 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/Negative/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
Copyright © 2019 S&P Global Ratings. All rights reserved.
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(PHOTO CREDIT: TTstudio/SHUTTERSTOCK)
MARKETS
AN OUTLOOK ON GAS IN THE GCC
GCC governments must apply commercial principles to the management of their gas portfolios to drive GDP growth and create employment, says Strategy&
G
ulf Cooperation Council (GCC) governments could generate $10 billion yearly in additional GDP and foreign earnings or support the creation of 100,000 jobs by applying commercial principles to the management of their gas portfolios, according to Strategy& Middle East. Countries of the region have long benefited from an abundance of cheap gas that exceeded their needs, however, demand for this finite resource is growing as result governments must start making hard decisions about how best to use it. In a recent report, Strategy& Middle East stated that a modest increase in the gas price of just $0.5 per million
18
David Branson Executive Advisor, Strategy& Middle East
British thermal units (mmBtu) would add more than $6 billion per year to GCC government coffers. David Branson, the Executive Advisor with Strategy& Middle East, said, “The days of abundant cheap gas in the GCC are over, governments now need to take a more strategic approach to manage the gas sector so that they use their gas resources more efficiently.� A recent research by Strategy& Middle East outlined three key areas where GCC countries must take action to capture the benefits and unlock significant value in the gas sector. GCC governments should allocate gas to create socio-economic value as the balance between supply and demand shifts.
Reallocating just
10%
of current production levels could increase the region’s GDP and foreign earnings by up to
$10 100,000
billion a year or support the creation of
Shihab Elborai Partner, Strategy& Middle East
jobs
Strategy& urged GCC countries to create more coherent and proactive strategies that allocate gas to enduse sectors based on their relative contribution to each country’s socioeconomic targets. Ad d i t i o n a l l y, g ove r n m e n t s c a n economically benefit from providing gas to the industry as feedstock for petrochemicals such as fertilisers, methanol and fuel for energy-intensive industries. Dr. Raed Kombargi, Partner with Strategy& Middle East, said, “The country that moves first to embrace commercial principles will become the prime candidate to be the GCC gas hub of the future.” Currently, Qatar’s gas market is dominated by exports, Saudi Arabia allocates most of its gas to the industry while the UAE’s gas is more evenly distributed across all four end-uses with a higher share going to gas-fired power generation plants and to maximise oil production. However, using gas to ensure a cheap and reliable source of power in the country can lead to a larger payoff because it supports economic diversification and the development of the services sector”, added Dr. Shihab Elborai, Partner with Strategy& Middle East. Gulf countries should also price gas to reflect its true value. Strategy& said that a significant problem for the GCC governments is that overall gas pricing is
opaque and prices remain artificially low by international standards. Similarly, the increasing demand for gas and increased fiscal pressure on governments are making pricing issues more urgent. Rather than consider gas operations as cost centres linked to oil production, GCC governments are urged to treat gas centres as separate, profitgenerating entities, with operations and wholesale prices that reflect the true value of gas. Ac c o r d i n g t o t h e r e p o r t , o n e approach to do this is ‘cost-plus pricing’, which factors in all costs needed to deliver gas to an end-user, including supply and transportation costs and a government margin. The cost-plus pricing model is applied to gas destined for domestic consumption. Additionally, another approach is ‘net-back pricing’, which indexes gas prices to the price of the end-products that use gas as a raw material. The ‘net-back pricing’ approach ensures that governments accurately capture the value of gas rather than allowing a manufacturer to benefit from artificially low prices. Net-back pricing is commonly used for gas that is exported.
Dr. Raed Kombargi Partner, Strategy& Middle East
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19
MARKETS
Gulf countries should take a more strategic approach to manage the gas sector so that they use their gas resources THE DAYS OF ABUNDANT more efficiently, added Branson. CHEAP GAS IN THE GCC ARE GCC governments should also OVER, GOVERNMENTS NOW NEED implement structural reforms to ensure that TO TAKE A MORE STRATEGIC the right market structure and institutions APPROACH TO MANAGE THE are in place to support more strategic gas GAS SECTOR SO THAT THEY USE allocation and accurate pricing. Strategy& underlined that Gulf governments can THEIR GAS RESOURCES MORE For decades, the GCC countries benefited from their abundant reserves of establish a gas aggregation institution cheap, easily accessible gas that exceeded their needs. Today, thatEFFICIENTLY. no applies. Since gas 2010, the demandand for gaspurchase has grown at a tolonger coordinate sales —new David Branson, Executive Advisor, compounded annual rate of about 5 percent (see Exhibit 1), even as agreements will lead With to thegreater production growswhich increasingly expensive. exception of Qatar, Strategy& Middle East the countries of the GCC mustgovernment start making hardrevenue decisions about how transparency, higher best to use a finite resource amid competing demands. and margins as well as lower risk.
Similarly, an independent regulator could also be created to ensure that gas companies operate fairly and provide equal access and treatment to all sector participants. The regulator could also advise policymakers, conduct due diligence on all market participants as well as resolve disputes and increase energy efficiency. GCC governments must develop a comprehensive strategy to allocate gas among end-users and price it to reflect its true value, the country that moves first to embrace commercial principles will become the prime candidate to be the GCC gas hub of the future, said Kombargi. Governments in the Gulf must start GROWTH IN DOMESTIC GAS CONSUMPTION IN MOST GCC Exhibit 1 As the supply/demand balance changes, GCC countries need to create Growth in domestic gas consumption in most GCC countries is outpacing production to implement economic principles that COUNTRIES IS OUTPACING PRODUCTION more coherent,GROWTH proactive strategies that allocate gas to end-use sectors growth based on their relative contribution to the country’s socioeconomic culminate in economic diversification, targets. Typically, these goals would be to increase GDP growth, local GCC domestic gas consumption and production (billion cubic metres, 2010-2017) GCC domestic gass consumption and production (billion cubic metres, 2010-2017) creation of employment among other employment, and fiscal revenues. +5% economic benefits. To accomplish the For example, the conventional wisdom among governments is that CAGR 292 281 providing gas to industry generates the biggest overall economic implementation of economic measures, 273 253 249 244 governments reformaluminum, the market benefit. Usually, this is in areas such asmust petrochemicals, 225 212 methanol, and fertilizers. However, using gas to ensure a cheap and structure to create dedicated gas reliable source of power in the country can lead to a larger payoff in terms of GDP growth and potentially jobs. That is because power aggregation and transportation companies Exhibit 2 supports all sectors of the economy resulting in economic diversification Gas consumption by end-uses varies widely among GCC countries which supervised by allocating an independent and the development of theare services sector. Similarly, gas for export through LNG can have the largest positive impact on a across country’s the regulator to promote efficiency Gas consumption by end-use (billion cubic metres, 2017) trade surplus (see Exhibit 3). As the supply/demand balance changes, GCC countries need to create gas sector.
A critical need for reform
more coherent, proactive strategies that allocate gas to end-use sectors 170 based on their relative contribution to the country’s socioeconomic 2010 Typically, 2011 2015 targets. these goals2012 would be to 2013 increase GDP2014 growth, local employment, and fiscal revenues. Saudi Arabia
Production (excl. Qatar)
UAE
Oman
2016
Kuwait 123
2017
For example, the conventional wisdom among governments is that Note: CAGR = compounded growth UAE United Arab Emirates. Note: CAGR = compounded annual annual growth rate, UAE =rate, United Arab= Emirates. 73% providing gas to industry generates the biggest overall economic Source: BP Statistical of World Source: BP Statistical Review ofReview World Energy, 2018 Energy, 2018
105
socioeconomic indicators
7%
77%
41%
GAS CONSUMPTION BY END-USES VARIES WIDELY Exhibit 2 GCC COUNTRIES AMONG 17% countries Gas consumption by end-uses varies widely among GCC Strategy&
39
29%
28%
Gas consumption consumption by end-use (billion cubic metres, 2017) GAs by end-use (billion cubic metres, 2017) Qatar
41% 23%
12%
4%
Impact of on socioeconomic indicators, GCC example GCC example Impact ofgas gasallocation allocation on socioeconomic indicators,
5
11%
6%
GAS ALLOCATION AMONG SECTORS HAS A SIGNIFICANT Exhibit 3 Gas allocation among sectors has a significant impact on IMPACT ON SOCIOECONOMIC INDICATORS
Qatar
Bahrain
Saudi Arabia
23 16% 15%
Oman
UAE
20
61% 35% Kuwait
45% 4%
GDP
30% 25%
Bahrain
(US$ million/mmscmd)
Jobs
Trade
(# jobs/mmscmd)
(US$ million/mmscmd)
170
Upstream
Source: U.S. Energy Information Administration, International Energy Statistics; Arab Union of Electricity; Strategy& analysis
7% 41%
39 28%
11% 4%
12% Saudi Arabia
1. “Industry“ includes subsectors typically found in gas-rich economies (plastics, methanol, fertilizers, aluminum, etc.). Different subsectors have their own characteristics that should be taken into account.
Power
29%
17%
Qatar
Export
Note: Upstream includes flaring, fuel, and re-injection. 105
77%
6%
Industry
LNG
123 73%
Power
41% 23% Oman
UAE
23 16% 15%
20
61% 35%
45% 4%
Kuwait
30% 25%
Industry1
Bahrain
Note:Upstream Upstream includes flaring,Industry fuel, and re-injection. Power Export Source: U.S. Energy Information Administration, International Energy Statistics; Arab Union of Electricity; Strategy& analysis 8
Strategy&
Note: mmscmd = million metric standard cubic meters per day. Source: Strategy&
Note: Upstream includes flaring, fuel, and re-injection.
Note: mmscmd = million metric standard cubic meters per day. Source: Strategy&
Source: U.S. Energy Information Administration, International Energy Statistics; Arab Union of Electricity; Strategy& analysis
20 Strategy&
8
Strategy&
9
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LEGAL PERSPECTIVE
COURT OF THE
BLOCKCHAIN Championing the future, Amna Al Owais, Chief Registrar of DIFC Courts, sheds light on an initiative that is the world’s first
T
ell us more about Court of the Blockchain. Court of the Blockchain is an initiative launched in July 2018 in partnership with Smart Dubai, with the ultimate aim of creating the world’s first Court of the Blockchain, in line with the Dubai Blockchain Strategy 2020. In the preliminary stages, the alliance has been working to explore the activation of cross-border enforcement of legal judgments through the blockchain—namely how blockchain could aid the verification of court judgments for cross-border enforcement. Under the present structure, when a person attempts to achieve a crossborder enforcement, he or she must go through a cumbersome process involving verification of the judgement by stamping and paperwork: this must go through multiple authorities, moving from one court to the other. Blockchain technology can enable m o r e a c c e s s i b l e , e ff i c i e n t a n d cheaper enforcement verification procedures by creditors, limiting a debtor’s ability to move funds whilst
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(PHOTO CREDIT: ANTON KHRUPIN ANTTONIART/SHUTTERSTOCK)
a judgement is being authenticated to be used internationally. The records in a blockchain database represent definitive proof as to the owner and origin of the judgement , allowing court officials on the network to trace the judgement back to its genesis block and confirm its authenticity. In addition, every record in the blockchain has a timestamp and unique cryptographic signature, thus making the ledger an auditable history of all transactions in the network. Thus, removing the hurdles of inefficiency, allowing cost effectiveness while empowering timely justice and unparalleled convenience. The next stage of building the Court of the Blockchain will seek to combine expertise and resources to investigate the handling of disputes arising out of private and public blockchains, with regulation and contractual terms encoded within the smart contract. Currently, blockchain-based smart contract transactions are irrevocable and there is no technical means to unwind a transaction. The joint taskforce between the DIFC Courts and Smart Dubai will model smart contracts across the blockchain that incorporate logic, and allow for various forms of exceptions and conditions, for seamless and more efficient dispute resolution. An open source platform ecosystem for dispute resolution of crypto transactions allows users to opt into a conflict resolution mechanism that enables more nuanced crypto solutions and produces greater certainty for legacy businesses than existing solutions. Moreover, while smart contracts are coded as self-executing contracts, they do not necessarily provide effective mechanisms for enforcement, especially if one party breaches his or her obligations in the smart contract—blockchain can remove this hurdle.
BLOCKCHAIN TECHNOLOGY CAN ENABLE MORE ACCESSIBLE, EFFICIENT AND CHEAPER ENFORCEMENT VERIFICATION PROCEDURES BY CREDITORS, LIMITING A DEBTOR’S ABILITY TO MOVE FUNDS WHILST A JUDGEMENT IS BEING AUTHENTICATED TO BE USED INTERNATIONALLY. — Amna Al Owais
Expectations from the private sector increasingly require the bold engagement of public service and of regulatory agencies. The DIFC Courts ambition is to contribute in creating a level-playing field between businesses, by re-engineering the way that commercial justice is designed and delivered. As goods and services travel across the global supply chain, they will seamlessly cross borders, so we need a seamless judicial platform that can do the same by creating a court system that can understand the virtual supply chain and deliver a decision that can be executed around the world. The Court of the Blockchain will have the capability to support supply chains operating virtually, with dispute resolution encoded into the blockchain, with virtual currency. Those supply chains will develop and advance to the point that smart contracts will replace traditional contracts, and we will see them become ubiquitous even for SMEs operating on a public blockchain.
In the future, it is expected that we will see not only the contract encoded into the supply chain, but also the applicable laws and regulations. At that point, it will be the blockchain itself that resolves most contractual disputes. This will allow companies to scale up faster than ever, with suppliers and customers knowing disputes can be resolved (and decisions enforced) in seconds versus months or years. How far has the taskforce come in exploring the feasibility of utilising blockchain in legal disputes? We are still in the early stages of the taskforce and we have a long road ahead of us, not only in terms of developing the technology and undertaking the research and development required to build the blockchain, but also in building the network of international courts required for cross-border enforcement. Without the agreed cooperation of other local, regional and international courts, then the task is redundant before it even starts. What kind of challenges have you faced in carrying out this initiative? One of the key challenges we are facing in creating the Court of the Blockchain is working to secure firm commitment from other courts. In September 2018, we attended the Standing International Forum of Commercial Courts (SIFoCC) in New York—a conference that brings together the leading commercial courts from around the world. The DIFC Courts presented a whitepaper to the Forum, advocating the Court of the Blockchain blueprint, whereby commercial courts work together to deliver the process of enforcement through the Blockchain. Following this meeting in New York, we have created a working group with the top global commercial courts in order to cement and bring forward international coordination with this project.
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LEGAL PERSPECTIVE
THE JOINT TASKFORCE BETWEEN THE DIFC COURTS AND SMART DUBAI WILL MODEL SMART CONTRACTS ACROSS THE BLOCKCHAIN THAT INCORPORATE LOGIC, AND ALLOW FOR VARIOUS FORMS OF EXCEPTIONS AND CONDITIONS, FOR SEAMLESS AND MORE EFFICIENT DISPUTE RESOLUTION. — Amna Al Owais, Chief Registrar of DIFC Courts
24
What are your views on the future of technology in legal processes? As with every other sector, the legal industry is now compelled to adopt technology to become more user-friendly, as the fast-paced of digitalisation continues to change people’s expectations of services and companies. The physical nature of traditional courtrooms has cemented their place over time as an intimidating, restricted institution that is growing increasingly unfit to solve complex and far-reaching disputes. The only way is through technology: the court needs technology to allow parties to come together in a forum which best serves their interest in finding a solution. Technology will enable courts of the future to bridge barriers of language, borders, jurisdiction and currency and enable them to keep pace in an interconnected global world, harnessing technology to deliver ‘courts as a service’. For example, as part of ongoing Case Management System (CMS) infrastructure, DIFC Courts became the first courts in the Middle East to introduce a new secure cloud-based technology to allow court documents to be uploaded from anywhere in the world. This e-bundling service enables judges, lawyers and courts staff alike to access case information in various formats, across multiple locations, and share them with numerous users. In another move designed to help people and businesses resolve disputes more quickly, the DIFC Courts Small Claims Tribunal (SCT) is giving claimants the option to use direct and instant messaging (social media platforms) to give defendants notice as part of an expanded range of e-services. However, as exciting as the many new technologies at our disposal may be, it is important to remember that they are just tools to help us on our journey. We must not forget that judicial excellence and serving the court user is the ultimate destination, whether it’s through innovation or face-to-face engagement.
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CM
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LEGAL PERSPECTIVE
IFRS 9: A CLEAR VIEW OF GCC BANKS' ASSET QUALITY By Dr Mohamed Damak, Senior Director and Global Head of Islamic Finance at S&P Global Ratings
I
t’s been a year since banks in the Gulf Cooperation Council adopted International Financial Reporting Standards (IFRS) 9. The overall impact of IFRS 9 has been manageable and predicts a stabilisation of asset quality indicators over the next 12-24 months unless the oil price drops unexpectantly or geopolitical risk increases. Rated banks in the GCC showed a slight deterioration of their asset quality indicators in 2018 because of the less -supportive economic environment. Credit impaired loans (Stage 3) comprised 3.1 per cent of their total loans on average at year-end 2018, up from 2.6 per cent at year-end 2017. The deterioration was mostly visible in Qatar, the UAE, and Saudi Arabia.
Dr Mohamed Damak
26
THE AVERAGE COST OF RISK FOR RATED GCC BANKS DROPPED BY 10 BPS IN 2018 IN COMPARISON TO 2017, DESPITE THE INCREASE IN NPLS. HOWEVER, WE BELIEVE THIS IS DUE TO THE TRANSITION TO IFRS 9, WHERE THE OPENING IMPACT IS CHARGED TO THE BANK’S EQUITY AND NOT TO ITS INCOME STATEMENT.
In the UAE, the proportion of nonperforming loans (NPLs) increased due to the pressure on the SMEs and the real estate sectors. Meanwhile, in Saudi Arabia, NPLs went up due to a significant outflow of expatriate workers as the contracting sector faltered and consumption dropped. Finally, Qatari banks depressed real estate prices and hospitality sector lead to higher NPLs. Banks in Bahrain and Oman showed a smaller increase in NPLs over the past year. In Bahrain, the primary reasons were a flagging real estate sector and, for some banks, their overseas business; whereas in Oman this was due to the strain on the retail sector. Kuwait is the only GCC country where the asset quality indicators for rated banks have improved. We believe this is because of write-offs, rather than a genuine improvement in the underlying asset quality. The adoption of IFRS 9 clearly shows where asset quality indicators might be heading in the next 12-24 months as each bank’s IFRS 9 disclosures reveal its Stage 2 loans. On average, Stage 2 loans (those loans which are underperforming) comprised 10.6 per cent of total loans for rated banks, including our estimated figure for Kuwait; excluding Kuwait, the figure is 11.8 per cent. However, the distribution reveals that tier 1 banks saw a minimal level of Stage 2 loans, except in Oman, where the economy has been subject to significant stress. S&P expects the total amount of loans at either Stage 2 or Stage 3 to remain stable at around 15 per cent of total loans over the next 12-24 months. However, we could see more loans migrating to Stage 3 from Stage 2 and banks pursuing more-aggressive write-off practises. We also anticipate most of the deterioration is likely to occur at smaller banks in each system as large banks typically adopt a conservative risk management practises and are selective in their lending. The average cost of risk for rated GCC banks dropped by 10 bps in 2018 in comparison to 2017, despite the increase in
IN THE NEXT 12-24 MONTHS, WE EXPECT GCC BANKS’ STOCK OF PROBLEMATIC LOANS (THAT IS, THOSE AT EITHER STAGE 2 OR STAGE 3) TO REMAIN STABLE, BUT THAT SOME STAGE 2 LOANS WILL MIGRATE TO STAGE 3.
NPLs. However, we believe this is due to the transition to IFRS 9, where the opening impact is charged to the bank’s equity and not to its income statement. Despite the transition and the fact that banks had to take the hit upfront, most of the banks decided to maintain a stable charge in their income statement. It is important to note that cost of risk dropped in Qatar and the UAE but was stable in all the other countries. In the next 12-24 months, we expect cost of risk to remain between 100 - 150 basis points (bps) as we do not exclude migration of some exposures between Stage 2 and 3. Total coverage (classified as provision for Stage 1, 2 and 3 loans, divided by total Stage 3 gross loans) also increased due to the mechanical effect of the new stock of provisions, reaching 162 per cent for the banks that we rate at year end 2018, compared with 144 per cent at year-end 2017. This supports our finding that IFRS9 did not significantly weigh on banks’ equity statements or cost of risk. In practise, banks have used their existing general provisions to cover for the additional provisions. In the next 12-24 months, we expect GCC banks’ stock of problematic loans (that is, those at either Stage 2 or Stage 3) to remain stable, but that some Stage 2 loans will migrate to Stage 3. If the GCC maintains its slight economic recovery, we expect the pace of migration to also slow, compared with 2018. Under our base-case scenario, we assume that oil price will average $60 per barrel in 2019 and that geopolitical risk will remain high but stable. If the oil price were to fall significantly, asset quality indicators might weaken more than we expect. Although we expect the overall stock of problematic assets to remain stable, and do not exclude migrations to Stage 3 from Stage 2, we consider that our ratings already factor in most of the impact of adopting IFRS 9. In addition, the impact of IFRS9 on banks’ equity was largely manageable and did not cause a major drop in their capitalisation which is why 87 per cent of our rated banks in the GCC carry a stable outlook.
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COVER INTERVIEW
Jamal Al Jassmi
28
BUILDING THE TALENT POOL Jamal Al Jassmi, General Manager at the Emirates Institute of Banking and Financial Studies (EIBFS), sits down with Banker Middle East to talk about the various aspects of talent development in the UAE
C
omputers were introduced into the banking industry as early as the 1950s, but it wasn’t as long ago when customers carried pass books, filled withdrawal slips and waited on a teller for a transaction that takes seconds today. Banking has perhaps been one of the most prolific beneficiaries of the digital age, impacting lives in a way that was once thought impossible. With the advent of computers came the need to train a whole generation of workers to adapt to technological aid. The skills conundrum of the fifties draw a striking parallel with the needs of presentday banking. “The first wave of banking education required a shift from manual bookkeeping to core banking processes and the use of technology at the customer’s end. This necessitated a serious reskilling of the workforce which involved developing new competencies on how to use technology,” said Jamal Al Jassmi, General Manager at the Emirates Institute of Banking and Financial Studies (EIBFS), one of UAE’s flagship finance and banking educational institutions set up to build skills in what was at the time a nascent sector. Al Jassmi continues, “Today, the sector is set to witness its second round of transition where new technologies like blockchain, fintech and AI are going to transform the landscape of banking. The changes brought in by these technologies are so disruptive that the existing skill-sets may seem redundant in another five years.”
THE SKILLS GAP Across the world, the debate on automation and the resulting potential for loss of jobs continue to rage, with contradictory reports on what to expect. However, there is agreement on the fact that there will be a yawning gap between sector needs and the skills of existing talent. In finance, the effects of digitisation are expected to be far-reaching, with global industry leaders already wary of a future where robots will take over human jobs. In a 2017 forecast, McKinsey posited that 30 per cent of the work done at banks today can be done by machines.
THE FUTURE OF BANKING JOBS IS NON-LINEAR. A BANKER FRONT-ENDING A CLIENT RELATIONSHIP MUST BE ABLE TO PERCEIVE THE FINANCIAL AND TECHNOLOGICAL DEPTHS OF THE ACCOUNT OR TRANSACTION, TO BE ABLE TO OFFER THE BEST AVAILABLE SOLUTION THAT IS CUSTOMISED TO THE CLIENT’S NEEDS. — Jamal Al Jassmi, General Manager, Emirates Institute of Banking and Financial Studies
Approaching the situation with an alternative view, however, is the World Economic Forum (WEF), which suggests that robots will displace 75 million jobs globally by 2022 but create 133 million new ones, resulting in a net positive. The expectation here is that the corporate sector will undergo technological transformations that on one hand automate certain tasks, while on the other hand prompts new products and services warranting new tasks and jobs that could be resourced by humans. Al Jassmi explains that the most effective way to tide over this major period of transition in banking and finance is to help the workforce reorient their skills. “We refer to this as developing techno-functional skillsets, which integrate current human skills at various levels with the functional requirements of fintech. The focus is not about developing technology experts but functional bankers who can understand, appreciate and implement technology in the business domains.” REGULATORY EVOLUTION Besides the technological trendlines, the banking sector across the world and in the UAE has seen several regulatory changes that have also sent the skills gap into overdrive. The introduction of the IFRS 9 and Basel III guidelines not only mounted the pressure on banks to maintain higher capital reserves, but to also create teams that could effectively function in an increasingly complex operational environment.
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In a move to meet the demand, the EIBFS Technical Advisory Committee entered into a strategic partnership with PwC’s Academy Middle East earlier this year, seeking to offer three new professional certificate courses in Fintech, Blockchain and Data Analytics.
“There was a clear frenzy in the sector around the time of the Basel III, and later the IFRS 9 implementation. It wasn’t enough to understand the nuances of these regulations, but banks had to prepare for unforeseen challenges as well, which meant investing in people as well as in technology,” said Al Jassmi. Demonstrating this point, EIBFS undertook training for banking professionals as these regulations were adopted. Moreover, banks also sought advanced credit analytics models to help them better predict and prepare for defaults. Adding to this, the UAE in recent years saw the roll-out of a bankruptcy law, its flagship taxation exercise through the value-added tax (VAT), and a public debt law, which will for the first time ever see public debt instruments being traded in local financial markets as a long-term alternative to raising federal funding.
THERE WAS A CLEAR FRENZY IN THE SECTOR AROUND THE TIME OF THE BASEL III, AND LATER THE IFRS 9 IMPLEMENTATION. IT WASN’T ENOUGH TO UNDERSTAND THE NUANCES OF THESE REGULATIONS, BUT BANKS HAD TO PREPARE FOR UNFORESEEN CHALLENGES AS WELL, WHICH MEANT INVESTING IN PEOPLE AS WELL AS IN TECHNOLOGY. — Jamal Al Jassmi, General Manager, Emirates Institute of Banking and Financial Studies
“The effects of most of these developments are gradually being felt in the industry. UAE’s efforts to build a stronger financial base can play a key part in altering the business ecosystem in the country. Whereas, even with IFRS-9 and Basel III placing a significant focus on capital as the key resource for banks globally, institutions in the UAE have successfully maintained high capital adequacy ratios, giving them the leeway to manage the broader economic headwinds,” he continues. DATA AND RISK-ORIENTED BANKING In a post-crisis and 4IR era, the onus on consistent and robust regulation continues to be top priority for authorities globally. Avoiding the risks of the past, while preparing for the risks of the future is on the agenda for large markets such as the US, EU and China.
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COVER INTERVIEW
The race against risk has seen several cautionary measures come in to play, from the review of remote booking to the shift towards alternative reference rates (ARRs). Another massive undertaking is working around the scope of the Emirates interbank offered rate (EIBOR), which along with its current unsustainable level, stands at odds with the global mood on IBORs. Understandably, managing these inflexions is hardly possible with the flip of a switch, but rather requires adjustments, training and new processes across banking functions and departments. The use of technology emerges as an important fix in this context, although, the focus on risk management is driving a deeper look at operational resiliency, according to EY. “There are many banking
32
THE CHANGES BROUGHT IN BY THESE TECHNOLOGIES ARE SO DISRUPTIVE THAT THE EXISTING SKILL-SETS MAY SEEM REDUNDANT IN ANOTHER FIVE YEARS. — Jamal Al Jassmi, General Manager, Emirates Institute of Banking and Financial Studies
practises that have hitherto aided in reducing operational costs for institutions, such as third-party support for services. Now more and more, however, the rising appetite for risk management is fueling a preference for in-house service teams that pose a relatively lower threat to the bank’s data and continuity. Skills development becomes a key must-have in this case.” Al Jassmi adds. THE ISLAMIC FINANCE OPPORTUNITY At the centre of the UAE’s banking sector ambitions is the vision to become a global hub for Islamic finance. As such the segment is pegged to see widespread growth, with a 2017 ICD-Thomson Reuters report estimating that Islamic finance assets will grow by 10 per cent annually, to reach a valuation of $3.8 trillion by 2022.
While the growth forecasts have prompted a rise in applicants for Islamic finance education, the rate of growth of the sector warrants a higher churn in the number of experts. In the past, reports have suggested that this demand looms at over 50,000 personnel needed to staff Islamic finance positions. In the UAE, as K PMG reports, the lack of specialists in Shari’ah-compliant products and services could impede the growth of the sector, although the larger potential of the domain itself continues to be high. Speaking about this, Jamal Al Jassmi said, “It’s important to look at training and education in the Islamic finance segment as closely interlinked with the growth of fintech. The impact of the latter on Shari’ah banking is beginning to grow at unprecedented levels, unlocking new opportunities through easier and quicker execution and traceability through AI and blockchain technologies. Fintech in Islamic finance is also essential from the perspective of customer service, besides enabling regulatory compliance and innovation, which is a core principle in Shari’ah.” BANKERS OF THE FUTURE According to WEF, the range of roles that will be in demand over the next three years build on the propagation of technology across sectors. Among the top jobs are data analysts and scientists, software and applications developers, and ecommerce and social media exerts. The report also highlights a new wave of functions that are underpinned by human skills, from customer service to marketing, as well as people management, training and innovation. In the UAE, developers and network engineers ranked among the top five most in-demand roles, in Robert Half’s 2019 outlook. “Banks have started to perceive themselves as technology firms in the business of banking. That is a high benchmark to reach, but one that embodies the larger digitisation mission that the UAE upholds. As a result, we
Robots could displace
75 2022 133
million jobs globally by
but create
new ones
million
Source: World Economic Forum
are seeing the need to build talent for roles linked to emerging technologies such as AI and machine learning specialists, Big Data analysts, robotics engineers and blockchain specialists,” said Jamal. In a move to meet the demand, the EIBFS Technical Advisory Committee entered into a strategic partnership with PwC’s Academy Middle East earlier this year, seeking to offer three new professional certificate courses in Fintech, Blockchain and Data Analytics. In addition, the Institute’s 2019 annual training programme places high emphasis on techno-functional skills, featuring 13 courses on fintech, digital, blockchain, AI, IoT, cybersecurity, and business analytics, among other topics. “The future of banking jobs is non-linear. A banker front-ending a client relationship must be able to perceive the financial and technological depths of the account or transaction, to be able to offer the best available solution that is customised to the client’s needs,” adds Jamal. Technological awareness is, however, not only necessary to navigate financial services, but to protect institutions from growing external threats. A study on cybercrime costs conducted by Accenture indicates that financial services companies face a greater financial impact due to
cyberattacks than any other industry. Globally, businesses in the sector have seen a 40 per cent increase in the average cost of cybercrime over the past three years, rising from $12.97 million per firm in 2014 to $18.28 million in 2017. For the present-day CIO, the risk of cybercrimes is ever-present. Speaking at a workshop hosted by EIBFS on cyberattacks and banking vulnerabilities, Rahul Tyagi, Co-founder and Lead – Academic Engagements at Lucideus, drove home the point that cybercrimes today are so evolved that detection is almost impossible until it is too late. “A simple coffee meeting with a bank employee who has a company mobile could be the starting point of an elaborate and highly damaging cyberattack. CIOs in the financial sector must be have the right processes and talent in place to face the most extreme scenarios when it comes to protecting their institutions, starting with risk quantification.” TECH AND SKILLS OVER COST The recent slew of mergers have ushered in a new and significant era in the UAE’s banking industry, where economic vagaries are obliging institutions to adapt their business models. With the parallel digital transformation underway, banks face a tough choice between financial sustainability and future-oriented investment. “Increased competition, higher capital and provisioning requirements arising out of the regulatory developments are the ground realities of the banking sector in the UAE today. While this means that banks are strongly leaning towards controlling costs to support their bottom line, it should not be at the expense of being left behind on the technological front,” explained Al Jassmi. “To achieve true disruption, institutions must continue to invest in people, and find innovative ways to balance cost optimisation and digitisation. Ultimately, this approach will be central to the reimagining and enriching the UAE’s banking landscape.”
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COUNTRY FOCUS
CRUDE AWAKENING As Oman descends deeper into junk territory, other GCC countries must learn from its mistakes
O
m a n i s fa s t b e c o m i n g a cautionar y t ale for GCC countries. When oil prices dropped, Oman raided its savings, borrowed heavily and set lofty targets to reform its economy. When oil prices rose, diversification efforts were muted; now it’s paying for its inaction. The world has not look favourably on how Oman has handled the fall and rise
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of oil prices. In April, S&P soured its outlook on the Sultanate, downgrading it to negative. This followed Moody’s and Fitch Ratings sending the Sultanate into junk territory a few months earlier. Sadly, higher oil prices sedated Oman’s economy and the Sultanate has been slow to wake up to lower prices. Oman’s economy shuddered to a halt in 2014 when oil prices plunged,
leaving deep fiscal wounds that have yet to heal. Despite paying lip service to diversification, Oman continues to derive about 35 per cent of GDP, 60 per cent of exports, and 70 per cent of fiscal receipts from hydrocarbon products. Higher oil prices have been like a sickness and its cure together. While providing light relief for the economy, narrowing last year’s fiscal deficit by more than five per cent of GDP according to Moody’s estimates, it also narrowed Oman’s interest in finding alternative fuel for its finances. NO ALTERNATIVE Stéphane Roudet from the IMF, who recently held the 2019 Article IV consultation discussions with Oman, said, “Economic activity is gradually recovering. After reaching a low of 0.5 per cent in 2017, real non-hydrocarbon GDP growth is estimated to have increased to 1.5 per cent last year, reflecting higher confidence driven by a rebound in oil prices and higher government spending.” “Oil and gas production increases brought overall real GDP growth to 2.2 per cent. Non-hydrocarbon growth is projected to increase gradually over the medium term, reaching about four per cent, assuming efforts to diversify the economy continue.”
(PHOTO CREDIT: ALEXEY BAGMANYAN/SHUTTERSTOCK)
However, as oil prices have climbed Oman’s enthusiasm for diversification has waned. Vital reforms that would have brought fresh revenue streams have been pushed back. Planned excise taxes on alcohol, tobacco and sugary drinks, along with the five per cent value added tax (VAT), have been delayed to no earlier than the second half of 2019 and early 2020 respectively. Moody’s estimates that these two measures combined could raise revenues of about 1.7 per cent of GDP, a relatively small share of the government deficits when oil prices are around current levels. These two measures are the only substantive fiscal measures that are being targeted for implementation in the coming years. The 2019 budget law that was approved by the royal decree in January 2019 contains few new measures that would arrest or reverse the fiscal deterioration if oil prices moderated. Other than some further potential revenue from state asset sales, the budget only plans additional revenue from the standardisation of municipality fees. This is unlikely to make much of a dent in Oman’s monetary woes. “The sharp fall in oil prices over 2014-2016 and only modest recovery since then has caused
GOVERNMENT DEBT WILL CONTINUE TO RISE WELL INTO THE 2020s, REACHING 58 PER CENT OF GDP BY 2020. — Fitch Ratings
a significant deterioration in Oman’s GDP per capita and its fiscal and external metrics, similar to some other large oil exporters,” S&P said. Despite a sharp increase in average oil prices last year, Fitch expects Oman’s budget deficit to narrow only gradually to nine per cent of GDP, still one of the largest deficits among its rated sovereigns. This is indicative of weaknesses in Oman’s fiscal policy framework. Any improvement in Oman’s finances has come from cannibalising existing revenue streams rather than cultivating new ones. Apart from heavily borrowing, Oman has been tapping its sovereign wealth funds for cash and tightening its purse strings.
T h e 2 017 f i s c a l d e f i c i t w a s financed mainly through $6.5 billion in international bonds and $1.3 billion drawdown on reserves, the World Bank said. The current account deficit fell to 15.1 per cent of GDP in 2017, from 18.7 per cent of GDP in 2016, due to an improvement in the trade balance related to higher oil prices and nonhydrocarbon exports. Central Bank gross reserves fell to $16.1 billion in 2017 from $20.3 billion in 2016. In 2017, the Government managed to reduce the fiscal deficit from 20.9 per cent of GDP in 2016 to 13.7 per cent, according to World Bank data. This was achieved by reducing current and capital expenditures, from 50.9 per cent of GDP in 2016 to 44.8 percent in 2017, and higher fiscal revenues from higher oil prices. However, Government spending has increased again. This is despite continued restraint on the civil service payroll and capital spending. “In nominal terms, the deficit will be only about 10 per cent smaller than budgeted, despite oil prices averaging more than 30 per cent above the 2018 budget assumption of $50/bbl,” Fitch said. “We estimate that Oman would have needed an oil price of $96/bbl in 2018 to reach budget balance.”
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COUNTRY FOCUS
Lower oil prices will give the Government little breathing space in 2019-20. “We forecast the fiscal deficit will widen to 10 per cent of GDP in 2019 under our baseline assumption that average Brent oil prices will moderate to $65/bbl,” Fitch said. OMAN OWES As oil prices dropped, Oman’s debts rose. S&P estimates that gross general government debt increased to 49 per cent of GDP in 2018 from less than five per cent in 2014 and expects it to rise to about 64 per cent by 2022. Fitch forecasts that Government debt will continue to rise well into the 2020s, reaching 58 per cent of GDP by 2020. It also predicts that sovereign net foreign assets will become a negative eight per cent of GDP in 2020, from an asset position of seven per cent of GDP in 2018. This reflects government external borrowing, the drawdown of reserves and the use of the State General Reserve Fund for financing. At the same time, S&P highlighted that the share of foreign currency denominated debt predominantly held by non-residents increased to 80 per cent of total debt in 2018, from 26 per cent in 2015. In 2018, the Government issued Eurobonds of $6.5 billion in January and Sukuk of $1.5 billion in October. “In our view, the debt structure is vulnerable to a sharp decline in foreign investor confidence in Oman, particularly as large Eurobond maturities loom in 2021 and 2022, which could add significant pressure to foreign exchange reserves,” S&P said. “High fiscal pressures since the drop in oil prices have eroded Oman’s once-strong asset position, and we estimate that Oman will become a net debtor in 2019.” S&P forecasts that general government liquid assets will average about 48 per cent of GDP over 2019-2022. It projects an increase in net general Government debt to about 20 per cent in 2022 from five per cent in 2018.
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ECONOMIC ACTIVITY IS GRADUALLY RECOVERING. AFTER REACHING A LOW OF 0.5 PER CENT IN 2017, REAL NONHYDROCARBON GDP GROWTH IS ESTIMATED TO HAVE INCREASED TO 1.5 PER CENT LAST YEAR, REFLECTING HIGHER CONFIDENCE DRIVEN BY A REBOUND IN OIL PRICES AND HIGHER GOVERNMENT SPENDING. — Stéphane Roudet, Deputy Division Chief, IMF
“The accumulation of government external debt has been a key factor behind negative rating actions on Oman,” S&P said. “The Government has made some strides toward diversification away from hydrocarbon receipts, but the pace and scope of planned fiscal measures could continue to be insufficient to stem deterioration in the Government’s balance sheet and curb rising external debt.” Even if Oman takes the baby steps towards diversification that it has planned, Moody’s predicts that Oman will struggle to service its debts. It forecasts that Oman’s debt metrics will continue to deteriorate in the medium term, reaching around 60 per cent of GDP and more than 170 per cent of revenues by 2021. TEENAGE WASTE LAND While the government battles rising debts, Oman’s citizens battle unemployment and stagnating incomes. While Oman has relatively high GDP per capita levels, estimated at $16,400 in 2019, real GDP per capita growth lags well below other countries at similar income levels. The World Bank forecasts that the 10-year weighted-average real GDP per capita is expected to increase only by about 0.4 per cent to 2022. Population growth has historically been high due
to immigration. However, this has recently moderated due to the shrinking construction sector and the Government’s restrictions on expatriate labour in line with Omanisation efforts. The most recent International Labour Organisation estimate of unemployment was 17 per cent in 2017, however youth unemployment is approximately 49 per cent—an urgent challenge in Oman where over 40 per cent of the population is under the age of 25. This also makes a difficult clientele for Oman’s banks. With an increasingly frugal population and a government weighed down by debts, Oman’s banks may struggle over the coming months. Indeed, in March Moody’s downgraded seven of the country’s financial institutions. “We expect the ongoing price correction in the domestic property markets and high household debt levels will increase credit risks for Omani banks,” S&P said. “We also continue to believe that systemwide funding may deteriorate if we see a significant weakness in government deposits, which account for more than one-third of the country’s bank deposits.” In October, Moody maintained its negative outlook for Oman’s banking system, reflecting the diminishing capacity of Oman’s Government to support the country’s banks in times of need. The negative outlook also reflects banks’ softening asset quality and relatively tight funding. Omani banks’ high reliance on government deposits remains a risk, said Moody’s, because the Government’s ability to finance its rising debt burden is becoming increasingly vulnerable to a change in foreign investors’ risk appetite. This increases the risk of deposit withdrawals from banks should the sovereign face reduced market access. “The Government’s capacity to provide support to banks is weakening as its fiscal position deteriorates,” said Mik Kabeya, an Assistant Vice President at Moody’s.
COUNTRY FOCUS
Moody’s expects the Government to continue to show a high willingness to extend support to its banking sector in a crisis, but the rating agency points out that the authorities may become more selective in providing support to banks as the sovereign’s credit strength reduces. “We are expecting a softening in loan performance despite the upturn in the economy, as the sluggish economic growth of last year weighs on borrowers,” said Kabeya. Bank profitability will soften as funding costs rise as higher US rates outweigh rising lending rates from banks’ loan re-pricing, Moody’s said. Loan-loss provisioning will increase as problem loans rise. On the bright side, Moody’s expects capital to remain sound, providing loss absorbency. S&P also pointed out that banks remain well capitalised and have relatively limited reliance on external funding. “Banks benefit from high capitalisation, low non-performing loans, and strong liquidity buffers,” said Roudet. “Maintaining strong regulation and supervision will help strengthen resilience and ensure sustained growth.” NEW DIRECTIONS Oman does have circumstances in its favour. S&P says that Oman benefits from relatively strong fiscal buffers, with liquid government assets estimated at about 50 per cent of GDP. It also expects that timely support from neighbouring countries in the GCC would be forthcoming, if needed. Moody’s said that the rise in the Government’s debt burden may be mitigated by planned asset sales. As the first step, late last year the governmentowned Oman Oil Company sold a 10 per cent stake in the Khazzan-Makarem gas field joint-venture to a foreign investor. A significant portion of the proceeds will be transferred to the Government and used to finance the 2019 budget. Earlier this year, the Government also sold a portion of the country’s gas
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The 2017 fiscal deficit was financed mainly through $6.5 billion in international bonds and $1.3 billion drawdown on reserves.
Oman continues to derive about
35% 60% 70% of GDP,
of exports, and
of fiscal receipts from hydrocarbon products
pipeline network to the state-owed Oman Gas Company (OGC). While OGC borrowed externally to fund this purchase, increasing the debt burden of the broader public sector, the proceeds of the sale will likely reduce the government’s direct borrowing requirement in 2019. During 2018, increased gas production from the Khazzan field, recovery in the manufacturing sector, and higher crude oil production in the second half of the year supported real GDP growth of 3.4 per cent, following a contraction of 0.9 per cent in the previous year.
(PHOTO CREDIT: EQROYN/SHUTTERSTOCK)
OMAN BENEFITS FROM RELATIVELY STRONG FISCAL BUFFERS, WITH LIQUID GOVERNMENT ASSETS ESTIMATED AT ABOUT 50 PER CENT OF GDP. — S&P
A c c o r d i n g t o F i t ch , t h e r e i s significant potential for higher growth and government revenue from new hydrocarbon projects, which will be critical to stabilising public and external finances. In nominal terms, the hydrocarbon sector expanded by almost 37 per cent year on year in 2018, largely on the back of higher oil prices. With a significant ramp-up in production, the gas sector’s contribution has increased to about 20 per cent of total petroleum activity, from 13 per cent in 2015. Nonetheless, the outlook for oil production, prices and the pass-through
of oil revenues to the Government’s budget is highly uncertain. “We estimate that a $5/bbl change in oil prices could change the fiscal deficit by around two per cent of GDP, all else equal,” Fitch warned. “A change in oil production of around five per cent relative to our forecast could shift the overall fiscal deficit by more than one per cent of GDP.” Despite its potential, Fitch’s calculations illustrate how precarious Oman’s financial situation is while it is reliant on limited hydrocarbon reserves. Non-oil sector growth inched up just 0.9 per cent in 2018, according to Moody’s. Construction saw a double-digit
contraction as megaprojects such as the new Muscat airport and several road projects reached their natural conclusions. However, other sectors are beginning to shine. Manufacturing and financial services both performed well last year, albeit not well enough to offset the fall in construction. Oman is a natural beauty, and its growing tourist industry is proving to be a vital asset. “Further efforts to curtail spending and the planned introduction of VAT could reduce the deficit by another two percentage points of GDP over the next two years,” said Roudet. “However, thereafter, assuming the IMF’s projected gradual decline in oil price and production materialises, and given the expected increase in interest payments, the fiscal deficit would increase again, pushing government and external debt up and increasing vulnerability to shocks. “Deeper fiscal consolidation is therefore important to ensure fiscal and external sustainability. The authorities are encouraged to lay out and implement an ambitious medium-term fiscal adjustment plan, based on reforms to tackle current spending rigidities—particularly on the wage bill and subsidies—streamline public investment, and raise nonhydrocarbon revenue. These efforts should be implemented by prioritising measures that help limit the impact of fiscal consolidation on growth and by placing more of the adjustment burden on those who can best shoulder it.” If Oman can take the IMF’s advice— and quickly—it could yet prove that one man’s junk is another man’s treasure.
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COUNTRY FOCUS
OMAN in numbers POPULATION
MEDIAN AGE
4.9 million
UNEMPLOYMENT RATE
29.3 years 1m
5m
Source: Worldometers; United Nations estimates (April 2019)
GDP NOMINAL GDP
$65.9 billion (2016) $70.8 billion (2017) $79.3 billion (2018) $78.0 billion (2019 – projected)
Source: Worldometers (April 2019)
Source: Standard & Poor’s
GDP PER CAPITA (000s)
GDP PER CAPITA GROWTH
22.6 (2016) 23.5 (2017) 24.9 (2018) 25.4 (2019)
5.0% (2016) -0.9% (2017) 3.4% (2018) 3.0% (2019 – projected) Source: Standard & Poor’s
-1.1% (2016) -4.1% (2017) 1.4% (2018) 0.8% (2019 – projected) Source: Standard & Poor’s
FISCAL INDICATORS
Source: Standard & Poor’s
REAL GDP GROWTH
17.8%
CURRENT ACCOUNT BALANCE
-$1.5 billion (2016) -$1.6 billion (2017) -$0.9 billion (2018) -$0.9 billion (2019 – projected)
OVERALL FISCAL BALANCE (per cent of GDP)
-20.9.7% (2016) -13.8% (2017) -8.9% (2018) -10.6% (2019 – projected)
Source: IMF
EXPENDITURES/GDP
50.9% (2016) 45.1% (2017) 44.8% (2018) 45.4% (2019 – projected) Source: Standard & Poor’s
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DEBT/GDP
REVENUE/GDP
30.0% (2016) 42.7% (2017) 48.5% (2018) 53.1% (2019 – projected)
30.0% (2016) 31.3% (2017) 35.9% (2018) 34.8% (2019 – projected)
Source: Standard & Poor’s
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RETAIL BANKING
Suvo Sarkar
BANK OF THE FUTURE: LIV. Two years after its launch, Suvo Sarkar, Senior Executive Vice President, Head of Retail Banking and Wealth Management at Emirates NBD and Jayash Patel, Head of Liv, exclusively share their experiences and future plans for the digital bank
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W
hat are your views on digital banking in the UAE? Suvo Sarkar (SS): With the UAE having one of the world’s highest rates of smartphone and internet penetration, we are seeing quick adoption of digital channels by customers in the country for financial services. More and more customers across different age groups and backgrounds are becoming active users of mobile and online channels, exhibiting a strong preference for ‘anytime, anywhere’ banking. Close to half of UAE’s banking customers are now digitally active, in line with global averages, and using electronic channels twice a week on the average to track spends or carry out transactions. While most traditional banks have been adapting to this shifting landscape by digitising their offerings, we have been witnessing a growing demand among the UAE’s 2.5 million millennials for a very different digital banking offering. Millennials are true digital natives, with over nine in ten owning smartphones and spending an average of three hours per day on social media platforms. They are driven by experiences rather than products and expect their bank to fit in with their on-the-go lifestyle. To cater to this new generation, Emirates NBD launched Liv., the region’s first lifestyle-focused mobile-only bank, built entirely new ground-up also by a team of millennials. Tell us more about how a digital bank works? Jayash Patel (JP): When conventional banks undertake a digital transformation process, they are often constrained by legacy systems, processes and policies. However, a digital-only bank has a key advantage in that it is specifically built to address the needs and preferences of digital native consumers who have grown up with the internet, smartphone and social media.
AS LIV. LOOKS TO EXPAND ITS PRESENCE ACROSS THE REGION, WE ARE ALSO SETTING UP A CLOUD-BASED IT PLATFORM THAT WILL HELP US SCALE LIV. QUICKLY TO NEW MARKETS. — Suvo Sarkar
Liv. was introduced to cater to this evolution in banking preferences of millennials. As a mobile-only bank, Liv. is always thinking digital-first rather than trying to digitise existing products and services, and we had the opportunity to re-imagine the entire relationship with the customer in the process. In the process, Liv. gives back control to customers, empowering them to take charge of the experience and delivering a more personalised and custom-built banking journey. In the two years since its launch, Liv. has disrupted traditional industry paradigms to offer customers a lifestylebased intuitive banking experience that enables them to keep track of their daily life and their finances in one app. The app offers customers several unique features catering to millennial customer preferences, including instant fully mobile based account opening, curated and personalised content, social media-based money transfers and gamification to offer an engaging experience. Liv.’s millennialfriendly proposition is further supported by partnerships with several popular and home-grown new generation brands, enabling customers to access a range of personalised promotions and offers they prefer. Following the launch of Liv., what kind of uptake and ROI have you seen? JP: Ever since its launch in 2017, Liv. has seen tremendous uptake among customers in the UAE. It is today the fastest growing bank in the country, recently crossing the 200,000-customer milestone. Acquiring the first 100,000 customers took us around 14 months whereas the second 100,000 took us only seven months, so our rate of acquisitions is accelerating. Five in six of our customers are millennials and we see accounts being opened on a 24/7 basis. In fact, two out of five Liv. accounts (40 per cent) are today
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RETAIL BANKING
Jayash Patel
being opened between 8pm and 8am, when most banks are closed. We also see new account openings from remote areas of the country, a clear indicator of the widespread appetite for digital banking. Millennials also rely on peer referrals to make informed decisions, and we see happy Liv. customers referring their friends and family, making word-of-mouth one of our strongest acquisition drivers. As a digital-only bank, Liv. operates from a lower cost base compared to a conventional bank, helping us deliver better margins eventually. We have zero branches or sales teams, making our
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AS A DIGITAL-ONLY BANK, LIV. OPERATES FROM A LOWER COST BASE COMPARED TO A CONVENTIONAL BANK, HELPING US DELIVER BETTER MARGINS EVENTUALLY. WE HAVE ZERO BRANCHES OR SALES TEAMS, MAKING OUR COST OF ACQUISITION A TENTH OF THE MAIN BANK AND OVERALL COST TO INCOME RATIOS ABOUT HALF. — Jayash Patel, Head of Liv
cost of acquisition a tenth of the main bank and overall cost to income ratios about half. As we add more products and services and continue to scale up, we expect to see increased momentum and profitable growth. What are some of the main challenges you have faced as a digital bank? SS: One of our early challenges was scaling up the platform as quickly as we wanted to, given that some of Emirates NBD’s core IT platforms which also support Liv. were undergoing an enhancement in parallel. While this
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RETAIL BANKING
initially slowed down our go to market timelines, we are now able to achieve an app update release once in three weeks on an average. Another issue is that the ecosystem in which Liv. operates is not yet fully digital, thus presenting a few challenges in integrating relevant information easily to enable completely seamless customer experiences. Liv. was also launched as a start-up by Emirates NBD, an unprecedented step for one of the region’s leading banks. This brought with it the challenge of working from a completely new mind-set needed to incubate and launch a start-up: of thinking and operating like a challenger instead of a champion, developing the ability to take risks and quickly absorb failures, and fostering an agile team culture. How does Liv. plan to expand its footprint and offering in the region? SS: Despite being a relatively new entrant to the UAE’s banking scene, Liv. is fast becoming the bank of choice for the UAE’s millennial customer base on the back of its unique lifestyle-led proposition. Given the strong market acceptance for Liv. since its rollout, we are actively looking at opportunities to expand the platform to other millennial-majority markets in the MENA region such as KSA and Egypt, where Emirates NBD has an existing presence. Going forward, Liv. will also continue to expand its product suite in the UAE as well as address needs of other emerging segments, such as Generation Z customers who are increasingly entering the workforce. Liv.’s success is testament to the growing maturity of the UAE market, as consumers embrace digital innovation in all aspects of their life. The bank has been a leader in bringing to market millennial-friendly products, services and features, such as the Goal Account, which allows customers to set and save towards financial goals to help them achieve more of what they want, whether it is travel, a gift for a loved one or to simply save for a rainy day.
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LIV.’S MILLENNIAL-FRIENDLY PROPOSITION IS FURTHER SUPPORTED BY PARTNERSHIPS WITH SEVERAL POPULAR AND HOME-GROWN NEW GENERATION BRANDS, ENABLING CUSTOMERS TO ACCESS A RANGE OF PERSONALISED PROMOTIONS AND OFFERS THEY PREFER. — Jayash Patel, Head of Liv
We will also continue to team up with innovative tech firms to bring latest tools to the market that can help us improve our customer experience. One example of this is our partnership with US-based Kasisto, the creators of the KAI Banking Conventional AI platform for finance, to introduce Olivia—Liv.’s first chatbot powered by AI that will enable us to respond to customer queries quickly in line with our growing customer base. We plan to invest in further evolving Olivia’s functionalities to develop a more engaging and convenient banking experience. As Liv. looks to expand its presence across the region, we are also setting up a cloud-based IT platform that will help us scale Liv. quickly to new markets. In addition, we are exploring facial recognition mechanisms, big databased analytics and fraud prevention technologies to help provide a convenient and safe experience for customers. Last but not the least, Liv. will also continue to engage customers through exciting promotions, recently announcing an exciting campaign offering one lucky customer the chance to win his or her private island. All that customers need to do is use their Liv. app and debit card to carry out transactions or sign up for new products to earn ‘Livion’ loyalty points to qualify directly or through a draw to participate in a group competition and emerge as the final winner.
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RETAIL BANKING
DIGITAL SIMPLICITY Subroto Som, Head of Retail Banking, Mashreq, on what retail banks must do to stay ahead of the game in the new era
T
ell us your projections this year. For the remainder of 2019, we believe non-oil activity, including government spending in Dubai and robust economic activity in trade and financial services, will support growth in the UAE economy. The construction of major infrastructure projects in Dubai in preparation for the 2020 World Expo will also contribute to growth. What would you say are the key ingredients to stay ahead in retail banking? Powerful forces are reshaping the retail banking industry. Customer expectations and technological capabilities are creating an imperative to change. Today, we are increasingly seeing banks looking to create efficiencies and find innovative ways to stay relevant to customers. There is a shift from banks looking to win the ‘battle of the balance sheet’, towards a focus on the ‘battle of the customer’. The fate of any banking institution largely depends on the quality of personalised customer experience it provides.
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Mashreq has always placed its customers first and personalisation is very much what Mashreq is focused on right now. By combining new technology, new expertise and new ways of banking, M a s h r e q ’s t r a n s f o r m a t i v e r e t a i l proposition network represents the future of banking in the UAE. Mashreq Bank has already embraced the new advent in digital banking and payments with open arms. We became the first bank in the UAE to introduce Samsung Pay, and one of the first banks to bring Apple Pay and Ali Pay, enabling customers to make day-to-day payments in-store and online in a simple and convenient way. The technology available today helps to better understand individual customers so there is now the ability for banks to make their relationships with customers very personal and meaningful, offering products that can be relevant based on where the customer is as well as what they a r e doing . Cu s to m e r ex p e ri e n c e personalisation will be the biggest single area of differentiation that you will see in the market over time. To this end, our retail banking segment witnessed a significant achievement this year with the launch of Mashreq Neo has been a tremendous success with over 75 per cent of all new accounts in Mashreq being opened on the Neo platform—the UAE’s first digital bank. Looking ahead, our strategy is to continue to digitise the bank, making customer experience seamless, personalised and omnichannel, and to lead into the future, where banking goes entirely branchless. From your point of view, what are the top three challenges facing the retail banking sector globally? Banks are facing challenges in several areas, but there are three that stand out in today’s globalised marketplace.
OVER TIME, I AM AFRAID BANKS WILL NOT BE COMPETING WITH BANKS ALONE. THERE WILL BE NEW COMPETITORS COMING IN AND WE HAVE TO PREPARE FOR THAT DAY. — Subroto Som
Tougher operating environment: Despite all the headlines about banking profitability, financial institutions are not making enough return on investment. Profits and assets growth are under pressure from economic headwinds linked to persistent low oil prices and a slowdown in global trade flows. Geopolitical issues and rising regulatory requirements are other factors contributing to this. Consumer expectations: Today it’s all about the customer experience, and banks are looking to deliver the level of service that consumers are demanding, especially in regard to technology. Customers expect digital innovation and banks are working to transform their value proposition to meet these distinct, emerging customer needs. Consumer demand: Against the backdrop of reduced margins, retail banks today face significant challenges to growth and profitability. In search of growth opportunities, banks are focusing on deepening their share of wallet with existing customers. Being customercentric instead of product-centric is the only way to thrive in the current environment. Digital technology gives banks the options to enhance the customer experience with relevant, intuitive and personalised products, driving long-term relationships and profitability. At Mashreq, we aim to be the retail banker of choice for customers looking for simple, digital-first banking innovations that empower their lives. What challenges would you say are unique to this region and how does this compare to global trends? As more customers use their mobile phones to do their banking, the relevance of the mobile experience is becoming a crucial aspect of the digital strategy that banks must address. The one-sizefits-all approach in banking does not work anymore. Most banks are moving towards digital, and but the interplay of digital process and banks’ legacy system is a challenge in itself.
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RETAIL BANKING
Mobile phone penetration in the UAE is now at a world-record high of 233 per cent. McKinsey’s latest research reveals that at least 80 per cent of urban consumers in the UAE now prefer to do a portion of their banking through digital channels. The digitisation of retail banking is not a new development, and we believe in the coming years, mobile will become the epicentre of digital banking. Secondly, the credit bureau in the UAE has come into place for the last couple of years, and that has shown that there are segments and pockets of the economy where there is high leverage, and de-leverage is happening. That has its own stresses and challenges. Mashreq uses information provided by the Al Etihad Credit Bureau to assess each customer’s creditworthiness before supplying any loans. In the long term, what the credit bureau will do is bring down bank charges and interest rates for lending as banks will have a more comprehensive assessment of creditrisk than is currently available. Customers that are a good credit risk will end up paying less for credit while at the same time, people that pose a higher credit risk will only be able to borrow in a higher price bracket. Finally, the UAE ranks foremost among regional economies most rapidly moving away from cash. Accessibility of financial services, level of technology available and the extent of consumer participation in the formal economy are key determinants in a country’s readiness to move to a cashless society, and the UAE fares extremely well on all these counts. Despite this, the UAE is still a far way off from being a totally cashless society as we have many tourists and visitors coming in, who are not part of the existing local banking community. The transient nature of this population compared to other developed markets make the journey to cashless more challenging. Our initiatives are aligned with the UAE’s vision to become a digital economy, and in time we do believe that e-wallet and mobile banking will replace cash to a larger extent with digital money.
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LAST YEAR WE SUCCESSFULLY LAUNCHED AGILE AT MASHREQ AND ARE ALREADY REAPING THE REWARDS IN TERMS OF INCREASED CUSTOMER CENTRICITY, GREATER COLLABORATION, AND SHORTER TURNAROUND TIMES — Subroto Som, Head of Retail Banking, Mashreq
Seeing how rapidly technology is evolving, in terms of competition, how do you see this changing in the next five years? The retail banking industry faces disruptive challenges as technology enables newage innovators to come up with customer value ideas and propositions that will shake up the whole industry. I think in the financial sector we keep looking at our competition and we look at the banks. Over time, I am afraid banks will not be competing with banks anymore. There will be new competitors coming in and we have to prepare for that day. Banks that hope to prevail must urgently pursue digital simplicity. That is why at Mashreq, our focus is to invest in digital and data capabilities that radically simplify the business while dramatically improving the customer experience through greater efficiency, quality, and speed.
We believe the key to creating the best possible experience and the most engaging customer journey is building a solid foundation on data. Having said that, while digital is undoubtedly on the rise and will be the core of retail banking in the future, customers want human interaction too. Branches will continue to play an important role, albeit a different one. The good thing is that technology has helped us to transform the branch banking experience. In your opinion what is the unrealised potential for the advancement of retail banking in the UAE, Egypt and other markets that Mashreq operates in? Our retail banking business is present in three markets: UAE and Egypt, but the bank is present in 12 countries along with an extensive network of correspondents in more than 60 countries worldwide. We at Mashreq are very keen to tap into new markets leveraging on the growing trends of digital innovation across the world. We see a lot of potential opportunity in the wealth management sector. A few years ago, a number of our clients’ were moving their assets overseas. However, the current tendency is to invest that money locally. As a bank, we not only recognise this trend but are also enhancing our portfolio solutions to create the right proposition to wealthy clients who increasingly invest excess funds through local banks. We believe that Dubai is a credible wealth centre and the growth opportunities for wealth management in the GCC are immense. Finally, we see a lot of promise in business banking despite past challenges in the SME sector. In the last year, we significantly engaged with SMEs in cash management, trade financing, trade transaction, foreign exchange and insurance. While there is
a good level of activity in this segment, capit al lending to build capacit y expansion is something we plan to do more. Our focus is on finding the right proposition to lend to SMEs, who are the drivers of the economy in terms of job creation and economic output. With the implementation of VAT, SMEs will have to maintain their books making the process of obtaining credit easier.
Subroto Som
How are you developing Mashreq’s offerings for the future? We are making significant investments in artificial intelligence, robotics and future technology over the past two years. By combining new technology, new expertise and new ways of banking, Mashreq’s represents the future of banking in the UAE. We have undertaken an intensive transformation agenda to digitise both our internal and external capabilities. On a branch level, this includes automation of requests through front-line staff which we hope will help avoid manual paperwork and save on recurring costs every year, and self-service kiosks that make everyday banking transactional processes simpler and quicker for customers. Our strategic focus is on customer centricity to provide the highest quality of customer services through state-ofthe-art technology. Today, customers are willing to switch loyalties to enjoy a superior experience. Size is not the only factor to determine the winner—speed, agility as well as superior customer experience can make even a smaller player the biggest winner in the race. Last year we successfully launched Agile at Mashreq and are already reaping the rewards in terms of increased customer centricity, greater collaboration, and shorter turnaround times. To become a digital banking leader, we are deeply engaged in the transformation to suit customer's changing needs and behaviours. Collaboration in the emerging ecosystem is key to success as opposed to direct competition.
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INVESTMENTS
By Laurie Hammond, Partner at Hogan Lovells and Thibaut Hollanders, Partner at Liedekerke Africa
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he world, including investors, will keep a close eye on the various national elections to be held in Africa this year. The lead up and aftermath of national polls usually comes with uncertainty, something which investors tend to avoid if possible. National elections have recently been completed in the Democratic Republic of the Congo (DRC) and there are upcoming elections in South Africa (May) and Nigeria (16 February). Other African nations heading for national elections include Senegal (24 February), Malawi (May), while citizens of Botswana, Mozambique and Namibia will head to the polls in October. For investors who have been active in the mining sector in many of these countries, after the elections it will be a matter of assured continuity and stability, both from a political and legal perspective, for them to keep investing.
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FOR INVESTORS WHO HAVE BEEN ACTIVE IN THE MINING SECTOR IN MANY OF THESE COUNTRIES, AFTER THE ELECTIONS IT WILL BE A MATTER OF ASSURED CONTINUITY AND STABILITY, BOTH FROM A POLITICAL AND LEGAL PERSPECTIVE, FOR THEM TO KEEP INVESTING. — Laurie Hammond, Partner at Hogan Lovells
(PHOTO CREDIT: ARMITA/SHUTTERSTOCK)
IN YEAR OF ELECTIONS, WILL AFRICAN COUNTRIES GET THE INVESTOR VOTE?
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INVESTMENTS
In a number of African countries, the mining sector has been hampered by significant challenges and change and uncertainty has been prevalent, as seen in new regulatory requirements and policies in countries such as the DRC and South Africa. Commodity price volatility has added to these challenges. As a result, corporates and investors have increasingly looked to alternative funding solutions to plug the liquidity gap and provide an attractive yield. In the DRC, alternative funding options, such as credit facilities from debt funds, and private placements (such as issuance of bonds by a limited number of investors or issuance of high yield bonds) are already frequently used across the mining sector. In Rwanda, because of the economic situation, mining companies will inevitably be looking for alternative financing and the government is encouraging nationals to invest in the mining sector. In the DRC a new Mining Code was promulgated on 9 March 2018 and provides for material amendments, including reinforcement of local content requirements and an increase in the royalty rate due to the state when selling minerals. There is also a reduction of the tax regime attractiveness with the introduction of two new taxes: the “50 per cent super profit tax” and the “capital gains tax”, which is due when shares are transferred. Existing mining projects will directly and immediately be subject to the new provisions. In this respect, major mining companies have threatened to bring proceedings over the New Mining Code before the International Centre for Settlement of Investment Disputes. In DRC, the new president, although from the former “hard opposition”, will have very limited actions, as the parliament remains within the control of the former president amidst widespread allegations of electoral fraud. Should the situation remain as such, the mining
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INVESTMENT OPPORTUNITIES LIE NOT ONLY IN MINING ITSELF BUT IN THE RELATED INFRASTRUCTURE, ENERGY AND TECHNOLOGY NEEDS OF THIS SECTOR IN EACH COUNTRY AND INVESTORS ARE INCREASINGLY LOOKING AT INVESTING FOR IMPACT. — Thibaut Hollanders, Partner at Liedekerke Africa
environment should not be fundamentally different over the next years. Rwanda is interesting as the mining sector is one of the top priorities of the Government. The new Rwandan Law of 13 August 2018 on mining and quarry operations has the objective of stabilising the mining sector and attracting more investors. In addition, the mineral reserves have been underestimated. Mining in Rwanda is the second largest exporter and was last year one of the main contributors of the country’s gross domestic product (GDP).
It is expected that it will at least remain the same for this year. Rwanda has liberalised its economy, allowing the private sector to be the engine of growth and wealth creation. In South Africa political and regulatory uncertainty will continue in the lead-up to local elections and will impact on long term investment decisions in the mining industry. The land debate will also continue and create a level of policy uncertainty, as it impacts significantly on the mines. H oweve r, t h e f i n a l i s a t i o n a n d gazetting of Mining Charter 3 and the withdrawal of the Minerals and Petroleum Resources Development Act Amendment Bill have had a positive impact on market sentiment and have provided a level of stability for the industry. The publishing of the Charter took longer than was promised, but the outcome was positive, as there were proper consultations and consideration of the comments received. Investing in mining projects in Africa requires a deep understanding of both the regulatory and political climate in that country and the potential impact of the global economy on that industry and country. At a country level, investors are looking for stability, certainty and how elections may impact this and their ability to exit. At a global level, investors looks at how financial market volatility, trade tensions and geopolitical factors could affect any investment. Investment opportunities lie not only in mining itself but in the related infrastructure, energy and technology needs of this sector in each country and investors are increasingly looking at investing for impact. G ove r n m e n t s , c o r p o r a t e s a n d investors working together with a long term, holistic view could open up investment opportunities that have far-reaching positive impacts across the continent.
ISLAMIC FINANCE
THE FUTURE OF ISLAMIC FINANCE (PHOTO CREDIT: JOAT/SHUTTERSTOCK)
Islamic finance is becoming increasingly popular, creating significant demand for experts to enhance industry standards and develop market-leading innovative solutions. Abbas Basrai, Partner, Financial Services at KPMG, ponders the steps that need to be taken to retain the momentum of the industry’s expansion
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slamic financial assets were estimated to be valued at $2 trillion in 2018 and are expected to grow in excess of 30 per cent over the next two years, reaching $3.2 trillion by 2020. Some of the fastest growing economic hubs include the Gulf Cooperation Council (GCC) region, Indonesia and Turkey. Muslims constitute approximately a quarter of the world’s population and are expected to grow to 29.7 per cent by 2050. Research indicates, however, that there is a significant opportunity worldwide to include Muslims in the formal financial system, and Islamic finance is also an attractive alternative for non-Muslims. Islamic finance has become widely accepted in global financial markets with Sukuk (Shari’ah-compliant bonds) issuance totalling $44.2 billion worldwide in the first half of 2018. Several conventional banks have set up Islamic windows. The UAE’s vision is well defined to establish its position as the global capital of the Islamic economy. With significant growth over the last 30 years, Islamic finance is well established as an alternative finance offering in global markets. As the sector matures, however, there are a number of areas requiring attention in order to sustain and accelerate this growth. These can include the ‘form over substance’ debate, the need for increased transparency, a requirement for harmonisation of standards, more Islamic banking experts, and reinforcing
Islamic financial assets were estimated at
$2 2018 $3.2 2020 trillion in and are expected to reach trillion by
INCREASED TRANSPARENCY IS LIKELY TO HELP ADDRESS THE ‘FORM OVER SUBSTANCE’ DEBATE. — Abbas Basrai
the public’s confidence that the products and services being offered conform to Shari’ah principles. These issues are examined below. TOWARDS COMPLIANCE External Shari’ah audits can address the last challenge. Compliance with Shari’ah is the backbone of the global Islamic financial industry and a unique value proposition offered by the industry to its stakeholders. Generally, internal Shari’ah auditors have the task of providing assurance over whether the financial institutions’ activities are performed in accordance with the rules set by the institution’s Shari’ah board. While this model has provided an additional layer of control, details are not typically disclosed to the public. T h e A c c o u n t i n g a n d Au d i t i n g Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have already made significant strides in enhancing st andards. Some local regulators have implemented more robust governance frameworks and several have created a central Shari’ah authority. A centralised model is increasingly being adopted across the industry, with Oman, Bahrain, Malaysia, Indonesia and Pakist an having established unified, governmentestablished Shari’ah boards in recent years. This is a trend that is anticipated to spread to other jurisdictions, which are likely to learn from one another.
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THE PROCESS OF ISSUING A SUKUK SHOULD BE AS STRAIGHTFORWARD AS ISSUING A CONVENTIONAL BOND BUT THIS IS NOT USUALLY THE CASE AT PRESENT. — Abbas Basrai, Partner, Financial Services at KPMG
Abbas Basrai
We b e l i e v e g r e a t e r S h a r i ’ a h governance efforts will be high on the agenda of regulators as the industry becomes systemically important in certain countries. This will in turn increase the credibility of the industry and boost stakeholder confidence. TOWARDS HARMONISATION Increased transparency is likely to help address the ‘form over substance’ debate. In theory, deposit holders are entitled to share not only the profits related to the activities that their deposits finance, but are also required to shoulder their burden of the losses. This principle has likely not been applied consistently in the past and no Islamic bank has transferred any losses to customers over the past 30 years. Nevertheless there has been steady progress towards the implementation of
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this principle in recent years. An example is the Malaysian authorities’ decision to make such accounts truly loss absorbent from June 2016, giving customers the option of choosing between loss-absorbent accounts and non-loss absorbent accounts. In addition, we understand that only a handful of Islamic banks disclose their profit and loss sharing formulae, profit equalisation reserves, or investment risk reserves. The latter were created to help smooth the return on deposits during volatile economic conditions and reduce liquidity risk.
Sukuk issuance totaled at
$44.2
billion worldwide in the first half of 2018
If the Islamic finance marketplace is to achieve a measure of global unity as regards its legal framework, the standards should be harmonised. At present, basic transactions, including Sukuk issuance, can be complex and time consuming due to a lack of standardised legal and Shari’ah documentation. This is made more challenging by the fact that different markets may have different definitions of what is and is not Shari’ahcompliant. Which means Shari’ah documentation cannot be easily applied across borders. The process of issuing a Sukuk should be as straightforward as issuing a conventional bond but this is not usually the case at present. TOWARDS INNOVATION The shortage of Islamic banking experts and a possible lack of innovation have created a gap in the market for the creation of new products that do not have a similar counterpart in conventional finance. There seems to be a strong imperative for new blood in the industry. Innovation requires expertise, including dedicated and welltrained personnel to research new ideas, their commercial application and the development of novel concepts. Necessity can be the mother of invention: a problem may encourage stakeholders to exert every creative effort to solve the problem. The Muslim world is ready for pioneering banking solutions that will fulfil their financial requirements while allowing them to remain true to their religious values. It is the collective responsibility of scholars, regulators, bankers and government legislators to take heed of and respond to its needs.
ISSUE 01
A Banker Middle East Supplement
THE TRANSFORMATION OF TITANS Standard Chartered’s Stuart Beaumont on the company’s newly announced CX transformation project
CPI-Alaris-Banking-AD-artwork-290519.pdf 1 5/29/2019 1:57:49 PM
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TECHNOLOGY
SECURING OUR FUTURE I t is an indisputable fact that the world is going in one direction and that is towards a future with advanced technologies. Various sectors of the economy are undergoing a process of digitisation in some shape or form. The most disrupted of all—is the banking sector. As fintechs and non-financial tech companies penetrate the market, banks and other financial services institutions stand to significantly lose their market share if they fail to adapt to present circumstances. Market data collated from various consultancy firms have suggested that new players could capture up to a third of incumbent banks’ revenues in the next two to three years. Failing to adapt to this operational climate change will potentially lead to the demise of less agile organisations. Coupled with numerous macroeconomic factors, the challenging conditions are already illustrated by the wave of mergers and consolidation activity across the banking sector in the region. Banks and other financial services institutions alike have all begun to embark on digital transformation initiatives enhancing their back-end processes all through the front end, especially the user experience. Keeping abreast of these developments, we have always had a section dedicated to technology. Complimenting this rapid progress as your knowledge and information partner, we have now decided to expand that section to cover the area both on a broader scale and more thoroughly through a supplement within the magazine.
Financial institutions must continuously adapt with the changing landscape that is technology. Capabilities such as the hybrid cloud, API platforms, robotic process automation, instant payments, artificial intelligence, blockchain and prescriptive security, should no longer be concepts that are alien to management executives. Many institutions experience a disconnect between IT and the rest of the organisation—it is issues such as these, that we aim to continuously tackle within this focused supplement. Digital capabilities are no longer an added value for banks, they are foundational to an institution’s competitiveness and long-term survival. We hope you find the next few pages informative and useful.
Nabilah Annuar EDITOR, BANKER MIDDLE EAST
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TECHNOLOGY
Speaking exclusively to Banker Middle East, Stuart Beaumont, Global Head, Voice & Virtual at Standard Chartered Bank, shares his views on digital transformation and explains why he has chosen Avaya as a technology partner Stuart Beaumont
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IT’S NOT JUST ABOUT TRANSACTIONS, BUT ALSO RELATIONSHIPS
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ell us a little bit about Standard Chartered and how it’s evolving. Standard Chartered is a leading international banking group, with a presence in 60 of the world’s most dynamic markets and serving clients in a further 85. Our purpose is to drive commerce and prosperity through our unique diversity, and our heritage and values are expressed in our brand promise, Here for good. While we’ve been around a long time—over 160 years—we’re evolving at an increasing pace in sync with our clients’ fast-paced, digitally connected, lives to make banking easier for them. As a result, we’re designing digital banking that is easy, convenient and secure. How are customer preferences shifting, and what challenges do these shifts bring? How are Standard Chartered responding? We’re supportive of clients communicating though a channel of their choice. With the internet, these channels are proliferating at an incredible rate. Phone is fast becoming a non-preferred channel, with chat, messaging and social all gaining momentum as we try and do business on client terms. That said, voice is not going anywhere yet. In banking we sell trust and advice, and it is important that our clients can ‘speak’ with the bank. New channels don’t replace voice, but rather complement it, resulting in our voice interactions being more relationship focused, rather than transactional. Still, we are focusing heavily on enabling full-service banking through other channels, and there are challenges to overcome there. For example, if you’re creating a fullservice offering—i.e. allowing the client to ‘stay in channel’, rather than making it a gimmick—you need it be secure and authenticated, and data management needs to be considered.
SOPHISTICATED TECHNOLOGY SUCH AS SPEECH ANALYTICS AND ARTIFICIAL INTELLIGENCE WILL BE MORE PREVALENT, AND FINANCIAL SERVICES INSTITUTION WILL GET BETTER AT MINING THE DATA FROM PAST INTERACTIONS AND TRANSACTIONS TO BUILD CLEARER PICTURES OF THEIR CLIENTS. — Stuart Beaumont Connectivity is another challenge—we need to allow seamless client transition between channels, while ensuring the context remains. At the same time, to maintain frontline productivity, we must unify the channels at the agent desktop. We also need to consider maintaining sales momentum as clients converse across newer channels. Other challenges to contend with include the cost to deploy and support new technologies that can handle these new channels, and client entry points. How do our customers start their service journey? Do they commence a chat through mobile, online banking, Facebook, or another social network? We must be where our clients are, so we need to consider all these variables. In response, we’re focused on digital banking with a human touch. That means high channel availability, repeatability across markets, and clear integration with the contact centre, which is often the last resort for a client. We also need platforms that can cater for new channels that may not yet have emerged. You’ve chosen a cloud-based solution from Avaya to address these challenges—specifically a managed hybrid cloud model. Why did Standard Chartered take this route? We had to do something different. We have contact centres in many countries, and numerous contact centre platforms to manage. Managing many disparate platforms can be costly, while potentially resulting in inconsistent client experiences. We felt there had to be a better way, while ensuring optimal security and data privacy.
The cloud model made the most sense, then. But public cloud was not a model that was yet suitable for us when weighed against our business and client requirements. Avaya’s private cloud created the global platform we needed, while within the bank’s environment. Not only did we like the solution design, but the managed services that Avaya offers allow us to consume the service, only paying for what we use. We can scale extremely quickly and deploy across different country contact centres in an efficient manner. Other vendors can propose similar deployment models addressing those challenges. Why did Standard Chartered Bank choose Avaya as its contact centre partner? A comprehensive selection process was undertaken. We started out with our desired design principles that solved for the problems we faced, and we approached numerous vendors. Our requirement was that, whichever vendor took on the project, they needed to deliver the rich contact centre features and capabilities that we needed, deploy them on a private cloud solution, and manage the service with flexibility. Avaya was chosen as our partner due to not only to their proven track record within the bank, but also because their solution was simple, easy, and can transition to public cloud if and when the Bank is ready. Avaya also had solid experience in managed services, so the vendor ticked all the boxes.
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TECHNOLOGY
WHY BANKS ARE EMBRACING PRIVATE CLOUD An opinion by Ayman Majzoub, Senior Director – Private Cloud & Managed Services at Avaya International
Standard Chartered chose to partner with Avaya for their proven track record within the bank and because their solution was simple, easy, and can transition to public cloud if and when the bank is ready.
How do you see digital communications between a financial services institution and their customers/clients evolving in the next three years? Digital communications will become smarter, simpler and more personalised as clients increasingly seek convenient yet secure ways of banking. Sophisticated technology such as speech analytics and artificial intelligence will be more prevalent, and financial services institution will get better at mining the data from past interactions and transactions to build clearer pictures of their clients, to the extent that clients expect personalised conversations which pre-empt their needs. As self-service and automation play a greater role, we will see our clients’ digital engagements increase and human-assisted engagements decrease. This is when it becomes crucial to find the sweet spot between balancing their desire to take control of their financial needs with our digital services and offering the option of a “human” touch when they require assistance. Most of us like the convenience of being able to transact and carry out most service requests on our mobile devices, but there are instances when our first
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WE’RE FOCUSED ON DIGITAL BANKING WITH A HUMAN TOUCH. THAT MEANS HIGH CHANNEL AVAILABILITY, REPEATABILITY ACROSS MARKETS, AND CLEAR INTEGRATION WITH THE CONTACT CENTRE. — Stuart Beaumont, Global Head, Voice & Virtual at Standard Chartered Bank
instinct would be to call the bank (for example, when our card is rejected or when we spot a fraudulent activity on our account). Whether this happens in the traditional sense where they pick up a phone, or through more digital channels like video or chat banking, contact centre agents will remain integral to our ability to deliver a good banking experience. That is why we continue to focus on not just developing user-friendly digital self-service solutions, but also enhancing our clients’ contact centre experience. At the end of the day, it’s not just about transactions, but also the relationships.
Banks and financial services providers have historically kept close control of their IT: they always built and ran their own data centers that housed most, if not all, of their applications and solutions, supported typically by large in-house tech teams. CIOs used to justify the investments involved in this approach because of IT and data security reasons, regulatory compliance to national data laws, and the lack of reliability/availability of public cloud services. The performance of those public cloud services did not tend to deliver what the industry needed when it came to guaranteed, real-time access to business-critical data and workflows when required. This was especially true of communication and collaboration applications like telephony, video, and contact center applications. However, this is set to change as banks look closely at the opportunities and cost savings offered by cloud services. Banks have been reluctant to adopt public cloud technologies where computing resources are made available, usually on shared infrastructure, to multiple customers and accessed via the internet. But by contrast, there recently has been growing interest in using private clouds (where computing and applications are provided exclusively to the bank over a private network, either within or off physical premises, and from behind the bank's firewalls). Standard Chartered is one of a number of banks taking this approach. In April 2019, Standard Chartered partnered with Avaya to deliver a multi-year CX transformation project that will enable the bank to more fully align its services with clients’ fast-paced, digitally connected lives. The Avaya OneCloud Private solution enables banks to hit the ground running with Unified Communications and Contact Center solutions delivered on their own private cloud. This solution provides banks with the agility, time-tomarket, and cost effectiveness typically associated with cloud propositions while offering data security and privacy of its customer and proprietary data. Get in touch: amajzoub@avaya.com
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9 - 10 September 2019 Dubai, United Arab Emirates Financial Regulation Technology Summit presents an exclusive opportunity for the Middle East banking industry to bring the focus back to business by creating a more proactive and effective compliance approach. The Summit will host senior leaders from banking and financial institutions, regulators, government authorities, solution providers, and experts in risk, compliance and technology from across different regions to discuss solutions to major challenges in adapting to the pace and complexities of regulation compliance.
Raja Al Mazrouei
Executive Vice President FinTech Hive at DIFC
Sopnendu Mohanty Chief Fintech Officer Monetary Authority of Singapore
Dr. Mohamed Damak
Senior Director & Global Head of Islamic Finance, Financial Services Research S&P Global Ratings
Nipun Srivastava Director Deloitte
Call for papers If you have an interesting case study or a technology / solution which can take the industry forward by making the compliance process effective and efficient, please reach out to us.
Topics: � Regulatory Compliance Transformation � Financial Forensics � Cyber Security
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Exhibitor
� Monitoring / Surveillance � Regulatory Reporting � Risk Management
For speaking and other enquiries, contact us at events@cpifinancial.net or call us on +971 (0)55 5974599 bleed guide.indd 1
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TECHNOLOGY
RETAINING THE DIGITAL NATIVE Gerrard B. Schmid, President and CEO, and Habib Hanna, Managing Director-Middle East, both at Diebold Nixdorf, sit down with Banker Middle East to share their views on the progress of digital transformation in the region’s banking landscape
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ow would you describe the development of digital transformation in the Middle East’s banking sector? Habib Hanna (HH): Over the past 20 years, we’ve experienced massive shifts from the information age and the digital revolution. Businesses in every industry are being driven to change rapidly based on these new consumer behaviours. Companies must think beyond channels and under stand the great necessity to enable a seamless, connected commerce experience. A c c o r d i n g t o t h e C u s t o m e r Loyalty in Retail Banking Report by Bain & Company, 54 per cent of the respondents trust a technology company with their money more than banks and 65 per cent of the surveyed are using a third-party payment solution for purchasing online and at the point of sale. The survey shows that digitally active customers are more open to exploring alternative options for banking while insisting on quality, ease of use, time efficiency.
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In the Middle East banking landscape, we are witnessing the same shift in consumer experiences. Consumers go on a lot of different types of digital journeys in a day—they might shop online, do some banking, move funds between accounts and do some light online browsing. And while there are a lot of different contexts for digital journeys, consumers perceive their online travels as a single journey. What banks are starting to address is that whether one is shopping for physical products or financial services, the consumer wants an experience that is harmonised across channels and personalised to their needs. Retail bankers have been long challenged to keep up due to strict regulations, compliance and the siloed growth of their organisations over time. As channels were established separately over the years, they f r e q u e n t l y r e m a i n f u n c t i o n a l l y, technically and organizationally independent. For banks to attract and retain these digital natives, digitalisation and integration
CUSTOMERS ARE LOOKING FOR FLEXIBILITY, CONVENIENCE AND WOW-FACTOR, AND THEY’RE LOOKING FOR IT ACROSS ALL THE CHANNELS, WHETHER IT’S PHYSICAL, ONLINE, MOBILE OR IN THE BRANCH. — Gerrard B. Schmid
(CREDIT: JAMESTEOHART/SHUTTERSTOCK)
of channels and transactions to deliver true omnichannel consumer experiences is the way forward. Diebold Nixdorf works closely with banks in the Middle East in their digital transformation journeys. For example, Al Rajhi Bank is redefining consumer experiences by introducing a unique customised kiosk that enables consumers to print personalised debit cards, chequebooks, and bank statements. RAKBANK is enabling Samsung Pay on ATMs in the UAE, and Emirates NBD is offering customers the ability to open an account and obtain a personalised debit card among other products and teller services on EasyHub, the first integrated digital kiosk. What are your views on the direction of customer experience services in the financial sector? Gerrard Schmid (GS): For a long time, the financial sector was a product-focused industry. However, over the past few years, we’ve seen it shift to be more of an experience-focused service provider. Customers have increasingly more options to choose from—whether it’s traditional institutions, online-only challenger banks or new fintech providers. Perhaps the leading customer demand is for a more seamless and personalised experience. Customers are looking for flexibility, convenience and wow-factor, and they’re looking for it across all the channels, whether it’s physical, online, mobile or in the branch. This is both a challenge and an opportunity for financial services companies. Much of the industry is built on legacy infrastructure, and there are significant challenges associated with migrating over to cloud or API-based systems that better enable these new types of personalised experiences. We help our clients overcome these challenges by offering end-to-end solutions that combine software, services and devices to enable a differentiated consumer experience.
Gerrard B. Schmid
Innovation in banking is a word that has been over-exhausted within the industry. How would you define true innovation in a rapidly evolving technological landscape? GS: I think there are two important characteristics of innovation. The first is iteration—its continuous improvement and refresh of an idea. The second is time—innovation is a quality that becomes apparent and is proven over time. The term innovation can be overused in our industry because it is often used to describe newcomers still caught in a hype cycle, and there are a lot of them. I think true innovation for banks and financial institutions is the ability to identity shifting customer needs, and then acting on that change through a willingness to experiment and disrupt their own historical ways of doing things. Diebold Nixdorf is a 160-year-old fintech, and we believe we’ve been able to innovate on the foundations we’ve built by recognising where trends are heading, understanding how new technologies fit in and then crafting solutions that help our clients evolve their business.
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TECHNOLOGY
Habib Hanna
FOR BANKS TO ATTRACT AND RETAIN THESE DIGITAL NATIVES, DIGITALISATION AND INTEGRATION OF CHANNELS AND TRANSACTIONS TO DELIVER TRUE OMNICHANNEL CONSUMER EXPERIENCES IS THE WAY FORWARD. — Habib Hanna, Managing Director-Middle East, Diebold Nixdorf
With technology, security will always be a risk. In your opinion, what is the most effective way to protect an institution against cyberattacks? GS: Security has really become an omnichannel topic. Attacks are becoming more complex, so it is important to defend against fraud in a strategic and multilayered way. Deploying both physical and digital defences at the same time is critical as these can be gateways to one another. Proactive monitoring, regular software updates, periodic hardware refreshes and continuing education are a must for any financial institution striving
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to protect their customers’ assets and maintain their trust. We proactively assist customers around the world via our Global Security Portal, which provides near real-time information on reported attacks or incidents impacting ATMs and other computer systems. Customers can view active security alerts, report an incident and view fact sheets as well as other important information regarding security incidents. Where do you see opportunities for the MENA market? HH: We see various areas of focus emerging but the top two are: 1. C r e a t i n g m e a n i n g f u l c u s t o m e r connections: stitching together the individual channels within their network to build an ecosystem that enables seamless, connected commerce. 2. Harnessing the power of data: Properly sourcing, parsing and activating on the data available to banks about their consumers and their networks. Creating meaningful customer connections: We advise retail bankers to view their banking transformation projects through the strategic lens of experience-driven banking. It requires banks to revise their approach from top to bottom, and embrace a disruptive dynamic t h a t c o m b i n e s a c l e a r, fo c u s e d strategic development plan with innovative collaborations. We all recognise that consumers want to be free to choose the channel of their choice, to be engaged in more personalised ways, and to have their banking interactions smoothly integrated into their day-to-day activities. The opportunity for retail bankers lies not in simply letting customers choose between channels, but rather by meaningfully converging and orchestrating physical and digital capabilities to provide a superior, end-to-end customer experience that enables connected commerce.
Another level of transformation is needed: To succeed in this new transformational shift, banks should consider the innovative best practises of organisations outside the traditional retail banking environment, such as fintech start-ups, retailers, technology providers, sharing economy partners and other innovators. Branches can—and should—still be the cornerstone of a successful financial institution, but they must be seamlessly connected to and ingrained with every other channel, from the ATM to mobile to the back-end systems. As an industry, we’ve got to think beyond channels and the channel mix and drill down to the roadblocks that are stopping FIs from enabling an omnichannel experience, not only for customers but for the banks themselves. Banks have already started using innovative approaches to connect with consumers and enable more interactions through multiple touchpoints. Voice assistant applications, biometrics, cardless transactions and iBeacon applications are appearing more frequently and becoming more readily accepted by consumers. What is your outlook on the financial services sector? GS: There is no doubt that the financial services sector landscape looks very different from what it used to be. There are a lot of new players, from newcomers within the industry, to nontraditional outside players. This means greater competition, but it also means greater opportunity for companies to do something completely new and out-of-the-box. To achieve a differentiated customer experience, we’re going to continue seeing different types of players partnering to create interesting, new customer journeys and value propositions. For example, we’re working with Mastercard to develop more seamless payment options. As the industry expands its ecosystem of partners and widens its view of what is possible, new solutions, new operating models and new business drivers will flourish.
23 SEPTEMBER 2019 Address Dubai Marina Hotel Dubai, United Arab Emirates
The most prestigious event on banking technology and innovation in MENA
Transforming Banking for the New Consumer The Banker Middle East Summit will put the spotlight on the most critical issues and developments in banking technology and innovation in the region. It will bring together C-level executives, senior management involved in business, technology, innovation, customer experience, and compliance, from leading banks to brainstorm and discuss solutions to enhance business performance, improve services and maintain competitiveness. CONFERENCE TOPICS INCLUDE: Digital Transformation | Efficient Compliance Practices | Technological Disruption | Big Data, AI & Machine Learning | Blockchain Banking | Innovation and Synergy with Fintech Organisations Supported by
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For more information, please email: events@cpifinancial.net or call +971 4 365 4538
TECHNOLOGY
DATA DIGITISATION— DRIVING ECONOMIC GROWTH IN THE UAE By Amr Sadek, Worldwide Director, Digital Banking Services at Thales
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he digitisation of data, products, and processes is an increasingly important driver of economic growth. With great growth, comes significant risk, and a whole host of impending cybersecurity challenges means vulnerabilities are exposed and the critical importance of digital security becomes evident. Until recently, the UAE’s digital footprint was minimal. It is now fast establishing itself as a global digital hub where many processes and everyday tasks require minimal face to face interaction. Last year, the UAE’s global ranking in digital competitiveness secured 17th place in IMD World Digital Competitiveness 2018 report. This is a testament to the country’s unremitting developments in the ICT sector which has seen increased adoption of digital strategies across various projects and industries. However, the digital revolution in banking has only just begun. Although we have been opening accounts, transferring funds and checking our statements online for over a decade, we are still in phase one, despite traditional banks offering their customers high-quality web and mobile sites and apps. An alternate approach is one where digital functionality becomes not only an additional feature but a fully integrated mobile experience where customers use their smartphones or tablets to do everything from opening a new account or making payments, to resolving credit-card
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billing disputes. And all of these will be done without having to set foot in a physical branch. A complete, all-encompassing digital user journey is now on the horizon. The onus lies with the IT teams working to implement the technology to safeguard businesses. By identifying and harnessing the power of robust analytics capabilities, they can introduce digital technology necessary in ensuring that sensitive data is adequately protected. This step, in addition to designing processes, platforms, and IT infrastructures while incorporating secure architecture principles into security programmes means that businesses can stay one step ahead of those working to devise attacks. While many banks have invested heavily in IT security, they are governed not only by budget constraints but also time restrictions. In an attempt to quickly implement security, they have ended up layering a new security infrastructure on top of their existing IT architecture, creating a heterogeneous architectural landscape. Rectifying this increases the need for manual intervention and vastly hinders system updates. Instead of resulting in a more secure architecture, this piecemeal approach to IT security often creates greater complexity and unanticipated gaps in a bank’s cyberdefences. Leaders in digital banking are now offering a full suite of banking services within a fully secured cloud. Adopting a cloud approach enables the banks to keep their services deployed without
compromising IT security best practise while still managing to facilitate audits though reputable entities. It starts from the initial stage of enrolling a new user and creates a new unique digital ID that will be used to securely identify them during the entire digital user journey inside the bank. Transitioning to the next-generation operating model starts with classifying and mapping customer journeys inside the digital eco-system and then focuses on the internal processes and teams that support them. In a highly compromised digital landscape, the key to navigating a landmine of threats lies in adopting an orchestrated approach. Directly integrating new technology into existing systems does little to diminish dangers that pose a threat every step of the digital customer journey.
Amr Sadek
IB&F Summit 2019_22-04-2019.pdf
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An exclusive event focused on the top trends and innovations in the Islamic economy
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Address Boulevard Hotel Dubai, United Arab Emirates
Join the Islamic Business & Finance Innovation Summit which will bring together leaders from across the Islamic finance industry to discuss where the most impactful innovations in the Islamic economy are developing, how best to harness the industry’s potential and foster further innovation to position it for a better future. CONFERENCE TOPICS INCLUDE: Regulation I Sustainable Growth I Role of Technology in the Industry’s Development International Collaboration Opportunities I Wealth Management
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TECHNOLOGY
PREPARING FOR A DIGITAL FUTURE In this interview with Somnath Menon, Group Chief Operating Officer at Al Ahli Bank of Kuwait (ABK), we talk about the bank’s preparation for a digital future through a partnership with Infosys Finacle. Read more on ABK’s digital transformation programme, the key principles that governed the implementation, and their vision for a truly digital future.
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igital transformation is more than adding a software wrapper for a new digital channel or digitising parts and pockets of an organisation or business. Truly digital transformation requires a cohesive and holistic approach that makes a bank ready for the digital channels of the future, equips a bank with the required agility to respond to market changes, and helps a bank tap into new possibilities, while ensuring minimum disruption to business.
What was ABK’s vision that led to the massive technology transformation programme? Were there specific challenges that made the move necessary? ABK has historically operated using a large application footprint, including many vendors for different products, in addition to many other home-grown systems. Most of these were on ageing versions, many more than even 15 years old, needing an
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urgent revamp. In line with its drive towards simpler banking and a futuristic digital focused outlook, ABK embarked upon its technology transformation programme. The bank was looking for an integrated solution as opposed to upgrading the multiple disparate systems to their latest versions. After a detailed evaluation of three leading industry players, ABK chose to partner with Infosys and implement the full suite of Finacle Core Banking platform.
TRANSFORMATION PROJECTS OF THIS NATURE REQUIRE BUY-IN, GOVERNANCE AND MONITORING. THE BUY-IN FROM ALL PARTS OF THE BANK IS ESSENTIAL AND CANNOT BE SEEN AS A TECHNOLOGY INITIATIVE ONLY. — Somnath Menon
The Finacle implementation included the entire integrated set of modules covering CRM, loans, deposits, trade, treasury, payments, mobile banking, retail and corporate internet banking and loan origination. This transformation was not restricted to the Core Banking System alone—it also included building the infrastructure for the future with a new middleware from IBM and also the Finacle Operational Data Store from Infosys for data analysis and reporting. The most important reason for ABK to embark on this huge transformation project was the need to start with a robust and stable core system, which could work nimbly with the ever growing and dynamic technology environment. ABK wanted to increase digital banking-led business growth with a digital engagement solution suite to make banking simpler and more intuitive for our customers, while ensuring security.
ABK wanted to enhance both its online and mobile banking experience with new features such as cardless withdrawal, unified login credentials, mobile bill payments and iTunes card purchases, biometric authentication for Android, touch ID for older Apple devices and Face ID for iPhone X, instant pay, and recurring and scheduled transfers. All these features are now available and in addition, the Finacle Mobile Banking Solution helped ABK make its mobile banking more convenient and secure. Banks adopt different kinds of digital transformation agendas. In your opinion, what are the important aspects of a technology transformation? The ABK journey can be best described as an example of a text-book core banking transformation, even on a multi-country scale. The governing rules that defined the programme were—limit customizations; minimise service disruption; freeze enhancements to the legacy system. These three rules governed every aspect of the programme. It was imperative to complete the rollout within the timelines agreed and below the estimated budget. The teams worked to ensure minimum/no effort overrun with optimum automation, proven methodologies, clear definition of scope
THE FINACLE IMPLEMENTATION INCLUDED THE ENTIRE INTEGRATED SET OF MODULES COVERING CRM, LOANS, DEPOSITS, TRADE, TREASURY, PAYMENTS, MOBILE BANKING, INTERNET BANKING AND LOAN ORIGINATION. — Somnath Menon
to prevent scope creep and significant change requests, and strong governance for timely action. Transformation projects of this nature require buy-in, governance and monitoring. The buy-in from all parts of the bank is essential and cannot be seen as a technology initiative only. To achieve this, a cross functional core project team, representing all business areas, support and operation units was set up to drive and incorporate all system functionalities. A multi-layered Governance system was built through different committees, from the ground right up to the Board levels. This enabled constant monitoring of the project, with agile problem resolution and quick adaptation to market and regulatory changes.
ABK works with all suppliers as partners and not as vendors. The precursor to choosing a partner is a systematic evaluation and verification process, with adequate proofs of concept and if necessary, reference calls/visits to earlier clients. Once a vendor is chosen and terms are agreed, then ABK works with them as partners, with the clear understanding that the bank’s success is their success and so there is great motivation for everyone to complete the project successfully. One of the unique governance models that ABK implemented was the Partner Steering Committees (PSC). The PSC was held every month, where the senior management from all the partners were present and the progress of the project was reviewed. The objective was to jointly agree on the solutions for any roadblocks to progress and ensure a clearly defined RASCI (Responsible Accountable Support Consult Inform) for all the partners involved. This has been hailed as a very fair and progressive model by all partners. According to one of the studies, there are 350 plus new technology transformations that are signed up every year globally. However, less than 20 per cent of them reportedly get to declare a within-budget, within-timeframe successful rollout, delivering the business benefits that have been committed. ABK achieved the entire transformation well within budget and the agreed timeline, which we understand is rare in the region. The underlying principle for this large transformation project is best described by an old adage of the English army—Seven P's—Proper Preparation, Planning Prevents Painfully Poor Performance. How have things changed since the modernisation, in terms of ease of use/ cost savings/benefits to customers? The positive impact that the technology transformation has had on its customer base is perceptible. The active subscribercount of the internet banking platform doubled within six months of the launch.
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TECHNOLOGY
THE BANK HAS ALSO BEEN ABLE TO DRIVE A FASTER TIME TO MARKET FOR ITS NEW PRODUCT LAUNCHES, HIGHER LEVELS OF STRAIGHT THOUGH PROCESSING, REDUCED MANUAL INTERVENTION WITH BETTER CONTROLS, REALTIME MONITORING OF LIMITS, CONSOLIDATED COST CENTREBASED REPORTING, AND A HIGHER DEGREE OF CUSTOMER SATISFACTION. Somnath Menon
A few immediate benefits that customers got to experience post rollout include: single registration across channels; card-less cash withdrawals; instant pay P2P services; and integrated corporate internet banking for cash management, payroll uploads, liquidity management, trade finance. As part of its standardisation initiative, ABK’s Egyptian subsidiary also migrated to the Finacle internet banking platform, and the UAE subsidiary launched the internet banking channel. As stated earlier, ABK had a large, varied and fragmented application landscape. The consolidation of 79 different systems to Finacle suite of products with a multi country deployment helped the bank save 33 per cent infrastructure costs. The bank has also been able to drive a faster time to market for its new product launches, higher levels of straight though processing, reduced manual intervention with better controls, real-time monitoring of limits, consolidated cost centrebased reporting, and a higher degree of customer satisfaction. Two big initiatives which are widely appreciated by the online and mobile banking customers are the ‘global view’—which allows a
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customer to view all their accounts with ABK across geographies with one login; and the ‘limitless account statements view’—which allows the customer to see all their transactions right from the date of opening their account with the Bank. Looking to the future, how do you see the digital aspects of banking evolving? What are your technology focus areas for the next five years given your larger vision for the bank? Customers are always looking for convenience for all their banking needs, and we at ABK are focused on growing the customer experience. Digital banking allows customers 24/7 access to their accounts. As the world moves towards the Internet of Things, banking will have to transform to embrace new and emerging technologies, drive greater self-service and enable customers to perform more and more transactions without manual intervention. This means banks will have to quickly accept and adapt to the changes to meet the customer expectations consistently and effectively. ABK has adopted the concept of making banking simpler. The bank constantly
— Somnath Menon, Group Chief Operating Officer at ABK
enhances its technology and adapts its processes and practises to drive simpler banking which reflects in the interactions customers have with the bank. With a robust and updated core banking platform, ABK is now set to accelerate its digital journey. Our digital strategy for the next three years is called “A2 B2 C2”—Artificial Intelligence, Automation, Blockchain, Big Data, Cloud, Cybersecurity. Robotic Process Automation (RPA) has been launched for a number of processes and is growing. We are now live on the Blockchain platform for payments and working on other blockchain initiatives. In fact, we have a large number of initiatives against each of the digital strategy objectives that will be implemented over the next few years. As early adopters of digital technologies, we are always striving for techdriven excellence so that our customers get the best experience from ABK. Read more on ABK’s digital transformation
S U P P O R T E D BY
I NDUSTRY A WARDS 2019
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23 SEPTEMBER 2019 Address Dubai Marina Hotel Dubai, United Arab Emirates *7pm cocktail reception followed by dinner and the awards ceremony
Join over 400 senior banking and finance officials from across the Middle East as we honor the outstanding institutions that shape the region’s financial landscape. Now in its 20th year, the Banker Middle East Industry Awards is recognised as the most prestigious banking awards programme celebrating financial excellence across the MENA region. It acknowledges pioneering developments, innovative banking solutions, and achievements in the financial services industry.
NOMINATIONS NOW OPEN Banker Middle East welcomes entries for the 2019 Industry Awards ceremony. Financial institutions must highlight their exceptional and unique products, innovation or initiatives and how it outperforms competitors in the market.
To learn more about the Awards process, please email: awards@bankerme.net Entries must be submitted by 31st July 2019