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EDITOR’S NOTE
O
ne of the many things that continue to make the Middle East an interesting market is its geopolitics. Although a bane for most, it remains a part of the region’s appeal. Usually perceived as a lack of stability, but with such uncertainties come lucrative opportunities—particularly for institutional investors. The yield on debt capital market transactions have increased accordingly, aligned with the growing interest in bonds and Sukuk within the region. Complimenting this market movement, our issue this month takes deep dive into how central banks and sovereign wealth funds across the world conduct their investment activity in the current economic climate. We also feature a commentary from a debt capital market expert on the preferred financial instrument for issuers in the region. We’ve also covered succession planning issues as well as opportunities in trade and investment within the Belt and Road Initiative. Although there is a noticeable market decline in deals—M&A and IPO activity—across the region in the last six months, consistent with the narrative since the beginning of the year, industry players still expect a rebound in 2020. The private equity space, however, is still witnessing a healthy growth with corporate acquirers increasing their share of deals from 54 per cent in 2017 to 60 per cent in 2018 (according to PwC estimations), particularly in the energy, financial services and healthcare sectors.
With the summer months coming up, we would habitually expect a lull in market activity across the board, particularly in this region; but I have a feeling this will not be the case this year. As governments and corporates continue to actively execute their transformation plans, we are bound to see interesting developments over the next couple of months—one can only hope. As usual, we wish you productive read and a fruitful summer.
Nabilah Annuar EDITOR, BANKER MIDDLE EAST
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CONTENTS
JUNE 2019 | ISSUE 219
ANALYSIS
10 US-IRAN tensions: A threat to Gulf ratings
32
NEWS
14 News Highlights
THE MARKETS
18 Where giants place their funds
LEGAL PERSPECTIVE
24 FINSA and what it means to Middle East investors 28 Has the road been paved for successful investments and development projects?
COVER INTERVIEW
32 Identifying the right tech strategy
COUNTRY FOCUS: TURKEY 38 Support act
CAPITAL MARKETS
45 2019’s instrument of choice
18
10 6
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CONTENTS
JUNE 2019 | ISSUE 219
INVESTMENTS
46 Playing an instrumental role
WEALTH MANAGEMENT
52 The pains of succession planning
RETAIL BANKING
50 Mashreq: One of a kind
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JUNE 2019 | ISSUE 219 MIDDLE EAST
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JUNE 2019 | ISSUE 219
CHIEF EXECUTIVE OFFICER
IDENTIFYING THE RIGHT TECH STRATEGY Mohammed Al Khotani, Managing Director, SAP Saudi Arabia
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NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726
A CPI Financial Publication
Where giants their funds 18 place
and what it means Middle East investors 24 toFINSA
one of a kind 50 Mashreq:
Dubai Technology and Media Free Zone Authority
Mohammed Al Khotani, Managing Director, SAP Saudi Arabia
the Middle East 55 Digitalising
SENIOR EDITOR
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IDENTIFYING THE RIGHT TECH STRATEGY
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ANALYSIS
US-IRAN TENSIONS: A THREAT TO GULF RATINGS
Tensions in the Arabian Gulf intensified in May 2019 after exemptions from sanctions ended on countries buying oil from Iran
T
he rising tensions between the US and Iran is threatening economic activities in the Middle East and can potentially disrupt the flow of oil due to the suspension of shipping activities in the Strait of Hormuz. Tensions in the Arabian Gulf intensified in May 2019 after exemptions from sanctions ended on countries buying oil from Iran, which is the country’s main source of revenue. THE CATALYST The attacks on foreign crude oil tankers near the Arabian Gulf, the deployment of US troops as well as
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the US Patriot missile system and surveillance warplanes is threatening to destabilise the Middle East, a region that is already unpredictable. The US announcement of sanctions on countries that depends on Iranian oil such as Turkey and China was followed by Houthis’ attack on vital oil supply systems in Saudi Arabia, further increasing fears among investors as the Gulf tension threatens crude oil shipments through the Strait of Hormuz. In a recent report, S&P Global highlighted that the Strait of Hormuz is a critical shipping route for almost one-third of the world’s crude oil
supplies, and the vast majority of hydro bon exports from Saudi Arabia, Qatar (LNG), Abu Dhabi as well as Kuwait, Iraq, and Bahrain. The tension in the Gulf marked by the US’s withdrawal from the Iran nuclear deal in May 2018 reached a boiling point in recent weeks— particularly after the recent downing of an unmanned US drone by Iran’s Revolutionary Guard. According to S&P, the escalation of tensions in the region could weigh on the creditworthiness of GCC sovereigns and have consequences for Gulf-based entities, possibly banks and some nonfinancial companies.
THE ESCALATION OF TENSIONS IN THE REGION COULD WEIGH ON THE CREDITWORTHINESS OF GCC SOVEREIGNS AND HAVE CONSEQUENCES FOR GULFBASED ENTITIES, POSSIBLY BANKS AND SOME NONFINANCIAL COMPANIES. — S&P Global Ratings
THE EFFECTS OF A MILITARY ACTION Some GCC countries are expected to be affected more than others, with Abu Dhabi, Kuwait, Qatar and Saudi Arabia’s economy expected to remain stable owing to their large stocks of external assets. Abu Dhabi and Saudi Arabia have alternative export channels that could partly alleviate the impact of a blockage of the Strait of Hormuz on their economies. Abu Dhabi’s pipeline system can bypass the Strait and deliver up to 1.6 million barrels of oil per day (about 50 per cent of production) directly to a terminal on the Indian Ocean, said S&P.
Similarly, Saudi Arabia’s pipeline system can pump five million barrels per day, about 50 per cent of its daily oil production, from its Eastern Province to a Red Sea port, highlighted the ratings agency. The current scenario is expected to affect Gulf sovereign ratings due to the increase in funding costs, disruption to foreign direct investment (FDI) flows, equity investments, expat activity, tourism and bank deposit outflows which could damage economic growth prospects and harm government fiscal positions. S&P explained that prolonged tensions will make global oil prices more volatile and weaken economic growth,
while an increase in oil prices would offset some of the impact of capital outflows and weaker economic growth. Bahrain appears to be the most vulnerable sovereign to the consequences of the US-Iran tensions. This is because the Kingdom has a weak fiscal position and its economy has by far the highest gross external financing needs, totalling more than 300 per cent of current account receipts plus usable reserves, reflecting its large banking system. Similar to other GCC countries, Oman has a large government debt position as well as high fiscal and external funding needs.
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ANALYSIS
The Sultanate is less likely to be affected by military action owing to its geographic location and neutral foreign policy. However, its funding costs have increased in line with those across the region, as seen by the large spread in its 10-year government bond yield. Iraq is less vulnerable to the current tension and security concerns across the region because of its low debt costs and funding needs, which are met by domestic banks and concessional lending, limited amount of short-term external liabilities and less reliance on FDI financing. However, Iraq’s position can be counterbalanced by a potential deterioration in its security situation, which has improved since the defeat of ISIS, potentially through the reported Iranian influence on Iraqi institutions, added S&P. The Gulf’s geopolitical standoff poses a liquidity risk for banking systems in the UAE, Qatar and Bahrain as deposit outflows from expatriate populations can be unpredictable. According to S&P, there are no official statistics on the proportion of expatriate deposits in GCC’s banking system deposit bases. However, given the structure of the populations, the contribution is not negligible.
Oil prices is expected to trade between
$65 $85
and
per barrel
RATINGS In March, S&P affirmed its A-/A-2 long and short-term foreign as well as local currency sovereign credit ratings for Saudi Arabia, with a stable outlook. The rating agency stated that the stable outlook reflected its expectation that the Kingdom will maintain its current moderate economic growth as well as retain strong government and external balance sheets over the next two years despite wider fiscal deficits.
THE CURRENT WAR OF WORDS AND CLOSE CALLS BETWEEN THE US AND IRAN POSE A SERIOUS THREAT TO OMAN. — S&P Global Ratings The heightening US-Iran war of words is likely to force a large population of expats in the region to return to their home countries and most of the expats are expected to go with a significant portion of their deposits. S&P suggests that retail deposits (from citizens and expatriates) in the UAE and Qatar account for approximately one-quarter of the total deposits in their respective banking systems.
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Furthermore, Moody’s also affirmed its Aa2 long-term issuer and senior unsecured ratings of Abu Dhabi, with a stable outlook, indicating that any economic risks to the Emirate’s economy are broadly balanced, supported by current oil prices and upside potential from continuing economic diversification efforts. Abu Dhabi’s fiscal strength is underpinned by the Government’s strong balance sheet and assets under management of the Abu
Dhabi Investment Authority (ADIA), which are estimated to be more than $590 billion as of 2018, far exceeding the total liabilities in the wider public sector. However, the current war of words and close calls between the US and Iran pose a serious threat to Oman. The Sultanate was given 12 months by S&P to steady its public finances and decrease its exposure to external debt or risk an even deeper descent into junk. In April 2019, S&P changed the Sultanate’s outlook to negative while affirming its debt score at BB, two levels below investment grade. THE OUTLOOK Although tensions have increased, both President Trump and President Rouhani have reiterated that they do not want war and a direct military conflict is unlikely despite the recent downing of the US drone and reports that the US had ordered an airstrike on Tehran. A direct conflict will economically, socially and politically destabilise the entire region. According to S&P, the increased international pressure to avoid open conflict will help moderate the situation. The domestic politics in the US also reduces the likelihood of open conflict with Iran, which present complex and avoidable political issues during the runup to the 2020 US presidential elections. US National Security Advisor John Bolton said Iran is increasing aggressive efforts in the Middle East and pursuing nuclear weapons, setting a hawkish tone on the eve of a regional security summit with his Russian and Israeli counterparts. GCC economies are among the fastest growing in the emerging markets sector largely due to the rise in oil prices which oil prices is expected to trade between $65 and $85 per barrel accounts for three-quarters of the six-nation bloc’s spending, and any instability associated with oil prices pose a serious threat to the sovereign ratings as well as those of major institutions such as banks, oil firms and wealth funds.
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NEWS HIGHLIGHTS Lebanon draft budget unlikely to deliver significant change to debt trajectory Moody’s said that Lebanon’s 2019 draft budget plans to tackle its pressing fiscal situation through spending cuts, revenue increases and refinancing of T-bills will likely fail to deliver a significant shift in the country’s debt trajectory. Lebanon unveiled a plan to bring its public finances under control in May but faces challenges to restore investors’ confidence that is needed to stave off the economic crisis. The budget, which awaits approval from the parliament, aims to cut the fiscal deficit to 7.6 per cent of GDP from 11.5 per cent in 2018 and implies the primary balance will turn into a surplus of 1.7 per cent from a deficit of around one per cent of GDP. According Moody’s debt projections, the implied primary balance adjustment and the previously announced interest savings from the refinancing of high interest-rate T-bills with lower participation of the central bank and commercial banks, remain insufficient to significantly change the debt trajectory because of the persistent interest rate—growth rate differential.
Egypt mulls samurai, panda bond issuance Egypt’s Deputy Finance Minister for Capital Market Operations said that the government plans to issue an international bond in either the Chinese, Japanese or South Korean currency in the coming fiscal year starting in July. Khaled Abdelrahman, the Deputy Finance Minister for Capital Markets Operations, said that the government is considering a panda, samurai or Korean currency issuance, reported Reuters. The Egyptian official said that the chosen currency would depend on factors including levels of investor demand and the cost.
Saudi Arabia appointed full member of FATF
RBS sees positive financial impact from SABB-Alawwal Bank merger
The Financial Action Task Force (FATF) granted Saudi Arabia a full membership, after almost four years as an observer. The Saudi Arabia Monetary Authority (SAMA) started that joining FATF will help Saudi Arabia showcase its efforts in the field of combating money laundering, financing of terrorism and proliferation. “The Kingdom’s accession to the group will enhance its role in international forums and will highlight its efforts in the area of combating money laundering and the financing of terrorism,” SAMA said. The proposed EU measure stalled after objections by all but one of the bloc’s 28 governments, which lowered the risk of additional regulatory hurdles for banks doing business with the Kingdom. The Kingdom had been previously denied membership after failing to meet criteria in anti-money laundering and counter-terrorism financing and its accession will likely be a boost to its standing with foreign investors.
Royal Bank of Scotland Group (RBS) said that the merger of Alawwal Bank and Saudi British Bank (SABB) would release capital that will have a positive and material financial impact on the Edinburgh-based lender. In a report from Bloomberg, Ross McEwan, RBS’s Chief Executive Officer, said that the merger will facilitate the exit of RBS’s shareholding in Alawwal, as the bank continues to focus on its key markets. The deal affects RBS as well as its NatWest Markets and NatWest Markets units, McEwan said. RBS had for years been trying unsuccessfully to sell its stake in Alawwal. The lender has been cutting investment-banking operations around the world to focus on consumer and commercial lending in the wake of its UK government bailout. The Royal Bank of Scotland (RBS) is part of a group that owned 40 per cent of Alawwal following the takeover of ABN Amro in 2007.
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Dubai Islamic Bank board recommends acquisition of Noor Bank The Board of Directors of Dubai Islamic Bank (DIB) has recommended the lender’s shareholders to consider the acquisition of Noor Bank after obtaining necessary approvals from regulatory authorities. DIB is proceeding with plans to acquire its smaller local rival as the UAE’s biggest Islamic lender joins a regional wave of mergers and acquisitions, the acquisition will create a lender with AED 277 billion ($75 billion) in assets. Post the completion of the acquisition, Noor Bank’s operations will be integrated and consolidated in its operations. DIB stated that the acquisition will also result in cost efficiencies and contribute to profitability as well as allowing DIB to offer competitively priced products and services across a more diversified portfolio and is also expected to drive innovation and accelerate the group’s digitisation programme. HSBC Holdings is advising Dubai Islamic Bank on the deal, while Noor Bank is working with Barclays.
DIFC enacts new insolvency law
Second merger wave may hit UAE lenders as industry shrinks Banks in the UAE may go through a second wave of consolidation as lenders seek to improve profitability and tackle inefficiencies economies, reported Bloomberg. Edmond Christou, BI banking analyst, said, “Amid rising regulatory requirements and digital spending inefficient, less profitable and less well-capitalised banks are susceptible to consolidation.” Abu Dhabi Islamic Bank (ADIB) and Commercial Bank International are among lenders that have underperformed in some areas and could benefit from commercially driven mergers, said Christou. Additionally, Mashreq Bank and National Bank of Ras Al-Khaimah (RAKBANK) could be viewed as attractive targets, though Mashreq Bank’s less supportive ownership makes it a less likely candidate, added Christou. Most bank mergers in the UAE have so far been driven by common shareholders, making it easier for deals to be completed. The Abu Dhabi government merged three of its banks after combining two of its largest lenders in 2017. Analysts said that the absence of common shareholders and a lack of cross-Emirate deals have so far hindered transactions.
Sheikh Mohammed bin Rashid, Vice President and the Ruler of Dubai, enacted a new insolvency law for companies operating in Dubai International Financial Centre (DIFC), the largest financial centre in the Middle East, Africa and South Asia. The new insolvency law and regulations, which will come into effect on 28 August 2019, introduces a new debtor in possession bankruptcy regime in line with global practises. In a statement, the Vice President and Ruler of Dubai said that the newly enacted Law No. 1 of 2019 compliments the financial centre’s commitment to international best practise, with the insolvency law aiming to balance the needs of all stakeholders in the context of distressed and bankruptcy-related situations in DIFC, facilitating a more efficient and effective bankruptcy restructuring regime. The law provides for a new administration process were there is evidence of mismanagement or misconduct. Similarly, the law also enhances the rules governing winding up procedures; and incorporates the UNCITRAL Model Law on cross border insolvency proceedings with certain modifications for application in the centre.
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NEWS HIGHLIGHTS Turkish central bank introduces new facility to boost demand in bond auctions The Central Bank of Turkey (CBRT) introduced a new and cheaper liquidity facility within the framework of its open market operations. CBRT stated that the interest rate on the new facility, which will be used through overnight repo transactions within predetermined limits, will be set at 100 basis points below the central bank’s benchmark of 24 per cent. The regulator said that the limits for the primary dealer liquidity facility will be determined taking into account the amount of government domestic debt securities purchased by primary dealer banks through the treasury auctions. Turkey held interest rates for the ninth month last week as the central bank moved closer to resuming cuts with a slowdown in consumer prices.
Lebanon’s Prime Minister rejects idea of IMF-backed aid Lebanon’s Prime Minister Saad Hariri rejected suggestions that his debt-laden country should seek a bail-out from the International Monetary Fund (IMF), as frustration mounts over months of political bickering that have stalled efforts to cut spending and unlock billions of dollars in aid, reported Bloomberg. The budget sets a deficit target of 7.6 per cent of gross domestic product for 2019, something the government needs to achieve to unlock billions of dollars in international aid and revive its ailing economy. Saad Hariri, said, “You have some who say that maybe we should now get into an IMF road map, thinking that the IMF will come and throw in some 30 billion, Lebanon’s share in the IMF is this very small.” Additionally, the premier criticised constant political bickering that has delayed efforts to pass an austerity budget for 2019. The draft budget was approved by the government after exhaustive discussions and is now being debated in parliament, where plans to freeze public sector recruitment and other such measures will prove unpopular. Lebanon’s economic situation is dire and international investors and donors would not wait forever for the country to prove it is serious about reform, said Hariri.
Sharjah Islamic Bank mulls US dollardenominated Sukuk issuance UAE’s Sharjah Islamic Bank (SIB) is expected to issue US dollar-denominated Sukuk by the end of June to boost its Tier 1 core capital, reported Reuters. Earlier this year the bank’s board approved the issuance of Shari’ah-compliant Tier 1 instruments for up to AED 2.8 billion ($762 million), to strengthen SIB’s capital adequacy ratios. Last year, the lender raised $500 million in Sukuk with HSBC and Standard Chartered Bank as global coordinators, attracting around $950 million in orders.
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Saudi Arabia, UAE banks revenues maybe pressured by US rate cuts Saudi Arabia and UAE-based lenders may have their annual revenue estimates cut by one or two percentage points for every 25 basis point decline in US interest rates, reported Bloomberg. Currencies in Saudi Arabia and the UAE are pegged to the dollar, and the two countries usually follow interest-rate changes made by the US Federal Reserve. Loans make up more than 70 per cent of Gulf banks’ earnings assets that are largely floating-rate corporate facilities and changes in interest rates have a huge impact on income from lending. Edmond Christou, Bloomberg Analyst, said that the net interest margin at Emirates NBD, the UAE’s second-biggest bank, may fall by 10 to 12 basis points for every 25 basis points cut in rates, the most among the top four UAE lenders.
Arab states committed to $100 million Palestinian lifeline Arab finance ministers said that they are committed to activating a so-called $100 million per month safety net for Palestinians. The financial lifeline was agreed upon by the Arab League several years ago but has yet to be activated. The decision by the ministers comes days ahead of a planned meeting in Bahrain where the US is due to discuss the economic component of its plan for peace between the Israelis and the Palestinians. In a recent report, Bloomberg revealed that the ministers called on its member states as well as regional banks to provide soft loans to support infrastructure and development projects in the Palestinian territories.
UAE and Luxembourg plan to boost economic ties
Emirates NBD hires Mizuho to arrange $200 million syndicated loan
The UAE’s Minister of State for Financial Affairs, Obaid Humaid Al Tayer, held a meeting with his Luxembourg counterpart Pierre Gramegna, who is the country’s minister of finance. As part of the cooperation, the UAE also seeks to benefit from the expertise of the Duchy, which is considered a global centre for the issuance of Islamic Sukuk. The UAE, considered the capital of the Islamic economy, seeks to strengthen its economic and trade ties with the Duchy of Luxembourg as well to enhance cooperation in Islamic banking.
Emirates NBD has reportedly mandated Japan’s Mizuho Bank to arrange a $200 million loan. The $200 million loan is also being syndicated to other banks and offers interest margins of 80 basis points and 110 basis points over the London interbank offered rate for the three-and five-year tranches. The loan has tranches with three- and five-year maturities and a $200 million greenshoe option. Last year, the lender raised a $2 billion three-year loan involving a group of 18 lenders.
Omani banks’ funding and liquidity to remain tight
Maybank Islamic wants to link up GCC with ASEAN
Moody’s said that Omani banks’ funding and liquidity is expected to remain tight over the next 12 to 18 months as the price of oil stays below breakeven, restraining deposits from the government. Liquidity conditions are tighter in Oman compared to other Gulf countries because of higher government dependence on oil. In a report, the rating agency said that funding squeeze will continue in line with its expectation for oil prices to range between $50 and $70 in the medium-term which remains below Oman’s estimated fiscal breakeven oil price of $85. Moody’s expects banks to respond by paying more for Omani Rial deposits, increase lending rates as well as lend more selectively and raise foreign-currency funding, however, deposits primarily from the government will lag as oil prices below breakeven constrain government finances.
Maybank Islamic plans to be the bridge for the Islamic banking sector between the Gulf Cooperation Council (GCC) and the ASEAN region after its Dubai branch starts its operation by June this year. According to a local daily, Mohamed Rafique Merican, the CEO of Maybank Islamic expressed confidence that the firm will be able to facilitate trade as well as the flow of funds for financial activities between the two regions, given Maybank Islamic’s strong footprints in Islamic finance in Malaysia, Indonesia and Singapore. Merican said that Malaysia's commercial transactions of oil and gas and other products with GCC will allow the bank to increase the trade flows between the two regions. Last year, Maybank Islamic Bhd announced that it might receive regulatory approvals to set up its Dubai branch in the first half of this year.
SOVEREIGN RATINGS AS OF 1 JUNE 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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MARKETS
WHERE THE GIANTS PLACE THEIR FUNDS
Speaking exclusively to Banker Middle East, Elliot Hentov, Vice President, Head of Policy and Research at State Street Global Advisors, provides a comprehensive viewof how central banks and sovereign wealth funds in the region invest
A
2017 study by State Street Global Advisors (SSGA) on central bank asset allocation for its reserve portfolio found that central banks have to perform a number of different functions, and one of them is related to the foreign reserves they hold. The core investment assets of central banks stem from the official reserve portfolio.
Elliot Hentov
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How do central banks differ in the way they invest? The core investment assets of central banks stem from the official reserve portfolio. In line with the liquidity and safety objectives, high-grade sovereign bonds issued in reserve currencies, gold and deposits have usually been the classic reserve instruments. They still constitute the bulk of the global reserve portfolio (almost 82 per cent), and even among the group of the 30 largest security-holders, our analysis focuses on, 16 invest nearly exclusively in these liquidity instruments. Both external and internal factors make a central bank differ in how they invest. However, what makes them significantly different is the purpose of reserve assets--investment purposes or for policy purposes.
WHILE SAFETY AND LIQUIDITY REMAIN THE CLEAR PRIORITIES, THE FOCUS ON RETURN HAS INCREASED IN RECENT YEARS, CONTRIBUTING TO THE DIVERSIFICATION OF CENTRAL BANK RESERVE PORTFOLIOS. — Elliot Hentov
(PHOTO CREDIT: Phongphan/SHUTTERSTOCK)
We believe the diversification of reserve assets is fully underway and the official reserves portfolio is becoming increasingly complex. Around 20 to 30 years ago, all central banks investors had their reserves in the same way. The basic question is how to have ready (foreign currency cash) reserves, and how to invest in foreign currency cash. Banks usually keep foreign reserves mainly denominated in US dollars, Euro, and Chinese yuan, as well as in liquid forms such as short-term treasuries. In recent years, instances such as the Asian financial crisis taught big lessons to central banks. The biggest lesson was: central banks need to have more reserves so as to better cope with the crisis as and when it happens. A number of emerging markets, especially crude oil producers, deposited huge foreign reserves into central banks and a part into sovereign wealth funds (SWFs) in order to ensure adequate cash in hand in terms of any eventualities. Today we see about two or three types of central banks In terms of investment patterns of their foreign reserves holding: • Diversified central banks investing a large part of their portfolio the way any long-term investor would invest; • Conservative central banks, still doing what they were doing 20 to 30 years ago. Our report is an update on the last two years and shows how rapidly central banks are adding both riskier assets (something that is not a government bond) such as corporate bonds, asset-backed securities, and equities, unlike in the past from they were largely holding cash. There are many who hold the common perception that central banks are policy makers. However, this is a very narrow definition. In fact, central banks’ scope of work also involves much more than that. While some central banks such as the US, in recent years went for quantitative easing (QE), other banks such as
European Central Bank (ECB) and Bank of Japan, in contrast, delayed QE and kept interest rates on hold. In other words, central banks as investors have responded to the policy signals of other central banks and have sought out higher-yielding assets in the era of QE. There are also some central banks on the other side of the spectrum, which are involved in investing their reserves. The whole idea behind quantitative easing was that big central banks wanted investors to go out of safe assets, treasuries, bonds and get a little bit into riskier assets. Our report shows how the central banks have actually done that. Overall, as our report finds, now there is a greater diversity of asset classes and broader use of risk assets, with roughly 15 per cent (that is $2 trillion out of total $13 trillion) in unconventional reserve instruments. Which central banks have implemented a diversified investment strategy more aggressively and actively? I would say it’s a mixed bag, as not all banks are transparent. There are some central banks which we do not even know exist. However, we do know that some large central banks, such as Japan’s, have stayed conservative. It may sound confusing to understand how Japan’s central bank does it. However, the basic point to understand is that it remains in treasuries, which is a huge reserve pile despite everything. Another example is the Swiss central bank, which has started to actively diversify. As for central banks in the Gulf, the region is different from other oil producing regions in the world. The central banks in East Asia, for instance, have sovereign wealth as their core but not oil wealth. On the basis of the investment pattern, there are three broad investment patterns: In the Gulf, for instance, central b a n k s h a v e a ck n o w l e d g e d t h e existence of sovereign wealth funds.
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Additionally, they are into sophisticated industries and are investing for the long term, which does not necessarily need to be done with their forex reserves. This means Gulf central banks’ foreign reserves are there for policy purposes, i.e., to provide liquidity for external reasons. This is the classic type of central banks--meaning they have sovereign wealth funds and are doing everything including the most advanced techniques of investment. • This category includes oil producers such as Russia and Kazakhstan that have expressed their willingness to diversify away from the US dollar. Due to geopolitical reasons, they have expressed reservations about staying with the US dollar, whether in the form of corporate bonds or mortgagebacked securities. However, these banks have to bear in mind that if they want to diversify, US dollar-denominated assets or investments cannot be ignored. Both Russia and Kazakhstan have diversified their holdings into gold, which for them is a stable asset and easily convertible, acceptable everywhere in the world and it gets them out of US sanctions radar. • The third trend is visible in the South East and East Asia. Central banks in Hong Kong, Greater China, Singapore and other emerging markets in Southeast Asia have been on a diversification drive. Although they have sovereign wealth fund vehicles, they also have a large portfolio, a large part of which they are not diversifying into different assets. So these are basically the three trends that we have been seen across the world. In this regard, what trends do you see emerging in the Gulf? In the UAE, the central bank is a purely focussed on its core domain, meaning it doesn’t hold sovereign wealth reserves and it is the same in Kuwait.
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I AM POSITIVE ABOUT THE MIDDLE EAST AND THE GCC REGION, AS OIL PRICES WILL BE STABLE. THERE MIGHT BE UPS AND DOWNS HERE AND THERE BUT STRUCTURALLY, THE REGIONAL ECONOMY WILL REMAIN STRONG IN THE MEDIUM TERM. IT’S BETTER TO REMAIN CALM THAN BOOM BECAUSE A BOOM COULD CAUSE ALL SORTS OF MISALLOCATIONS. — Elliot Hentov, Vice President, Head of Policy and Research, SSGA
In Saudi Arabia, the situation is a bit different as the central bank traditionally manages the sovereign wealth fund’s money as well. However, in recent years, we have seen this changing and the Kingdom’s central bank is gradually transferring or is splitting up the money that is not purely foreign reserves into the Public Investment Fund (PIF), pension system and other sectors where it belongs so to speak. So, when I say Middle East central banks and including Saudi did not have classic central bank structure, I am talking about the money that was really kept for foreign reserves. Within the classic portfolio, the holdings are mainly in US dollars. It’s difficult to give exact proportion, but as per estimates at least 90-95 per cent of holdings are dollar-based, either in the form of the US government paper or any other government paper that they can hedge back into dollars. What about other GCC countries like Oman and Bahrain? Bahrain’s reserves have shrunk because the economy has been into deficit for quite some time. As a result, their reserves are fairly small and it is just basically a liquid pool. Oman is in the same economic situation as Bahrain.
If you think of high-quality government bonds, such as those of Europeangovernments, almost half of the world’s government bonds are owned by other governments but 12 years ago it was about 15 per cent. Can you elaborate more on the factors that are taken into consideration when central banks place their funds? It is a mix of factors that involves foreign reserves buyers, quantitative easing, large sovereign wealth funds and public pension funds. Even if they are not buying large quantities of assets, this doesn’t mean they can’t as they are multi-trillion groups. That said, there are two key things that are worrisome: • First, the significance of having foreign reserves is to ensure not only stability and security of the domestic economy but to also have adequate liquidity. One of the main goals of buying US Treasuries by central banks is to maintain liquidity and safety. However, this way how to remain liquid and safe has become one of their prime objectives. • Secondly, it also creates a lot of awkward relationships between governments themselves and between central banks and central governments.
While safety and liquidity remain the clear priorities, the focus on return has increased in recent years, contributing to the diversification of central bank reserve portfolios. How do they mitigate their exposure? People are worried about the global debt crisis, primarily because debt levels are rising fast. The only way to avert any potential debt crisis is to have lower rates. This is because, one, rates are controlled by the central banks. Secondly, central banks are also the holders of debt thereby creating a conflict of interest. The reason is they are not only rate-setters but asset holders and investors too at the same time. It is not an imminent concern but at some point in time, it could grow too much, thereby generating the conflicts of interests. Theoretically, it prevents central banks from raising rates because it has the potential to damage their own portfolio. Globally, central banks hold around $800 billion (six per cent of their portfolio) in equities and over one trillion (nine per cent of their portfolio) in return-enhancing b o n d s ( m a i n l y i nve s t m e n t - g r a d e corporates and asset-backed securities) compared with close to zero at the beginning of the century. In total, equities accounting for around six to seven per cent of the global equity market value are held by government investors, of which the majority rests with the pension and sovereign wealth funds. Central banks own just one or two percent of the global equities. For corporate bonds, the share is around 10 to 11 per cent for government assets. Finally, we are seeing the rise of the Renminbi in the Gulf as one of the reserve holdings of central banks. While the amount of money being put into the Renminbi is still very modest, we are seeing more and more banks are investing in it. Ten years ago there were less than five central banks that had Renminbi in
their portfolio, today it’s almost 75 to 80 central banks. Though the number has grown a lot but the share of the portfolio is still pretty small--going from one per cent two years ago to close to three per cent now. China is the second largest economy in the world, it has the second largest bond market in the world and it is the biggest trade finance centre in the world. This could lead one to think the currency to eventually become number two globally. However, in reality, it’s not. Nevertheless, we are seeing preparations are underway. Do you think it’s because of how China has grown over the past 10 years? The Renminbi is used widely and across the Gulf because of the Special Drawing Rights (SDR), which is the IMF currency. The IMF used to have four currencies that it used as reserve currencies and they used to say you must have this percentage if you want to maintain the accounts the way they do. The IMF added China around two years ago and that was kind of green light for everybody to do so. The Gulf countries are active investors in China across the board but not in the central banks. One can speculate why it is like that. Gulf’s sovereign wealth funds buy liquid assets, Chinese equities as well as hard assets and companies’ shares. This apart from partnering with Chinese companies and the Chinese government as investors, which show the links are very strong. How does global trade issues such as Brexit, the debt crisis, recession and the macro-economy affect MENA? There has been a slowdown in 2018 and markets were very nervous about it at the end of the year. Then there has been a bit of policy reversal by the US Fed. I expect in the next few months, the news on the global economic front will get better and we could see a bit of a recovery in Europe, and China.
When I say a bit I mean it will hit the bottom and pick up again, a bit of a rebound. We see a bit of a resolution of the China-US dispute that will be very positive. But markets have already priced it in. The Fed has turned lucent and the easy policy stance will also see a bit of rebound in the US. I expect the next two quarters or so to be pretty good. However, it would be somewhat a temporary rebound, because overall the global economy is slowing down across the board, and it looks like 2020 will be much of a slower year than this year. It might not be technically a recession but it’s quite a slowdown, the whole world will be growing slow next year. Partially this will be because China is not growing the same way it used to 10 years ago. China accounted for 40 per cent of global growth in the last decade, and over a third of global growth was led by China. However, China’s growth potential is dropping, its economy is having debt constraints. As the growth is coming down, it has a ripple effect on the global trade, and commodities are facing the knock-on effects. The fact is that China is a massive engine of the global economy;but since it’s slowing down, that is going to inevitably hurt everybody. Secondly, the US growth was flattered by taxes, deregulation and very lowinterest rates until recently. That effect is partially affecting the US and as a result, growth will be a little bit lower. Overall you have structural forces that are going to fall down the economy, again not negative but slower than what it has been in the last two to three years. How do you see things picking up? Our view of the 2020s is a bit dark. Frankly, I am not going to lie, a bit sombre. The reality is we do not see any fundamental growth drivers that are very strong and positive. This means we think governments and policy makers will step in to drive the recovery in the 2020s and the only way they can do that is they can even do things that are even more unconventional.
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OUR VIEW OF THE 2020s IS A BIT DARK. FRANKLY, I AM NOT GOING TO LIE, A BIT SOMBRE. THE REALITY IS WE DO NOT SEE ANY FUNDAMENTAL GROWTH DRIVERS THAT ARE VERY STRONG AND POSITIVE. THIS MEANS WE THINK GOVERNMENTS AND POLICY MAKERS WILL STEP IN TO DRIVE THE RECOVERY IN THE 2020s AND THE ONLY WAY THEY CAN DO THAT IS THEY CAN EVEN DO THINGS THAT ARE EVEN MORE UNCONVENTIONAL. — Elliot Hentov, Vice President, Head of Policy and Research, SSGA
If you are a markets person you do not like unconventional stuff because you want markets to be working the way markets work. But we expect that there will be a lot of intervention by the governments that is going to make markets work. Maybe this will be good for the economy but not great for markets in the 2020s. I do not know when the recession will come to end. But I do care about what will happen after the recession, that is, the recovery will not be normal but governments will start doing things that are very unconventional. There are always winners and losers for investors but markets will not operate the way they used to in the past. What are your views on the geopolitical crises we face? Geopolitics plays a big role; geopolitical factors are either at a back-burner or are sometimes in the front. We think governments are going to bring back financial controls and industrial policies in the 2020s at least in the developed economies, something they have not done in the last 40 to 50 years. In the 1970s, governments came up with industrial policies when the governments felt like they can steer the economy. We think some of that will come back and this is where geopolitics comes in. Think of what has happened under the guise of China, in Europe and America in the last two to three years. For example, the US changed the rules of inward investment, disallowing Chinese companies to buy an American firm.
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Another example is Germany that changed the percentage of foreign ownership foreigners can hold in certain sectors. They have laid down rules about which Europeans companies can merge and cannot merge, all under the guise of competing with China. During a recession, people are pissed off because they are losing jobs. In this scenario, what do you think governments will do with those types of tools? They will decide which companies should merge, which sectors and companies to provide support and financing, which sector, region or company will change the rules to help you a little bit. It will be like you bringing the government back to manage the economy. We see this happening under the guise of geopolitics right now. The US is talking about all sorts of measures about who can own what and who can control what because they say they are protecting themselves from the China threat. In a few years, it will no longer be about China, but something more profound. It will be like the return of the states to the market economy. That is why the future is so bleak and it’s a return to the 1970s partially. Regression is going back a little bit, and that’s why geopolitics matters because they have set a stage. For example, in America if it was not for China for the government to say this is okay or not okay, citizens will question what the government is doing in terms
of protecting the American workers. This means ‘America first’ but it is under that guise the state is taking the larger role. The same is true in case of much of Europe. What is your outlook on things at the moment? In the short term, we expect the next few months are going to be fine. Things should start rebounding a bit. I am hopeful we will see a lot of tech innovation spilling over into productivity for many years, in terms of improving processes and workflows, boosting productivity and that will boost economic growth. I am positive about the Middle East and the GCC region, as oil prices will be stable. There might be ups and downs here and there but structurally, the regional economy will remain strong in the medium term. It’s better to remain calm than boom because a boom could cause all sorts of misallocations. Secondly, Saudi Arabia is one of the few places in the world that is doing reform. Things are actually changing on the ground. You cannot say anything like that about any other place in the world. Saudi’s financial sector reforms have been meaningful, fast, impactful and if they can do what they have done in the financial sector across the economy I am quite positive about the future. In the UAE, Dubai is exposed to world trade that is facing headwinds. The silver lining is that the Emirate is attached to the Indian subcontinent which has been growing strong for the last few years, regardless of the global scenario. That is a positive sign. Another positive factor is Expo 2020, no matter what happens after that, it is a stimulus for the domestic economy. The UAE has incredible financial stability and has very comfortable savings position. Kuwait is also in a very comfortable position. Its oil production costs are low that is something positive.
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LEGAL PERSPECTIVE
FINSA AND WHAT IT MEANS TO MIDDLE EAST INVESTORS
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T
he obligations under the new Swiss Financial Services Act (FINSA) will affect Middle Eastern financial service providers that provide financial services on a cross-border basis to Swiss retail, professional or institutional clients. The production of financial instruments for the Swiss market is also for the first time comprehensively regulated. Most likely to take effect on 1 January 2020, there will be transition periods applicable to many of the new obligations.
(PHOTO CREDIT: BCFC/SHUTTERSTOCK)
Dr. Martin Liebi, Attorney-at-Law at PricewaterhouseCoopers Legal, Zurich, explains how Switzerland’s upcoming Financial Services Act affects financial service providers and investors in the region
The new provisions will apply to the financial institutions providing financial services, but also to their employees, directly. They will introduce certain information, documentation, and behavioural rules as well as organisational requirements, such as rules to prevent conflict of interests and how to handle commissions paid by third parties in the context of the provision of financial services. Client advisors must be entered into a newly established client advisor register and the Middle Eastern financial service providers affected by FINSA must affiliate with an ombudsman. Extensive obligations apply also to Middle Eastern producers of financial instruments or Middle Eastern entities offering securities in the Swiss market. The public offering of securities requires the publication of a prospectus which must be reviewed or approved by the newly established prospectus reviewing body. Prospectuses created under the laws of Middle Eastern jurisdictions or even UK law will have to get recognised by the prospectus reviewing body. The obligation to produce a key investor information document (KIID) applies if financial instruments are distributed to retail clients. CROSS BORDER IMPACT Financial services provided by financial service providers to clients in Switzerland fall within the scope of FinSA if they are provided in particular by phone, in writing or by e-mail. Excluded from FinSA are however explicit requests of Swiss clients to Middle Eastern financial service providers to provide financial services. On the flip side, any provision of financial services on Swiss territory, even if such provision is made only on a temporary basis (for example, visit of the client during his stay in Geneva), falls within the scope of FinSA. It is important
EXTENSIVE OBLIGATIONS APPLY ALSO TO MIDDLE EASTERN PRODUCERS OF FINANCIAL INSTRUMENTS OR MIDDLE EASTERN ENTITIES OFFERING SECURITIES IN THE SWISS MARKET. THE PUBLIC OFFERING OF SECURITIES REQUIRES THE PUBLICATION OF A PROSPECTUS WHICH MUST BE REVIEWED OR APPROVED BY THE NEWLY ESTABLISHED PROSPECTUS REVIEWING BODY. — Dr. Martin Liebi
to note that even pre-contractual activities with potential prospective clients can trigger the application of the obligations under FinSA. Prospective clients are protected with regards to the obligations under FinSA like actual clients. Financial services that trigger the application of FinSA are the purchase or sale of financial instruments (equity and debt securities, structured products, funds, derivatives, bonds and structured deposits), the receipt and transmission of orders related to financial instruments, the management of assets (the administration of financial instruments), investment advice (the provision of personal recommendations on transactions with financial instruments) and the granting of loans to finance transactions with financial instruments.
Not all clients are protected equally under the FinSA. Financial service providers must segment their clients into private clients, professional clients or institutional clients, each category subject to different levels of protection. Institutional clients enjoy the lowest level of protection. There is a legal assumption that professional clients do not require a suitability & appropriateness test due to their experience, expertise or wealth. The additional obligations with which the Middle Eastern financial service providers must comply with are aligned with the ones imposed under the European regulation MiFID II. There is for example, an obligation to conduct an appropriateness and suitability test, to provide information (about the financial service providers in general and the specific activities provided and products distributed), to document and render account (such as related to the financial services agreed with and provided to clients), and to treat equally, unless they are waived by the clients entitled to do so. Another key new feature that has a direct impact on employees of Middle Eastern financial service providers is the obligation to enter into a public client advisor register.The entry is a mandatory legal requirement for any natural person that is marketing, offering, and providing financial services to prospective or actual clients in Switzerland. The client advisor register has to cheque the financial know-how of the client advisor and its knowledge of the applicable behavioural rules under the FinSA, such as but not limited to, information, documentation, rendering account and retrocession obligations. There will be an AI-proctored online test available 24/7 which client advisors can take at their convenience at their location of choice. Additional requirements are professional liability
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LEGAL PERSPECTIVE
Timely and full compliance with these new requirements is key for Middle Eastern financial service providers. Sanctions for non-compliance can be quite draconic. Willful non-compliance with these new requirements can lead to imprisonment of up to three years and even non-diligent compliance results in a fine of up to CHF 250,000. It’s very likely that FINMA will initiate an enforcement procedure in case of non-compliance.
Dr. Martin Liebi, Attorney at law – PricewaterhouseCoopers, Legal, Switzerland
WILLFUL NON-COMPLIANCE WITH THE RULES ABOUT THE CREATION AND DOCUMENTATION OF FINANCIAL INSTRUMENTS CAN BE SANCTIONED WITH A FINE OF UP TO CHF 500,000 AND NONDILIGENT NON-COMPLIANCE WITH A FINE OF UP TO CHF 100,000. — Dr. Martin Liebi
insurance (or equivalent security), the affiliation of the financial service providers for which the client advisor is working for to an ombudsman, no entry in the criminal register regarding property and no industry ban or prohibition issued by the Swiss Financial Market Supervisory Authority (FINMA).
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Both the client advisor register, and the ombudsman are intended to be operated by Regulatory Service, a group company of BX Swiss Exchange. The company is still, at the time of writing, in the authorisation process with FINMA and in the recognition process with the Swiss Federal Department of Finance.
FINANCIAL INSTRUMENTS AND SECURITIES There is also quite a change to the Swiss regime applicable to the cross-border offering of financial instruments and securities. Creators of financial instruments for the Swiss market and entities offering securities in the Swiss market are now subject to increased regulation. The admission to trading and the public offering of financial instruments require now generally a prospectus created in line with clearly defined content requirements similar to the ones applicable in the European Union, unless an exemption applies. Any prospectus must be reviewed, or in case of a non-Swiss prospectus, be recognised by a newly established prospectus reviewing body. The distribution of financial instruments to private clients require a KIID. The KIID contains the key risk parameters and features of the financial instrument. Structured products can still only be issued by Swiss or foreign equivalently supervised bank, insurance company, or investment firm. Although there are transition periods applicable, there is also a backloading obligation for all securities stemming from an ongoing public offer pending on or beyond 2 January 2022. Willful non-compliance with the rules about the creation and documentation of financial instruments can be sanctioned with a fine of up to CHF 500,000 and nondiligent non-compliance with a fine of up to CHF 100,000.
LEGAL PERSPECTIVE
HAS THE ROAD BEEN PAVED FOR SUCCESSFUL INVESTMENTS AND DEVELOPMENT PROJECTS? Emile Boulos, Local Partner at BonelliErede’s Dubai office and Maryline Kalaydjian, Associate at BonelliErede’s Beirut office, discusses the effectiveness of the legal reforms in Lebanon
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everal legal developments have recently come to light which will undoubtedly have a positive and incentivising impact on the implementation of the contemplated, and the long-awaited development and investment projects in Lebanon. Th e E c o n o m i c C o n fe r e n c e fo r Development through Reforms with the Private Sector (CEDRE), an international conference in support of Lebanon’s development through specific
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reform, was held in Paris on the 6 April 2018 with 48 participants from the international community. The key outcome of CEDRE was a pledge of financial support for Lebanon resulting in the sum of $10.2 billion by way of loans ($9.9 billion of which were on concessional terms) and $ 0.86 billion in grants. T h e p l e d g e s , h o w e v e r, w e r e conditional on the basis that Lebanon shall effectuate reforms in certain key
sectors, such as electricity and water, as well as the lowering of the fiscal deficit by one per cent annually over the next five years. SUSTAINING REFORMS FOR THE FUTURE CEDRE participants emphasised the importance of an organised follow-up mechanism whereby the Lebanese government would commit to implementing such specific promised reforms.
Emile Boulos
The message from the international community was clear—Lebanon would only be able to unlock the CEDRE pledges once a consolidation plan that stabilises and reduces debt came into force. From a legal reform perspective, it became crucial for the Lebanese government to enact new laws and regulations in addition to amending existing archaic laws and regulations that require urgent updates with the purpose of creating a stable environment for investments, both national and foreign, based on well-established legal frameworks. There was a significant progress prior to and in the build-up of CEDRE with regards to the exploitation of the oil and gas (O&G) sector. The legal framework governing O&G in Lebanon supports and promotes further investments in the sector, with a number of milestones set out in the applicable laws and regulations already achieved.
Maryline Kalaydjian
ADDITIONAL REGULATIONS ARE CURRENTLY BEING DISCUSSED BY THE NEWLY-FORMED LEBANESE GOVERNMENT WITH THE AIM OF CREATING A TRANSPARENT AND STABLE ENVIRONMENT THAT WILL PROVIDE FURTHER COMFORT FOR INTERNATIONAL O&G COMPANIES.
Additional regulations are currently being discussed by the newly-formed Le b a n e s e g ove r n m e n t w i t h t h e aim of creating a transparent and stable environment that will provide further comfort for international O&G companies. In late 2017, the Council of Ministers approved the awards of two exclusive petroleum licences for exploration and production to a consortium composed of energy giants—Total, ENI and Novatek.
The consortium is currently discussing and preparing the various plans required to start the exploration phase by end of 2019 with a second offshore licencing round having been approved by the newly formed Council of Ministers. PUBLIC AND PRIVATE PARTNERSHIPS In addition, the Public Private Partnership Law No. 48 (PPP Law), enacted in September 2017, and highly commended by the CEDRE participants, introduced a
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LEGAL PERSPECTIVE
SAVE FOR SOME GAPS THAT WILL BE COVERED BY IMPLEMENTATION REGULATIONS, THE PPP LAW IS MOSTLY COMPLIANT WITH INTERNATIONAL STANDARDS AND SHOULD PROVIDE PRIVATE INVESTORS WITH THE LEGAL CERTAINTY THEY NEED TO ENTER INTO PPPS WITH CONFIDENCE.
transparent, competitive as well as fair, and accountable process for submitting PPP tenders, therefore giving private investors increased clarity and visibility in project implementation. Since the existence of a clear legal framework is fundamental to a strong foundation for successful ventures, the PPP Law is expected to create an investorfriendly environment that shall encourage the private sector to partner with the newly formed Lebanese government. Save for some gaps that will be covered by implementation regulations, the PPP Law is mostly compliant with international standards and should provide private investors with the legal certainty they need to enter into PPPs with confidence. To this date, no PPP agreements have been implemented in Lebanon yet, however, there are several projects in the pipeline that should come into place by the end of this year, most notably the expansion of the Beirut Rafic Hariri International Airport. Similarly, the water sector witnessed the introduction of Law No. 77, the ‘Water Code’, which was ratified one month after CEDRE. Among other improvements, the new law allows public utility projects
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to be run by Build-Operate-Transfer or Design-Build-Operate-Transfer contracts. As the government seeks private sector partners to assist with key initiatives, the PPP Law will no doubt have a large role to play in attracting international companies to invest in these sectors via the revamped public tender process. EXISTING OBSTACLES Until recently, the obvious obstacle to implementing the reforms laid down by CEDRE was the lack of a national unity government in Lebanon. In February 2019, almost a year after CEDRE, the newly formed government of national unity could now finally turn its attention to addressing the outstanding CEDRE demands. In March 2019, the Prime Minister confirmed that in light of the consensus between the different political parties there would now be a strong emphasis on approving laws related to unlocking the pledged CEDRE funds. Electricity reforms, one of the key reforms demanded at CEDRE, remains at the epicentre of any national reform as state-run national utility company Électricité du Liban (EDL) has accumulated losses totalling billions of dollars over the past two decades.
The newly formed government has approved a plan by the Minister of Energy and Water, Nada Boustani K h o u r y, t o b o o s t p owe r s u p p l y, increase electricity tariffs, and reduce fiscal deficit. According to a policy paper published by the Ministry of Energy, a decrease in just one per cent of EDL’s losses would translate into roughly $13 million in savings, a substantial contribution to reducing public debt. Reducing the deficit from EDL’s operations would free up funds for use elsewhere and unlock the pledged CEDRE financial support. Should the plan proceed as scheduled, Boustani Khoury is hopeful that Lebanon will reach a surplus of energy production by 2030. LOOKING AHEAD Moreover, the update of the Lebanese Code of Commerce is currently in progress with the purpose of creating a more business-friendly environment for investors according to international practises and standards. Amendments with the aim of modernising the Code of Commerce have been recently submitted for the Parliament’s consideration, one of them being the approval of a single shareholder limited liability company. Lebanon has demonstrated a resolute commitment to addressing the issues of much needed legal reforms—changes that should boost the country’s appeal to foreign investors. With the newly formed government under intense pressure to deliver but having only a few months to operate thus far, it is expected that the rate and scale of reforms will increase significantly from here onwards, in line with the CEDRE promises. Bolstered by the support of the international community, Lebanon should be well on its way towards macroeconomic stability and sustainable growth.
COVER INTERVIEW
Mohammed Al Khotani
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IDENTIFYING THE RIGHT TECH STRATEGY Mohammed Al Khotani, Managing Director of SAP Saudi Arabia, sits down with Banker Middle East, and shares his views on developing trends across the industry and the key technologies shaping them
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hat is your outlook on current market conditions and its implications for the banking sector? The economic growth in the Middle East and particularly in Saudi Arabia (KSA) recovered in 2018 from a contraction in 2017, benefiting from the increase in average oil prices. Meanwhile, the pace of fiscal consolidation eased, and the nonoil economic activity picked up. Private sector economic activity strengthened in Saudi Arabia, although the overall private credit growth remained subdued. Supported by increased oil revenues, most Middle East economies have seen some improvements in their fiscal and external balances. The oil production rose after the organisation of Petroleum Exporting Countries (OPEC) and its allies agreed to boost output in June 2018,
but they may cut oil production in 2019 despite pressure from the United States to lower oil prices. Overall, the economy in Saudi Arabia is set to show stronger gross domestic product (GDP) growth in 2019.The oil price is expected to remain firm, which will support stronger government spending. Non-oil sector will continue to grow, albeit at a slow pace. The implementation of government stimulus packages such as Saudi Arabia’s Saudi Vision 2030, will continue to spur the growth in the region. The improvements in the macroeconomic conditions will help banking sector see better overall financial performance in 2019. The profitability pressure in regional banking system will be alleviated, largely driven by widening net interest margins and increasing lending activity, as well as their strong culture of cost management.
BANKING 4.0 WILL SEE BANKS RETHINKING BANKING FROM THE GROUND UP. THIS WILL AFFECT THE WAY BANKS INTERACT WITH CUSTOMERS AND MANAGE TRADITIONAL BANK PRODUCTS, PROCESSES, AND FINANCE AND RISK OPERATIONS. THE IMPLEMENTATION OF NEW TECHNOLOGIES AND TALENT WILL BE REQUIRED TO SUCCEED IN THE DIGITAL AGE. — Mohammed Al Khotani
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COVER INTERVIEW
BANKS WILL CHANGE TO LOOK AND OPERATE MORE LIKE TECHNOLOGY COMPANIES, PROVIDING BANKING AND RELATED NON-BANKING SERVICES AS THEY BECOME DIGITAL PLATFORMS. — Mohammed Al Khotani, Managing Director, SAP Saudi Arabia
Banks have significant low-cost demand deposits on their balance sheets. We also anticipate the lending growth to increase slightly in KSA in 2019 as compared to previous years. This will result in improvement in the profitability of the banks. In addition, banks in the region are making consistent efforts to manage operating costs effectively. However, lending growth is projected to remain in the mid-single digits and profit growth is forecast to be modest. Most banks in the region are expected to be able to withstand sudden stress. Their loss absorption buffers have been stronger, partially due to the implementation of IFRS 9, which came into force on 1 January 2018. The capital positions of banks will remain broadly adequate, as the lending growth will be modest, and the profitability will be stable. In addition, Saudi Arabia’s banking sector’s liquidity will remain at a healthy level in 2019, on the back of current oil prices and sovereign support. We are also witnessing big mergers in the region’s banking sector. Talking about the mergers currently witnessed Saudi Arabia’s banking sector, what advice would you give these banks for their integration exercise? Middle East banks are increasingly looking to gain scale and stay competitive through consolidation. Many banks in the region have been involved in takeover or
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To achieve customer intimacy, ADIB are implementing Customer Experience (CX) in UAE, and the Saudi Investment Bank (SAIB) is also implementing SAP CX Marketing to differentiate itself in the KSA market, says Al Khotani.
merger talks, especially those in the UAE and Saudi Arabia. These merged entities expect new opportunities in competing for privatisation and bank mergers are complex in the region, largely due to substantial government ownership of major banks. Increasing regulatory demand, higher compliance costs, and rapid technological innovations are also key drivers of consolidation. Looking forward, the bank consolidation and merger trend is expected to continue in the region, which will help further consolidate the over-crowded banking systems and improve banks’ funding and profitability. The main advantages of mergers are reduction in costs, overheads and competition. The merged entities should focus on economies of scale in driving efficiencies in purchasing, human resource management, cost for developing new products and rationalising business contracts, leading to lower overall risk for the combined entity. Paraphrasing Peter Drucker, “The purpose of business is to create a (more satisfied) customer”—the new entity needs to leverage its combined strengths to build a deeper relationship and customer intimacy by offering more customer service offerings, better pricing, innovative products, and enhanced customer experience. As a tech provider, how do you see the role of banks changing for their customers/clients? Digital transformation will change the traditional definition of the banking industry. New ecosystems will emerge, and banks will need to adjust their business models. In the experience economy, banks need to become intelligent enterprises to respond to increased customer expectations, leverage data as the new currency, and evolve into technology companies as they are driven by the “platformification” of the industry.
97% 94% 25%
Of banks say customer experience is a focus
Of banking leaders are focusing on Big Data and Analytics
Reduction in attrition by making proactive calls to at-risk customers based on predictive models
60% 99% 360,000 hours Of human tasks will be automated by 2025
Accuracy in voice and video recognition by 2020
In reduced manual work by using an AI system to automate tasks Source: “The Intelligent Enterprise for the Banking Industry”, SAP Industries
The future will bring a more inclusive financial infrastructure, and banks will play an important role by providing digitally enabled and connected banking services to address financial inclusion. Their customers want the ease and simplicity of an experience that proactively provides advice and solutions based on real-time insights and life stage situations. Digital transformation has enabled consumers who prefer a simpler way of banking to perform most tasks like opening an account, making a deposit, checking their balances, or making payments from the comfort of their home or on a mobile device.
It is imperative that the financial sector would need to rethink its priorities and pace of change by having a deeper understanding of customer journeys, using data and advanced customer intelligence, and a complete rethink of overall organisational structure that moves the focus from product to the customer. By 2025, a significant portion of banking revenue will come from non-banking services. Banks will be a platform for digital services. These services will reflect a wide range of banking and related non-banking services to deliver an end-to-end service orchestrated by the bank. Digitalised solutions will address the “customer of one” anytime, anywhere. These services will span from simple after-sales services to more-complex outcome-as-a-service models, resulting in the monetization of the data assets banks are able to generate based on the business they conduct. How do you suggest banks adapt to the changing business model and what are the unique aspects of the Saudi Market that should be kept in mind? With over 21 million Saudis and over 10 million expats, Saudi banks are looking at ways in which they can cater to this growing customer base. Furthermore, the Kingdom has a vast majority of young and tech-savy population that is shifting behaviour in the market. With over 88 per cent of the total population using the internet, it is no surprise that Saudi residents expect to make speedy transactions anywhere, anytime, on any device. Banks must keep up to meet the ever-evolving needs of their customers—by going digital. The banking industry is being reshaped by four major trends: • Increased customer expectations: Bank customers want and expect more from their banks. Today banks are trying to understand how to offer customised offers, products, and services beyond banking transactions while delivering the best customer experience;
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COVER INTERVIEW
• Data as the new currency: Today, data analysis at banks is very fragmented and piecemeal, making a deep understanding of customer needs and wants very challenging. Banks are spending significant resources to reduce duplicate data and create a single view of each customer, from user history to user behaviour and intent; • “Platformification“of banking: A new type of plug-and-play business model is appearing at banks that allows multiple participants (producers and consumers) to connect to the bank, interact with each other, and create and exchange value. For instance, Barclaycard has inked a landmark agreement with SAP that will make its “virtual card” offering Precisionpay compatible with SAP Ariba—the world’s largest B2B marketplace for businesses; a major step forward for they payments offering; • Evolution of banks into technology companies: Banks are reviewing and changing their organisational structure, technologies, and cultures to run more like technology companies than banks. To compete with the established technology firms for talent, they also need to deliver the best employee experience. As such, the Saudi Arabian Monetary Authority, SAMA, is undergoing institution wide transformation by implementing end to end SAP systems which span from ERP, HR, Procurement to its core mandate of Supervision. Other retail/ commercial banks like UAB are utilising SAP technologies for big data analytics along with streamlining Finance and HR systems. Which technology trends do you see as a key enabler for the banks to drive digital transformation? Intelligent technologies promise to bring great benefits, such as productivity and efficiency gains, enabling innovative new business models and new revenue streams.
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DATA DRIVEN INTELLIGENCE WILL DIFFERENTIATE THE SUCCESSFUL FROM THE LESS SUCCESSFUL FINANCIAL SERVICES PROVIDERS WHICH WILL INCLUDE BANKS AND NEW ENTRANT NON-BANKS. — Mohammed Al Khotani, Managing Director, SAP Saudi Arabia
Al Khotani highlighted that the Saudi Arabian Monetary Authority (SAMA) has embarked on a Procurement digitisation journey with SAP Ariba solution. Likewise in the UAE, ADCB is using SAP Ariba to achieve procurement excellence, and ADIB is also using SAP Ariba along with some other SAP products.
The following intelligent technologies are instrumental in helping banks respond to the quickly evolving global financial services marketplace: • Artificial intelligence and machine learning: Machine learning (ML) and artificial intelligence (AI) enable algorithms to ‘learn’ from existing data and achieve the best possible outcomes without being explicitly programmed. Once the algorithm is trained, it can then predict future outcomes based on new data. Businesses can leverage these capabilities to eliminate repetitive manual tasks, such as service ticket management, automatically determining classifications, routing, and responses. They can also be used to anticipate customer behaviour— such as account closures and credit card cancellations—with instant insights from transactional data and digital interaction points. • Advanced analytics: The integration of advanced analytics capabilities— including situational awareness—into applications enables business users to analyse data on the fly and drives better decision-making. Empowered users, benefiting from embedded analytics in business processes, can get realtime visibility into their changing environment, simulate the impact of business decisions, mitigate risk, and
achieve better customer outcomes and experiences. Predictive analytics of structured and unstructured data provide 360-degree customer insight, enabling banks to anticipate the behaviour of its customers, respond to their needs, predict the next best step or product offer, and rapidly engage customers in real time. • Blockchain: A relatively recent breakthrough technology, blockchain is revolutionising the movement and storage of value by creating a chain of unaltered transactional data. The blockchain model of trust, through massively distributed digital consensus, could reshape supply chains and commerce across the entire digital economy, for example, digitalising the bill-of-lading document as part of the international ocean shipping process. • Conversational AI: Advances in machine learning are enabling algorithms to become highly accurate in naturallanguage understanding and in image and voice recognition, especially useful in after-service and call centre activities. Voice interfaces will be the go-to for the next generation of applications, allowing for greater simplicity, mobility, and efficiency while increasing worker productivity and reducing the need for training. Customer experience bots for services and commerce provide a humanised way for the customer to interact with their bank. This results in higher customer satisfaction and better customer experiences due to ease of consumption by using ML techniques for natural-language processing. • Robotic process automation: Robotic process automation streamlines repetitive, rule-based processes and tasks in an enterprise and reduces cost through the use of software robots by replicating specific tasks or keystrokes. Automation frees up employees for engaging in highervalue tasks, resulting in increased employee satisfaction.
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COUNTRY FOCUS
SUPPORT ACT Turkey is reliant on foreign investment and its financial situation is becoming precarious Turkey’s President Recep Tayyip Erdogan is used to challenging results that he doesn’t like; however, another recession will be hard to argue with 38
(PHOTO CREDIT: LUCIANO MORTULA - LGM/SHUTTERSTOCK)
I
n March, Turkey’s electorate sent a clear message to their President: the economy isn’t working for them. The opposition alliance won five of Turkey’s six biggest cities, including the capital, Ankara, and Istanbul, the economic capital. Despite only losing Istanbul by a slim margin, Erdogan has annulled the results and scheduled a rerun for 23 June 2019, wooing voters with initiatives to fix the economy and a promise to adhere to free market rules. The fact that the lira lost 10 per cent of its value on the news suggests the markets aren’t convinced.
In fact, no one seems reassured. In May, Turkey’s benchmark index of confidence dropped to its lowest reading since October last year, according to the Turkish Statistical Institute. Any figure below 100 reflects pessimism about the future--the index dropped to 77.5 in May from 84.7 in April. CONFIDENCE TRICKS While Erdogan can choose to ignore what the ballot box is saying, he cannot afford to lose investors’ goodwill. Turkey is reliant on foreign investment and its financial situation is becoming precarious.
Last year, the value of the lira plunged nearly 30 per cent against the dollar, sending inflation soaring by nearly 20 per cent. Ankara’s planned purchase of S-400 missiles from Russia is fuelling tensions with the US. A government spending spree to reverse the economic contraction drained reserves, resulting in a record deficit. S&P, which sent Turkey deeper into junk territory last year, has little faith in Turkey’s institutions. “There are limited checks and balances between government bodies, raising questions about Turkey’s ability to address the
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COUNTRY FOCUS
challenging environment for its financial sector and the broader economy,” it said. “Following the June 2018 elections, power remains firmly in the hands of the executive branch, with future policy responses difficult to predict.” The authorities have repeatedly ruled out a loan from the IMF, which would come with conditions unpalatable to an autocratic president. At a press briefing , Gerr y Rice, D i r e c t o r, I M F C o m m u n i c a t i o n s Department, said, “We continue to monitor the economic situation there very closely, and as we’ve said before we recommend a comprehensive, clearly communicated policy package to secure macroeconomic and financial stability. “We’ve received no indication from the Turkish authorities that they are contemplating a request for financial assistance from the IMF, so the recommendations that I just talked about, they do not come in that context.” UNLIKELY SUPPORT Shortly after its local elections, the Government unveiled a plan to curry favour with disillusioned voters. The Turkish Finance and Treasury Minister said that the Government will inject fresh capital into state-owned lenders and oversee the formation of two funds to shoulder some bad loans in the biggest move to bolster its banks since the financial crisis of 2001, Bloomberg reported. The Turkish Government will issue TRL 28 billion ($4.9 billion) of bonds and place them at state banks. It marks the second time that the Government has acted to shore up its lenders after last year’s currency crisis. Bloomberg quoted Hakan Ozyildiz, a former Deputy Undersecretary at the Finance Ministry, as saying, “This plan will increase the debt burden on the Treasury, in 2001, the same type of bonds was issued to cover the state’s losses.”
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ON A ROLLING SIX-MONTH BASIS, THE CURRENT ACCOUNT POSTED A SURPLUS OF $2.7 BILLION AT END-FEBRUARY, COMPARED WITH A DEFICIT OF $32 BILLION A YEAR EARLIER.
The newswire reported that the treasury chief’s road map also includes programmes to reorganise soured real estate and energy borrowings through debt and equity swaps. Banks will purge non-performing loans and transfer them to the two funds, which will be run by banks as well as local and international investors. “The non-performing loans ratio of 4.2 per cent is considered a very good level by our counterparts as well as, we are taking a step that will further enhance the quality of assets of the sector,” added Albayrak. H o w e v e r, o u t s i d e o b s e r v e r s have been less impressed with the Government’s sticking plaster solutions. “While the Government has fiscal space for counter-cyclical policies, the nature of some measures, notably interventions in the food retail market and rampedup lending by state banks and reported pressure on private sector pricing policy risk creating distortions if maintained and raise questions over the broader policy stance,” Fitch said. “The new economic reform plan published shortly after the elections did not refer to these policy measures and lacked detail, but did provide approximate timelines for individual initiatives.”
Some of the structural measures in the plan have been welcomed by the private sector, particularly reforms to the insolvency process and politically difficult pension and severance pay reform. The post-election period could be more conducive to economic reform that would begin to tackle long-standing structural weaknesses, although Fitch remains cautious about the prospect of meaningful progress. Despite government efforts, S&P believes that output in 2019 will contract by 0.5 per cent in real terms amid tight financing conditions and elevated inflation. “In our view, Turkey’s response to financial, and balance of payments, pressures has so far been largely ad hoc, focused more on relieving symptoms rather than on resolving the fundamental economic vulnerabilities,” it said. That is not to say that Turkey doesn’t have advantages to play on. Moody’s recently highlighted the country’s high economic strength, reflecting the Turkish economy’s large size, high diversification, relatively high per-capita income and young population which underpins the economy’s large–albeit diminishing– growth potential. Fitch, however, echoes that Turkey’s institutional strength is low. The country is battling weak external finances, low foreign reserves and high net external debt, elevated inflation, a track record of economic volatility, and political and geopolitical risks. The most damaging economic ailment has been the weakening lira, caused by external financing vulnerabilities and aggravated by political and geopolitical developments. According to Fitch, the only cure is a rapid correction in the current account deficit. However, significant uncertainties remain around the outlook for economic recovery and inflation, economic policy implementation, and the impact on the public finances and banking sector.
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COUNTRY FOCUS
The current account adjustment is perhaps the most pressing issue. On a rolling six-month basis, the current account posted a surplus of $2.7 billion at end-February, compared with a deficit of $32 billion a year earlier, according to Fitch. Gross foreign exchange reserves rose by $7 billion in the first two months of 2019, but fell to $96.3 billion in March ahead of elections, possibly reflecting efforts to keep the exchange rate stable ahead of the polls. Fitch said that market concerns about the reserves position appear to have contributed to a renewed fall in the lira. Fitch forecasts that weak domestic demand and a further improvement in services exports will underpin a current account deficit of 0.7 per cent of GDP in 2019 — the smallest since 2002. However, maintaining any surplus is going to be challenging. “Despite the current account shifting into surplus, we believe Turkey’s balance-of-payments risks remain elevated and therefore constrain the sovereign ratings,” S&P warned. “This is principally due to the need to refinance a high stock of external private sector debt, which we estimate amounts to about 40 per cent of 2018 GDP.” Servicing these debts translates into large external financing requirements. Fitch estimates the total external financial requirement, including short-term debt, at $173 billion in 2019, down from $212 billion in 2018. The financing requirement means Turkey will remain vulnerable to global investor sentiment and financial conditions, domestic political and economic policy uncertainty and a pronounced deterioration in relations with the US. Almost half of this debt is maturing in the next 12 months, which is considerably risky given the limited foreign exchange reserves at the Central Bank of the Republic of Turkey (CBRT). However, Turkey boasts a comparatively low net general government debt burden, thanks to past economic policies. This should give the government some wiggle-room as it toils to get its finances
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Inflation will average
14.2% 2019 in
the highest of any sovereign rated above the ‘B’ category Source: Fitch
in under control. Nevertheless, S&P warned that a combination of support for public-private partnerships, weaker economic growth, and possible external deleveraging in the private sector could rapidly erode what today appears to be a sound public balance sheet. Tu r key ’s e c o n o m i c wo e s h ave manifested themselves in monster inflation which continues to wreak havoc. Inflation spiked, surpassing 25 per cent in October 2018 marking a 15-year high. Even though it is slowly losing its sting, inflation remained above 20 per cent in January 2019, according to S&P.
(PHOTO CREDIT: BORIS STROUJKO/SHUTTERSTOCK)
Consumption is expected to decline by two per cent in 2019.
Weak domestic demand should put inflation on a downward path, but the PPI (Producer Price Index) remains high at 29.6 per cent, Fitch warned, and the impact of unwinding temporary tax and other price control measures is unclear. Fitch forecasts inflation to average 14.2 per cent in 2019, the highest of any sovereign rated above the ‘B’ category. The policy rate was kept at 24 per cent in April and is rising in real terms. “High dollarisation and the increased role of state bank lending and informal pressure on bank interest rates may be undermining transmission channels,” the rating agency said.
ONE CERTAINTY IS 2019 WILL MARK THE FIRST FULL-YEAR OUTPUT CONTRACTION FOR 10 YEARS. In Fitch’s view, monetary policy credibility is weak and potential mis-steps put the economy at risk. As high inflation will erode incomes, S&P believes that consumption will likely decline by two per cent this year. “In our view, Government initiatives to temporarily boost domestic demand through lower taxes will have only a limited effect,” it said. “In addition, we believe that headline inflation likely underestimates the full impact on consumer purchasing power.” For instance, food inflation exceeded 30 per cent toward the end of 2018, straining the budgets of lower income households. BORROWED TIME Turkey’s banks have also been struggling to swim against the ride. Straining under piles of debt, authorities have pressured banks to lower borrowing costs and restructure loans to keep the economy moving. In February, Moody’s warned that these stunts were risky, and could negatively affect margins. S&P has also expressed its concerns. “In our view, risks to the stability of the Turkish banking system have risen substantially over the last 12 months,” it said. “These stem from more difficult domestic and foreign financing conditions, and a likely deterioration in asset quality.” S&P revised its assessment of contingent liability risks to the state from the banking system to moderate from limited in August 2018. “So far, the authorities have not provided any concrete plans as to how they might deal with a deterioration in
bank asset quality,” it said. “The New Economy programme published in September 2018 lacked specific details on resolving banking sector problems bar a reference to an asset quality review.” Such a review was undertaken by Turkey’s Banking Regulation and Supervision Agency (BRSA) in December, but the details have not been made public. Official nonperforming loans are around 4.5 per cent of system loans, according to S&P, which could underestimate existing credit risk. The rating agency forecasts that problem loans will increase, rising to double digits over the next two years. Turkey’s participation banks have also suffered, however the sector benefits from being politically important to the Government. Fitch said that the market share of Turkey’s participation banks has remained broadly stable and growth is set to remain subdued in the short term due to the weaker growth outlook, the high interest-rate environment and assetquality pressures. However, the segment continues to offer reasonable medium-term growth prospects “considering the strategic importance of participation banking to the Turkish authorities, its current low base, the recent establishment of two new state-owned banks and also of a centralised Shari’ah board, to facilitate product growth,” the rating agency said. Participation banks’ non-performing financing (NPF) ratio was 3.8 per cent at the end of the third quarter of last year, above that of conventional banks’ (3.2 per cent), according to Fitch. Credit risk remains high due to SME exposure and to risky sectors such as construction. Capitalisation is moderate but capital ratios are sensitive to Turkish lira depreciation, Fitch said. Segment internal capital generation is set to weaken. While the Turkish government may have hauled the economy out of a recession with temporary stimulus and rapid credit growth from state-owned banks, the illusion is unlikely to last.
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COUNTRY FOCUS
TURKEY in numbers POPULATION
MEDIAN AGE
82.8
30.2
million
1m
years
10m
Source: Worldometers; United Nations estimates (May 2019)
NOMINAL GDP
Source: Worldometers (May 2019)
CURRENT ACCOUNT BALANCE TO GDP
$863 billion (2016) $852 billion (2017) $779 billion (2018) $827 billion (2019 – projected)
(3.8)% (2016) (5.6)% (2017) (3.3)% (2018) (1.0)% (2019 – projected)
Source: Standard & Poor’s
Source: Standard & Poor’s
GDP PER CAPITA (000s)
DEBT TO GDP
$10.8 (2016) $10.5 (2017) $9.5 (2018) $10.0 (2019 – projected)
28.3% (2016) 28.3% (2017) 29.3% (2018) 28.2% (2019 – projected)
Source: Standard & Poor’s
Source: Standard & Poor’s
GDP REAL GROWTH
CONSUMER PRICE INDEX GROWTH
3.2% (2016) 7.4% (2017) 2.7% (2018) (0.5)% (2019 – projected)
7.8 (2016) 11.1 (2017) 16.3 (2018) 15.9 (2019 – projected)
Source: Standard & Poor’s
Source: Standard & Poor’s
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CAPITAL MARKETS
2019’S INSTRUMENT OF CHOICE Considering current market sentiments, Mohammed Khnifer, debt capital markets banker at a supranational banking institution, makes a qualitative comparison between syndicated loans and fixed income structures
T
he loan market across GCC is expected to suffer during the rest of this year due to exceptionally excellent market conditions for fixed income instruments. But do not take my word for it. Dealogic data shows that year to date loan volumes across emerging Europe, the Middle East and Africa dropped 62 per cent in 2019 compared with 2018, with 174 deals in 2018 versus 69 ones in 2019. The cost of funding on bonds has gone down for borrowers this year. The last two months in Saudi Arabia witnessed borrowers from different sectors: Al Marai, one of the largest regional dairy companies, and Saudi Telecoms Company (STC), entering the Sukuk market.
Some borrowers now have the ability to be aggressive with their pricing in the bond market—STC pursued an aggressive pricing strategy, as Aramco did, with their recent Sukuk issuance and even managed to price lower than the Saudi sovereign ten-year bond issued earlier this year.
THE DETERMINING FACTOR FOR SELECTING DEBT INSTRUMENT OVER A LOAN IS ESSENTIALLY PRICING.
Mohammed Khnifer
We are seeing more appetite for debt capital market activity from blue chips in Saudi Arabia and across the Gulf. The determining factor for selecting debt instrument over a loan is essentially pricing. As we speak right now, the fixed income approach is the right one. Market conditions are far more attractive because of the Federal Reserve and relative market conditions across secondary trading which allowed some borrowers to be more aggressive with the pricing. The second factor is the inclusion of emerging market (EM) borrowers across the GCC into EM indexes (i.e. JPM EM Bond Indexes). Corporates can now benchmark their issuances against sovereigns, and this provides them with more appealing terms. Due to there not being enough transactions on the loans side, some domestic banks in Saudi Arabia have changed their approach to meet the guidelines of Vision 2030, which encourages banks to invest in new industries and infrastructure projects. This is why we have seen a trend of increasing lending since the last quarter of 2018 in Kingdom; however, it came on the account of a very thin/tight margin rate.
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INVESTMENTS
PLAYING AN INSTRUMENTAL ROLE Bana Akkad Azhari, Head of Relationship Management MEA & CIS at BNY Mellon Treasury Services, discusses the striking opportunities for the Middle East in China’s Belt and Road Initiative
C
hina’s Belt and Road Initiative (BRI) is instrumental to China’s aim of reshaping global trade. With the potential to be the world’s largest platform for inter-regional collaboration, the project is ambitious in the extreme—covering 65 per cent of the world’s population, one-third of the world’s GDP and a quarter of cross-border trade in goods and services. With the aim of improving connectivity, trade routes and deals, and cooperation across Eurasia and Africa, BRI will link China to Europe, the Middle East and Africa through ports, highways, tunnels and railways that will encompass over 70 countries. Yet, the critical connectivity will also require the involvement of a financial supply-chain large enough to construct and support this scale of infrastructure as well as financing the resulting increase in trade. And that means a major role for both global and—importantly—local banks.
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MIDDLE EAST ADVANTAGE This is particularly true for the Middle East. There is no doubt that there is potential for local banks throughout the region to become key beneficiaries of China’s enthusiasm for strengthened partnerships in the Middle East, stemming from the country’s reliance on the region for oil imports. Middle East-China relations are already strong and appear to be on an upward trajectory. China currently sources more than half its oil from the Middle East and North Africa (MENA), and the International Energy Agency expects China to double its oil imports from the MENA region by 2035. Given this, a successful BRI could bring substantial benefits to the Middle East: new trade corridors, improved infrastructure, increased investment opportunities, and, of course, an increase in bilateral trade.
THE ROLE OF LOCAL BANKS It is through local banks that much of the investment will be channelled, whether via trade finance, infrastructure finance, or through local payments and collections. Indeed, BRI can potentially create significant opportunities for local banks. Yet, this could stretch some providers with respect to capacity and expertise. Technology could offer an answer, but a number of local banks may struggle to compete with global players in terms of delivery and capabilities.
China invested over
$182 billion
in the MENA region between 2005 and 2018
(PHOTO CREDIT: MICROONE/SHUTTERSTOCK)
A SUCCESSFUL BRI COULD BRING SUBSTANTIAL BENEFITS TO THE MIDDLE EAST: NEW TRADE CORRIDORS, IMPROVED INFRASTRUCTURE, INCREASED INVESTMENT OPPORTUNITIES, AND OF COURSE, AN INCREASE IN BILATERAL TRADE. — Bana Akkad Azhari
Given this, local banks in the region can choose to harness the international reach and advanced technological capabilities of specialist providers, through non-compete partnerships with global banks. In this way, they have the added support to ensure that the financial supply chain can cope with the increased volumes and complexity of the physical supply chain. Marrying the reach and technology of global trade services and cash management providers with local banks’ region-specific regulatory knowledge and understanding of local culture and client needs can, therefore, help to ensure that Middle Eastern banks are effectively positioned to truly harness the changes brought with the BRI. Initiatives to promote greater ChinaArab financial cooperation are already underway. In 2018, China’s President Xi Jinping announced the establishment
of the China-Arab Countries Interbank Association, capable of granting up to $3 billion in loans for financial collaboration. Founding members include banks from countries such as Egypt, Morocco, Lebanon and the UAE. Initial areas of focus will be promoting cooperation on oil and gas, nuclear and clean energy— but there is potential for the breadth of sectors to become far wider. DRIVING TRADE OPPORTUNITIES Undoubtedly, trade remains the critical driver. Already, China’s Middle East trade is extensive—China is both Saudi Arabia and the UAE’s top trading partner, with the Egypt-China trade corridor, for example, rapidly gaining strength. Yet from now on, China’s expansion of trade and investment are likely to be tied to the wider goals of the BRI and helping to improve the flow of goods across Eurasia and Africa.
For instance, Egypt and Jordan have emerged as key focal points of China’s BRI ambitions. Egypt is particularly interesting. Over 60 per cent of China’s exports to Europe already passes through the Suez Canal. W h a t ’s m o r e , E g y p t ’s t r a d e agreements with African states means that Chinese products that are made in Egypt can enter African markets with fewer trade barriers. Consequently, Chinese investment along the canal has been significantly amplified. The Suez Canal Economic Zone (SCZone), for instance, has attracted an array of Chinese companies, helping to fuel opportunities and economic growth. The establishment of Chinese fibreglass manufacturer, Jushi’s huge production base in the SCZone, for example, has resulted in Egypt becoming one of the largest fibreglass producers and exporters in the world.
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INVESTMENTS
MARRYING THE REACH AND TECHNOLOGY OF GLOBAL TRADE SERVICES AND CASH MANAGEMENT PROVIDERS WITH LOCAL BANKS’ REGION-SPECIFIC REGULATORY KNOWLEDGE AND UNDERSTANDING OF LOCAL CULTURE AND CLIENT NEEDS CAN, THEREFORE, HELP TO ENSURE THAT MIDDLE EASTERN BANKS ARE EFFECTIVELY POSITIONED TO TRULY HARNESS THE CHANGES BROUGHT WITH THE BRI. — Bana Akkad Azhari, Head of Relationship Management MEA & CIS, BNY Mellon Treasury Services
in 2017 as a result of strengthening SinoJordanian relations. Certainly, the Middle East stands to benefit from major foreign direct investment (FDI) from China, which will help to drive trade and economic growth. China invested over $182 billion in the MENA region between 2005 and 2018, overtaking the UAE as the region’s largest lender in 2016.
Bana Akkad Azhari
Moreover, efforts to further expand the China-Egypt Suez Economic and Trade Cooperation Zone—operational since 2015— are being stepped-up. So far, it has helped Egypt establish industries in areas such as petroleum equipment, building materials and machinery manufacturing; with car manufacturing and textile opportunities also expected to be developed. Following the success of the initiative, countries including Saudi Arabia, the UAE and Oman have also worked with China to develop similar industrial zones. There are plans to ultimately connect these zones with regional ports in the UAE, Egypt and Djibouti, with the aim of building business hubs and increasing trade flows and cooperation in the energy, finance, science and technology sectors, in particular.
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Proving that Chinese interest in Egypt is not limited to the Suez, in 2016, President Xi Jinping pledged to provide $1.7 billion in financing for Egyptian banks to lend to country-wide infrastructure development and signed an additional $15 billion worth of deals. As an alternative route to the Mediterranean, the Levantine region is also likely to become a critical region for the development of the BRI. Jordan is positioned as China’s focal point here, and accordingly, Chinese Jordanian ties have steadily strengthened. In 2015, Jordan joined the Asian Infrastructure Investment Bank and s i g n e d i nve s t m e n t d e a l s a c r o s s transportation, energy and trade sectors worth more than $7 billion. Bilateral trade volume increased by 30 per cent
LEVERAGING POWER Indeed, the BRI is far from a oneway street. Middle Eastern countries are increasingly exploring ways to leverage opportunities and harness the partnership. However, effective cross-border trade will only be possible if banks are able to facilitate local businesses’ efforts to navigate new and existing trade corridors and leverage their position to capture growing opportunities in a rapidly evolving trade landscape. This requires a regional understanding of regulatory frameworks, culture and business practises and an ability to harness innovative technology, as well as maintain the global reach of a correspondent banking network. Increasingly, it seems, local and global banks need to act in harmony to maximise the obvious potential opportunities of the BRI.
S U P P O R T E D BY
O R G A N I S E D BY
CHANGE
OF DATE
SAVE THE DATE! 26 NOVEMBER 2019 The Ritz-Carlton, DIFC
Dubai, United Arab Emirates
I NDUSTRY A WARDS 2019
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 To learn more about the Awards process, please email: awards@bankerme.net
RETAIL BANKING
MASHREQ: ONE OF A KIND Sridhar Iyer, the Head of Marketing and Mashreq Neo, discusses the unique value proposition Mashreq Neo brings to the market
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SPONSORED CONTENT
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hat are your views on bank branches? While branches will always fo r m a n i n t e g r a l a n d irreplaceable part of the banking ecosystem, in the medium to long term we expect the role of the branch to evolve to serve customers based on their specific needs and the neighbourhood they reside in. Most notably, for those who require deeper personal engagement and advisory services such as purchasing a home, financing a business or making high involvement decisions, branches will play a key role in offering financial advice and enhancing their banking experience. However, for day-to-day banking transactions, branches will become increasingly digital with a range of self-service options including ITMs (Interactive Teller Machines); cash deposit/withdrawal machines and virtual RM (virtual Relationship Manager) that will make transactions simpler and quicker. Technology will help the branch staff provide 360-degree view of the customer and avoid routine steps like waiting, customer verification, etc. thereby offering a much better experience. Mashreq has already embarked on a digital transformation journey integrating technology, new skills and innovative ways of banking to offer customers a remarkable experience. Our goal at Mashreq is to become the region’s most progressive branch network. How does Mashreq Neo consolidate customer needs? Customers today are accessing a multitude of services from a diverse range of providers, directly via their smartphone. Whether it is for shopping, paying bills or accessing government utilities, the smartphone is ubiquitous. Mashreq Neo goes one step further down the digital highway. The banking services via Neo offer a fully-fledged digital bank encompassing a comprehensive
suite of services across the customer’s lifecycle—from customer onboarding, engagement and service. With the bank in the palm of their hands, customers can now open accounts instantly, review their transaction history, make payments internationally, trade in stocks and gold, invest in funds and enjoy lifestyle experiences/offers via the app. Several other attractive propositions like online and real time insurance and loans are in the pipeline making Neo a compelling banking experience. What were the goals of introducing this to the market? Expectations of customers from banks are shaped by their experiences in other industries. Today a customer compares a bank’s service not just with other banks but also with non-banking players including eCommerce companies and start-ups. It is therefore imperative for banks to be nimble and agile while being secure and safe. Given this context, we saw an opportunity to reshape banking via Neo. The aim was to provide a complete banking experience to the ‘Connected Generation’ in a simple, swift and safe manner. When we say the ‘Connected Generation’, we mean anyone who is comfortable and familiar with the use of smartphones to perform daily activities.
IT IS WIDELY REGARDED AS THE MOST COMPLETE DIGITAL BANK ACCOUNT BECAUSE IT HOUSES EVERYTHING NOW EXPECTED FROM A BANK, IN A SINGLE APP—YOUR BANK ACCOUNT, INSURANCE, FOREX TRADING, STOCK TRADING, GOLD TRADING AND LIFESTYLE DISCOUNTS — Sridhar Iyer
Where do you see Mashreq Neo going in the next few years? The customer response to Neo during the past one year has been overwhelming. Over 70 per cent of our customers use the Neo app over 10 times a month. The Neo Referral Programme, where a Neo customer refers his/her their friends for a Neo account has proved to be extremely popular with our customers and a key factor for the rapid growth in sales. Today, we acquire three times the number of customers vis-a-vis the mainstream bank. Given this, we are confident that Mashreq Neo will grow, not just in terms of customer numbers but also in terms of customer engagement, transactions and service. As we increase focus on customer education and develop compelling banking propositions on digital/mobile, we anticipate more and more customers to migrate from traditional banking to ‘digitalfirst’. Our aim is to be available to our customer at the time and place they need us and through their preferred device. Currently, over 95 per cent of the banking transactions at Neo are done via remote channels. I believe that it’s only a matter of time before we see digital and mobile becoming mainstream for customers across their entire banking journey. How important is a digital bank in today’s banking landscape? Digital banks are undoubtedly the future of the banking landscape. Personalisation, convenience and transparency are now not a ‘a nice to have’ but critical factors in creating happy customers. A digital bank is better placed at providing these customer three benefits in addition to making banking simple and secure. As with any change, people will need time to become familiar and get comfortable. However in the near future, consumers adapt, adopt and ultimately demand services from digital only banks, for an easier, simpler and a more secure banking experience.
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WEALTH MANAGEMENT
From a succession point of view, businesses in Kuwait and Saudi Arabia have more experience in handling transition of power.
THE PAINS OF SUCCESSION PLANNING Daniel Fleming, Head of Wealth Advisory, Middle East at JP Morgan Private Bank, sheds light on the changing trends amongst family offices and their investment behaviours 52
(PHOTO CREDIT: ARLO MAGICMAN/SHUTTERSTOCK)
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hat are the key trends involved when family businesses make investments? Currently, many family businesses across the region have grown to become conglomerates investing in local real estate and many family businesses’ balance sheets are dominated by this asset class. There is also a growing trend in investing in assets outside of the region and those assets class tend to fall within real estate in the US, the UK as well as Europe, China, Singapore and Hong Kong. Additionally, there is also an increasing interest in investing in areas like healthcare, hospitality and in some cases the automotive sector as well as a liquid cash investment. How do family offices differ in different parts of this region? In terms of their approaches, family businesses are all the same, but they do defer from a generational perspective, for example, Kuwait and Saudi Arabia started producing significant oil way before countries such as Qatar and the UAE and thus their wealth is better understood in terms of generations. In Saudi Arabia and Kuwait, we work with third and fourth generation family members, as opposed to speaking with founders of family businesses who are much older. And as a result, the investment views are different because in businesses were they are still under
YOUNGER FAMILY MEMBERS THAT ARE UNQUALIFIED AND LACK THE SUFFICIENT LEVEL OF EDUCATION ARE HIRED FOR HIGH-LEVEL ROLES AND TASKED TO MAKE DECISIVE BUSINESS DECISIONS. THIS LACK OF COMPETENCE HAS THREATENED THE CONTINUITY OF SOME BUSINESSES IN THE REGION. — Daniel Fleming
the leadership of founders, they are mainly focused on their core businesses, whereas the third or fourth generations are more inclined to diversification. In addition to that, third and fourth generation investors are bringing in new ideas and new ventures into the family businesses, and this is why they are more diverse. However, family businesses in the first-generation phase are still using the founder’s approach whereas in the subsequent generation they bring in new ideas and end up being huge conglomerates as can be seen with family businesses in Kuwait and Saudi Arabia. In regards to the transition from one generation to another, what opportunities and challenges do these businesses typically encounter? Family businesses across the region have endless opportunities, some business owners are thinking more about the voluntary transition of ownership rather than waiting for it to happen naturally. Saudi Arabia and Kuwait are more populated with millennials than anywhere else in the GCC. This educated group are exceptionally tech-savvy and has a better understanding of technology than their parents, and through the use of technology, millennials are able to implement ideas much faster than past generations. Similarly, the challenges that family businesses are facing include choosing the best-qualified candidates from nextgeneration family members. There is also the issue of power struggles amongst family members and in some larger families, where both second and fourthgeneration family members are involved in the running of the business at the same time. They almost always work at different stages and having different targets, and that is where we feel that corporate family governance should be practised across different sectors within the business.
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WEALTH MANAGEMENT
From your experience what are main concerns of family businesses? There are two main concerns in family businesses—succession and geopolitical issues. This has been the issue for the last five years and will remain a challenge for the next 10 years. From a succession point of view, parents in Kuwait and Saudi Arabia have more experience in handling transition of power. It is evident that they learn from previous mistakes and are doing more to avoid repeating them. Significant transitions are underway in the UAE and Qatar; in these two countries transition is the main challenge. Family businesses in these countries are studying succession and business transition in order to execute smoothly. On the geopolitical front, family businesses are concerned about tensions within the region involving decades-old rivalry between, Saudi Arabia and Iran, Qatar and the other GCC members, as well as the unrest in Lebanon and Yemen. This situation is prompting family businesses to hedge a lot of liquid wealth outside of the region. Where do family offices in the Middle East fail when it comes to succession planning? The main challenge facing family businesses is choosing a competent successor. More often than not, every member from the next generation is keen to be involved the business. The third and fourth generations also try to push the elders to do something about succession and this tends to put pressure on the founders. Another changing trend is the active participation of female members in the family businesses, where in some cases they have been chosen as leaders, and this creates more challenges especially for their male counterparts. Family businesses also face the challenge of allocating the right roles to members of the next generation. Younger
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procedures. Therefore, it is very rare for next-generation family members to take decisions that have a negative impact on the future of the business. Similarly, some businesses have structured different rules relating to the position as well as the level of education and experience required for it.
ANOTHER CHANGING TREND IS THE ACTIVE PARTICIPATION OF FEMALE MEMBERS IN THE FAMILY BUSINESSES, WHERE IN SOME CASES THEY HAVE BEEN CHOSEN AS LEADERS, AND THIS CREATES MORE CHALLENGES ESPECIALLY FOR THEIR MALE COUNTERPARTS. — Daniel Fleming, Head of Wealth Advisory, Middle East, JP Morgan Private Bank
family members that are unqualified and lack the sufficient level of education are hired for high-level roles and tasked to make decisive business decisions. This lack of competence has threatened the continuity of some businesses in the region. Can you define proper family governance? Family governance depends on the family structure, however there are different types of rules on who comes in and at what level, and who they report to. Some family businesses have well-established protocols as well as
In the GCC, around 80 per cent of the private sector belongs to family offices. What is the future of these businesses here? Family businesses will maintain the current 80 per cent share of the private sector in the GCC. Regions such as Europe and the US have experienced a significant decrease in IPOs as familyowned businesses are not expected to sell shares so long as they remain profitable. On the other hand, there still are instances where family-owned mini-conglomerates sell their go public because parts of their business cease to support the company’s core business. How do you evaluate a family business’ readiness to invest in wealth management planning? The readiness of family businesses to invest in wealth management is determined by the type of business and where their business is in its lifecycle. Some of larger family businesses have been operating for years, building large cash reserves both locally and outside the region. There are several reasons for this; for example, businessmen who live in regions like the Middle East go through the same cycle, making sure that they have enough drive power to invest in new opportunities. Secondly, family businesses are building liquid wealth to ensure that their future generations are well taken care of in an event the business stops being profitable. As time goes by, family members try to diversify their business portfolios. Thus, having a very good liquid pool is important.
ISSUE 02
DIGITALISING MIDDLE EAST Naji Kazak, Kodak Alaris’ General Manager for the Middle East, Africa, Turkey and Russia
TECHNOLOGY
DIGITALISING MIDDLE EAST Naji Kazak, Kodak Alaris’ General Manager for the Middle East, Africa, Turkey and Russia highlights the digital progress in the Middle East and its importance
Naji Kazak
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hat are your views on digitisation trends in this region? Digital transformation is a hot topic in the Middle East. You look at governments and financial institutions and you feel the importance of going digital to them, if we talk about banks in specific then you look at the digital channels they open to their customers to complete transactions that were previously done in a branch through a mobile application, application can be done online, money transfers too, some banks even introduced cheque deposi ti ng through t heir mobile application, others introduced virtual branches. Competition is increasing among banks and digit al transformation is a key to their survival, this is mainly driven by the need to excel in customer satisfaction and reduce operational cost. Tell us more about Alaris and what services it can offer to financial institutions? Data come in from different channels. It can be on paper or digitally born or even on social media. Banks and financial institutions have invested a lot in the various system to accommodate the large amount of data they generate, while some have already introduced artificial intelligence and robotics into their processes. There is a growing challenge in how data is handled and being a paper-centric region makes the challenge harder. Alaris expertise lies in optimising the workflow of data capturing, regardless of the source of data we take optimised images of data in preparation for data classification and extraction. In most cases, financial institutions need to validate the data provided before putting them into a business process and this is something that we help automate.
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How did the company come to what it is today? Kodak Alaris is a spin-off company of Kodak Eastman that is well known for its imaging science. We proudly inherited this part of the business and specialised in it. We were the first to manufacture a high-volume document scanner in 1990, typically these scanners operate 24/7 with very little downtime and today we have an extensive portfolio of scanners that cover speeds from 20 pages per minute to more than 400 pages per minute. In the past, the company has worked with the likes of Central Bank of Egypt, National Bank of Egypt as well as Emirates NBD and ADCB to name a few. Kodak Alaris has partners who use technology to provide digitising solutions to most of the banks in Saudi Arabia, so the firm has built a great reputation across the region.
Scanners cover speed from
ALARIS MISSION STATEMENT “To deliver innovative solutions that utilize image capture expertise to optimize business processes.” 1990
2004
First Kodak production scanners
First Distributed Capture Scanners
1999 Extended Warranty care kits
Kodak Alaris founded, Information Management Division launched
Alaris, a Kodak Alaris Business Division Rename
2008
1995 High-Volume Capture Software
2018 2013
2000 Perfect Page technology introduced
Capture Pro Software launced
2017 Alaris IN2 Ecosystem & Alaris S2000 Series Scanners announced
1.5 Trillion+
Top 2
Top 2
Pages have scanned by Kodak and Alaris Scanners since 1990
Global market share leader in production capture
Scanners manufactured since 1990
Source: Kodak Alaris Inc.
THE ALARIS SOLUTION
20 pages 400 pages
Clean up the image and check for completeness for increased accuracy and create a searchable file
Automate processes such as document classification*, information extraction, and routing
per minute to more than
Data is no longer only on paper, many documents come in a digital form but still need to be captured, hence our investment in the software space to automate the image capture process. Additionally, Kodak Alaris provides professional services to help clients in planning and implementing their digital transformation journey. Altogether, the company brings a unique proposition to clients where they need to deal with only one entity to provide them with an end-to-end solution. Kodak Alaris’ products can solve a lot of business issues, whether it’s transformation and digitalisation of e-governments, banks or companies
Route to required back office systems ECM
Source: Kodak Alaris Inc.
THERE IS A GROWING CHALLENGE IN HOW DATA IS HANDLED AND BEING A PAPER-CENTRIC REGION MAKES THE CHALLENGE HARDER. — Naji Kazak
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TECHNOLOGY
TYPICAL INFORMATION CAPTURE WORKFLOW
Source: Kodak Alaris Inc.
that aim to move away from paperbased processes. It is complicated and demanding to access data that is on paper. Data is the new currency, even more so for this region. We all must work towards figuring out ways to make companies more efficient in this new digital age. At Kodak Alaris, we believe that our scanning solutions, capable to integrate into customers’ businesses, will allow them to be more efficient by transforming themselves. Transforming customers’ through our scanning solutions is the company’s objective across the world and in the Middle East region as well. With our team based out of Dubai, we have had great success stories in various countries and a remarkable 2018 in the region. What common challenges do you see banks face in managing their processes? According to a survey conducted by Souqalmal.com, in 2018 only 32 per cent would recommend their bank, it represents a seven per cent increase from 2017 and a two per cent drop from 2016, which is alarming. When you dig into the reasons for dissatisfaction you would find things like frustration with papers and forms, the need to supply
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DATA IS NO LONGER ONLY ON PAPER, MANY DOCUMENTS COME IN A DIGITAL FORM BUT STILL NEED TO BE CAPTURED, HENCE OUR INVESTMENT IN THE SOFTWARE SPACE TO AUTOMATE IMAGE CAPTURING PROCESS. — Naji Kazak, Kodak Alaris’ General Manager for the Middle East, Africa, Turkey and Russia
the same information repeatedly, long time to decide on applications and loans. Banks also relate to these problems as 49 per cent of employees stated that data getting lost and the speed of the process are the two biggest challenges they face. Having said that, banks need to deliver service faster than ever and studying the journey of that application is an absolute necessity if banks want to improve customer satisfaction. Alaris helped a bank in the region to reduce their loans processing time from seven days to one day, we provide the expertise and the know-how to assist banks with these matters. Customers need services at their fingertips and they need it now, we see banks analyse their branch-customer interaction and take decisions based on the customer experience. The cheque is a great example, the process of depositing a cheque was time-consuming, initially customers were required to deposit cheques at the teller now they have the option of depositing cheques through an ATM, however, they still need to physically travel to an ATM location. Excellence in customer satisfaction requires a step further towards innovation and digitisation, hence some banks now offer cheque deposits through mobile apps removing the need to visit a branch or an ATM. Looking at how banks approach their legacy systems right now, would you do things differently? Why? Technology develops and improves every day, while some systems are more efficient than others it would be naïve to say that investing in a new system is the only way forward, banks have invested a lot time and resources in employing these systems and any new systems to be implemented need to integrate well with the existing business process. We understand this very well that is why we have a fully equipped team to help banks integrate our solutions to their existing processes.
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TECHNOLOGY TECHNOLOGY
BANK OF THE FUTURE Steve Weller, CEO of Saxo Bank MENA Region provides an insight into how banks can survive the digital age
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he downfall of banks has been predicted several times throughout history. In the 1990s it was said that ‘banking is necessary, banks are not’ and for banks these gloomy forecasts have gained renewed traction in recent years. Fintechs delivering a relevant and razor-sharp digital customer experience make banks look dusty and foot-dragging. At the same time, tech-giants such as Apple, Tencent and Alibaba are moving rapidly into areas usually associated with more traditional financial institutions. Most banks are late to the digital party. That is obvious to everyone. Yet, despite the evident challenges, the rumours of the bank’s demise are greatly exaggerated. If banks have the courage to make the right decisions, they have a bright future ahead of them. In our opinion, to be successful the bank of the future builds on a foundation of long-term win-win and putting clients at the very core of its operations. The future belongs to banks who acknowledge that the rising digital demand from clients is not met by simply expanding on an ever-growing IT department. lncreased expectations for digital experiences from clients and the many opportunities that new technology provides call for an open business model with sharp focus on the bank’s core strength—servicing clients.
FINTECHS DELIVERING A RELEVANT AND RAZOR-SHARP DIGITAL CUSTOMER EXPERIENCE MAKE BANKS LOOK DUSTY AND FOOT-DRAGGING. — Steve Weller Steve Weller
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THE BANK OF THE FUTURE DOES NOT DEVELOP MUCH TECHNOLOGY ITSELF; THE BANK OF THE FUTURE HELPS ITS CLIENTS NAVIGATE THROUGH THE INCREASINGLY COMPLEX WORLD OF APPS AND SMART FINTECH SOLUTIONS BY HANDPICKING THE BEST SOLUTIONS AND PACKAGING THEM EFFECTIVELY. — Steve Weller
Most banks have been accustomed to building their own systems to cover large parts of the value chain to meet the opportunities and challenges faced by digitalisation. That is why most banks today develop in essence the same technology and digital solutions. It is highly inefficient for everyone to do the same and a foolish race to participate in. Only one can be the best, so why not leverage the services offered from the best providers instead of developing them in-house? The old model is clearly not sustainable in the long-term as studies have shown that roughly 80 per cent of annual IT budgets at European banks are used solely to run and maintain legacy IT systems. This leaves little resource for real innovation and meeting the fierce competition from fintechs and the tech-giants. The bank of the future does not develop much technology itself; the bank of the future helps its clients navigate through the increasingly complex world of apps and smart fintech solutions by handpicking the best solutions and packaging them effectively. By adhering to this platform or marketplace model, banks can build a low cost, flexible and state-of-the art client experience. The flexibility of having an open model makes it easy to add new
services, without adding high costs and complexity. Banks’ core competency is to service clients; however, the client focus is all too often shifted by an outdated IT infrastructure. In a time dominated by flexible technology and cloud solutions, it does not make sense that many banks still rely on old mainframes. When a bank switches to a more open model, it not only gets the benefit of more flexibility but also lower costs. The bank also creates a much stronger foundation for building long-term winwin. Operating as an open platform removes any incentives in promoting one’s own products and services, which many banks do today, and lays the foundation for truly putting the clients’ interest first which, in our view, is the clear precondition for long-term success. Those banks who dare to take the leap from developing technology in-house, to become truly open banks operating as marketplaces or platforms,
have a bright future ahead. Indeed, with the advent of cloud-based solutions, that future is not that far away. In 2001, Saxo Bank signed our whitelabel partnership for a bank to use our technology to better service their customers and we have argued for a long time that partnerships are the future of the financial sector. The development has not moved as fast as I expected, but it is certainly accelerating. More banks start to understand that outdated IT infrastructure is the biggest obstacle and that they no longer have to develop their own technology. It is simply too expensive, especially with increasing regulatory requirements, and the world is moving too fast. Banks have a strong opportunity to compete against fintechs and the big tech companies as they have the resources as well as large and loyal customer bases, but theses strong foundation can easily crack if they insist on building their own systems, products and solutions. The winners will be those who focus on delivering an experience tailored to the needs of the individual client. This can only be achieved by collaborating with specialist partners, each of which can supply the sub-elements that together form a razor-sharp and unique client experience at the lowest possible cost, putting the clients’ interests first.
THE FUTURE BELONGS TO BANKS WHO ACKNOWLEDGE THAT THE RISING DIGITAL DEMAND FROM CLIENTS IS NOT MET BY SIMPLY EXPANDING ON AN EVER-GROWING IT DEPARTMENT. — Steve Weller
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TECHNOLOGY TECHNOLOGY
AUTOMATING CYBERSECURITY By Lucas Moody, Vice President and Chief Information Security Officer at Palo Alto Networks
(PHOTO CREDIT: BILLION PHOTOS/SHUTTERSTOCK)
A
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utomation has always played a role in cybersecurity. If you think about basic antivirus software, it typically works in the background, automatically scanning devices for aberrations that might indicate the presence of malware or other intrusions. Gone are the days when basic antivirus software could offer the breadth of protection required to meet the challenges of today’s highly sophisticated threat environment. We are at a turning point in the use of automation in our overall approach to cybersecurity. We must ensure that we are using automation as well as machine learning and artificial intelligence, to simplify and accelerate our ability to respond to attacks. Our security operations centres (SOCs) are under constant siege and they can no longer rely on manual operations to deal with attackers who are using automation to scale at an unprecedented pace. If we
do not automate our SOCs to reduce complexity, we simply cannot keep up. We must also ensure that we can build automation into cybersecurity as forethought and not just as afterthought. This will allow us to reduce the pressure and complexity involved in detecting and responding to attacks as our adversaries become more innovative. The shift towards automation is a function of the growth of our digital world, which changes the ways in which we are attacked and the ways in which we must detect, predict and respond to attacks. Our adversaries can access the same inexpensive compute resources that are available to us in the cloud. They can go to the dark web and buy tools that are both inexpensive and highly effective. Because these adversaries have easy access to compute resources, they can scale exponentially, using automation to launch attacks on a massive scale.
In addition, they can leverage technologies such as machine learning and artificial intelligence to be more agile and innovative. And motivation has perhaps never been higher, with the participation of nation-states not just out for money but to generally wreak havoc wherever possible. This paradigm is not going to change, so organisations must change their approach to cybersecurity and automation. At Palo Alto Networks, we often talk about using machines to fight machines. There is a simple reason for this approach: It is truly the only way to deal with today’s threats. When our adversaries can scale their resources simply, exponentially, and inexpensively by adding more compute power, we cannot respond by hiring more and more people. It’s an equation that doesn’t work. The only way is to respond in kind, leveraging automation in our SOCs so we are fighting machines with machines.
For business leaders and board members, this means being prepared to ask the right questions of cybersecurity leaders and to instil a culture of cybersecurity that starts right at the top. From a practical standpoint, critical questions to ask include: • Is the organisation incorporating automation at every step of cybersecurity? This often starts in the development of new applications and services. If cybersecurity is not included early through approaches like DevSecOps, it will be harder and more expensive to add automation capabilities later in the process. • Is the organisation using automation to correlate data, and does it have the technology foundation to ensure that the data is complete and current—i.e., from every possible source, including endpoints, networks, and multiple clouds (public, private, and hybrid), as well as all mobile devices, including those in the internet of things?
GONE ARE THE DAYS WHEN BASIC ANTIVIRUS SOFTWARE COULD OFFER THE BREADTH OF PROTECTION REQUIRED TO MEET THE CHALLENGES OF TODAY’S HIGHLY SOPHISTICATED THREAT ENVIRONMENT. — Lucas Moody
• Can the SOC access a centralised, holistic view of all activity, leveraging automation to reveal the root causes of attacks with actionable forensic detail to accelerate and streamline event triage, incident investigation, and response? • Do your cybersecurity tools leverage machine learning and artificial intelligence to empower security analysts to reduce complexity by shifting from manual investigation to proactive protection? Do these tools allow the SOC to respond faster to attacks with deeper insights, allowing the organisation to reduce risk by keeping pace with the volume and sophistication of today’s advanced threats? As a business leader, whether in the boardroom or executive suite, cybersecurity is becoming a more critical factor in ensuring that you meet your fiduciary responsibilities to the organisation. By staying informed about key cybersecurity trends, such as automation, and asking the right questions of your teams, you can play an active role in setting the right tone and culture for your organisation. Are your cybersecurity security teams fighting machines with machines? Are cybersecurity and automation integrated into your development processes? Are your SOCs leveraging automation, machine learning, artificial intelligence, and other modern technologies to strengthen protections, reduce complexity, and lower risk? Why automation, why now? For cybersecurity, it’s no longer a question; it’s an imperative.
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TECHNOLOGY TECHNOLOGY
HOW TECHNOLOGY AND DIVERSITY CHANGED THE MEANING OF ‘DISRUPTION’ David Parker, Executive Director, Business Development—Financial Services & International Offices at the Bahrain Economic Development Board, explains how fintechs are challenging maledominated sectors—finance and technology.
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ot so long ago, the word “disruption” had a negative connotation. Most people and businesses feared disruption—understanding it as a destabiliser and a threat to order. Today, however, disruption is increasingly the favoured description of the path to progress and profitability, referencing inspired entrepreneurial interventions that challenge outdated business practise. Fintech has the potential not just to change financial services, but to overcome barriers to entry for those who have traditionally been underrepresented, and to tackle entrenched inhibitors to commerce.
FINTECH SHOWS DIVERSITY IN ACTION
David Parker
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Fintech brings together two of the business world’s most male-dominated sectors—finance and technology. Both have suffered from a lack of diversity at the top of their fields, as well as a lack of equal opportunity. This does not make good business sense. Credit Suisse’s research into some 3,000 companies with market capitalisations of $10 billion or more showed that those corporations with a woman on their board outperformed their male-only peers by five per cent between 2012 and 2014. When navigating increasingly complex
BREAKING TRADE RELATIONS BARRIERS As those shaping the future of fintech change, diversify and internationalise, traditional trade relationships are also undergoing major transformation. The legacy of big banks—too often slow and cumbersome in a world moving ever faster with ubiquitous digitalisation— is being disrupted by new fintech companies that display agility and speed that larger institutions cannot replicate. Technologies such as distributed ledgers like blockchain, for example, can cut costs and processing times by dispensing with the need for physical authentication. In the Middle East, regional trade is hampered by tariffs and non-tariff barriers, including insufficient cooperation between
border agencies, complex procedures, a lack of harmonisation of processes, weak regional economic integration and poor implementation of regional trade agreements. Saudi Arabia and the UAE have undertaken the development of fintech for cross-border settlements, including a digital currency project. A Shari’ah-compliant cryptocurrency exchange has graduated from Bahrain’s regulatory sandbox. We have yet to fully see what kind of impact this technology will have.
NEW RULES Disruption brings challenges. In order to keep pace with fintech, traditional financial institutions need to harness the opportunities presented by technological change and increasing diversity. For the big banks, this means acquiring start-ups, funding accelerators, and making efforts to disrupt themselves before they are disrupted by others. In a sense, it is the same for governments—if markets want to be competitive, they need to get ahead of technology and borrow from the disruptive instincts of founder culture. Diversity is crucial, and in this aspect Bahrain has advantages. At the Bahrain Economic Development Board, women make-up 61 per cent of the workforce and 58 per cent of the management are women, and as a country with a strong history of women in leadership roles, our group of “Women in Fintech” leaders grew organically to help steer our fintech strategy.
A Credit Suisse research into some
3,000 2012 2014
companies showed that corporations with a woman on their board outperformed their male-only peers by five per cent between and
Equally, STEM education has never been more vital to a market’s competitiveness and parity of opportunity in ICT roles is critical. Today, some 60 per cent of those enrolled in ICT courses at Bahrain University are women. This will grow in importance as Amazon Web Services (AWS), who are opening the first hyper-scale data centre in the Gulf in Bahrain later this year, predict that 10,000 jobs for data scientists will open over the next five years across the region. AWS has seen a huge demand in Bahrain for training - enrolment in its data training courses in the first three months has outpaced that in both China and India. An active VC community is essential to funding the entrepreneurial activity that is vital to fuelling disruption and finding the next generation of break-out tech companies across the Middle East. To bring this to fruition, the Bahrain Development Bank (BDB) led the way in establishing the Al Waha Fund of Funds, a $100 million fund with an all-female leadership.
CONDITIONED FOR SUCCESS So, is disruption now a positive phenomenon rather than something to be feared? To a degree, it will always depend on your personal perspective and a combination of factors—the vulnerability of business models, appetite for change, and the ability to deal with unpredictability. Stephen Hawking, said, “Intelligence is the ability to adapt to change”, and certainly those who can anticipate and always stay ahead of disruption will be better placed to see the positives. What’s clear is that with fintech, with such rapid consumer-driven demand for new solutions, and such a pace of technological progress, that economic development is colliding with social structures. Additionally, it will be a successful adaptation to both those forces for a change that will mark out the real winners.
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(PHOTO CREDIT:KATJEN/SHUTTERSTOCK)
business environments a diversity of perspective is critical. Women can now access the financial services profession from all kinds of different backgrounds and through many more different businesses, and this will increase as the drive towards open banking takes hold and brings in greater competition from challenger banks and start-ups. New cross-over apps are being introduced by small start-ups founded and run by women and, more broadly, those with no financial experience whatsoever. In the new era of fintech, no one cares about the gender, race, ethnicity, nationality or, even, age of entrepreneurs as long as their products make banking easier and faster.
TECHNOLOGY
NURTURING INCLUSIVE GROWTH Guy de Blonay, Funding Manager at Jupiter Asset Management sheds lights on the growth of fintechs in the Middle East region
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cross the Middle East and particularly in the GCC, financial services providers are demonstrating a commitment to innovation, securing a number of partnerships with fintech providers, adopting the latest technologies from cybersecurity tools to payment platforms and working with regulators to increase access to new technologies. Banks are increasingly looking to adopt the services of fintech companies through partnerships, investments or acting as incubators. With only seven percent preferring to develop all technological solutions internally it is clear that many are carving their own niche in the market. With a record $111.8 billion invested across 2,196 fintech deals in 2018, banks know they must embrace change and evolve their business models or else face significant disruption.
DIGITALISATION Digitalisation is an ongoing process that has now become irreversible. It is no longer a question of “if”, but a matter of “when”. Global banking giant JP Morgan has set the pace in this regard, having
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established a 10 per cent of revenue invested in technology’ benchmark. This precedent has set a threshold for financial institutions to maintain pace with innovation trajectories while ensuring that they aren’t flying faster than their clients. Achieving digitalisation requires leveraging technologies developed either in the house or increasingly often, by financial innovators and disruptors. Investment into a bank’s own services encourages new markets to grow and evolve, creating a win-win scenario. Across the GCC, banks and financial institutions are working with fintech firms to digitalise operations and provide new solutions to customers. Abu Dhabi Commercial Bank (ADCB) announced in February that it has gone live in the UAE with a personal finance management (PFM) application, MoneyBuddy, built on technology developed by Barcelona-based fintech firm Strands. This is just one example of appetite for partnerships in the Middle East. Meanwhile, both RAKBANK and National Bank of Kuwait (NBK) have employed Ripple’s blockchain technology to support their e-remittance offerings.
CASHLESS PAYMENTS Electronic payment methods such as WeChat Pay, AliPay as well as Apple Pay and PayPal are rapidly becoming widespread, significantly affecting transaction volumes. In early May Checkout.com, a little-known payments start-up whose Swiss-born founder and Chief executive Guillaume Pousaz live with his family in the UAE, raised Europe’s biggest ever early-stage funding round for a fintech company, making it one of the few European startups with a valuation of about $2 billion. These companies are driving the global migration to a cashless economy. The adoption of digital payments is three times faster in emerging markets—such as those of the GCC—than in developed markets, so depending on how fast the landscape grows or changes, incumbents like VISA or MasterCard have three to five years to adapt. Cashless payments offer customers and vendors simpler, cheaper and clearer transactional capabilities. The next logical step is to understand how far this process has gone and what the anticipated destination looks like. While the cashless society is still some way off, the gap is closing as the global eCommerce market is estimated to reach $4.2 trillion by 2020, an increase of 55 per cent on the 2018 figure.
GCC banks invested
$111.8 billion 2,196 across
fintech deals in 2018
In regard to anti-money laundering (AML) and compliance soft ware, companies are doubling down on efforts to keep a lid on financial mishaps. More efficient and cheaper softwarebased solutions must comply with more stringent regulations that are being introduced as a result of rapid technological advances. Companies that focus on avoiding these mishaps to defend their brand reputation will almost certainly outlast rivals who neglect to follow suit.
OUTLOOK
Guy de Blonay
ACROSS THE GCC, BANKS AND FINANCIAL INSTITUTIONS ARE WORKING WITH FINTECH FIRMS TO DIGITALISE OPERATIONS AND PROVIDE NEW SOLUTIONS TO CUSTOMERS. ANALYTICS The impact of digital analytics is increasing year-on-year. Data collection and analysis, big data, robotisation and AI now facilitate institutions in the development of innovative predicative models that increase the chances of greater returns, optimised operations, reduced costs and improved customer satisfaction. Data-driven organisations are 23 times more likely to win customers than non-data driven peers. Analytics tools and digital banking technology can also support integration within banking. The GCC has seen a trend toward greater consolidation in the banking sector, with a number of mergers across the region taking place. Recently, following the First Gulf Bank and National Bank of Abu Dhabi merger to become FAB, the Temenos core banking system was used to integrate
and centralise operations. Consolidation is driven by necessity, as smaller banks are merging to achieve the operating efficiencies enjoyed by larger players. Those efficiencies will, in part, be driven by the effective deployment of technology.
SECURITY As the threat of cybercrime rapidly grows, so does the number of fintech companies entering the cybersecurity space. The infrastructure behind institutions is now incredibly complex, to protect both the customer and the company, and to keep systems operating as smoothly as possible. The landscape of threats to financial institutions is evolving rapidly, matching the pace at which companies can adopt new technologies. Unchartered technological territory comes with risks not yet identified as it creates more points of vulnerability for cyber-criminals to exploit.
The GCC shows considerable promise in creating a supportive environment for fintech firms to emerge. The success of efforts to establish fintech incubation programmes—such as Dubai International Financial Centre’s FinTech Hive and the Saudi Arabian Monetary Authority’s Fintech Saudi—demonstrates the GCC bloc’s readiness to provide an environment for the growth of emerging technology companies. The recent initial public offering (IPO) of Network International, the Dubai based payments processor backed by Emirates NBD, demonstrates the region’s capability to provide an environment for the growth of worldleading technology firms. In the past, Asian banks had some of the lowest overall IT spending globally. However, Asia is now spending the most on innovative technology as a proportion of overall IT spend. According to the Monetary Authority of Singapore, banks could cut their costs by as much as 30 per cent if they leverage fintech in areas such as automation of banking functions and artificial intelligence (AI), representing 10-20 per cent of the banks’ operating income. With regional banking sectors such as the UAE’s forge closer ties to robust Asian financial institutions, it is likely that a similar approach and methodology will be adopted as the local fintech sector is nurtured.
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(PHOTO CREDIT: SERGEY TINYAKOV/SHUTTERSTOCK)
TECHNOLOGY TECHNOLOGY
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SPONSORED CONTENT
OPEN BANKING AND FIVE RAPIDLY EMERGING BUSINESS PROPOSITIONS By Rajashekara Maiya, Vice President — Business Consulting and Product Strategy, Infosys Finacle
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n the 2018 edition of the Innovation in Retail Banking report, Infosys Finacle and Efma reviewed a decade in banking innovation. Regulations, when banking was in the throes of the recessionary crisis, focused on safeguarding the taxpayer and the economy by mandating banks to hold more capital against their risks. Even before the crisis, regulations in banking always focused on mitigating risk. From then to now, in just about 10 years, mandates seem to have evidently shifted from capital regulation to innovation. In sharp contrast to expensive closeddoor innovation and limited discretionary spend due to high regulatory costs, open innovation is now fast becoming the norm. Regulations in several countries have brought in open banking reforms with the objective of providing customers more control over their finances, amongst others. In January 2018, the Competition and Markets Authorit y (CMA) in the UK rolled out the open banking
NEW ECOSYSTEM-DRIVEN MODELS ALLOW BANKS AND SERVICE PROVIDERS TO OFFER VALUE THEY CAN’T PROVIDE ON THEIR OWN. WHAT’S MORE, WITH ANALYTICSPOWERED INSIGHTS ACROSS AN ECOSYSTEM, THESE RECOMMENDATIONS AND OFFERS CAN BE MADE REMARKABLY CONTEXTUAL. — Rajashekara Maiya
regulation mandating the country’s nine biggest banks to implement open banking standards to improve industry competition and foster customer-centric innovation. In addition to the scope of the Payment Service Directive 2, the broader legislation in EU, the mandate requires banks to adopt and maintain common API standards, read/write API specifications, and more third-party access to current account data. Regulatory action has moved eastwards rather fast with nearly concurrent developments in Singapore and Hong Kong. Association of Banks in Singapore has published the API Playbook developed in consultation with the Monetary Authority of Singapore (MAS). In Hong Kong, the Monetary Authority has published its Open Application Programming Interface Framework to deploy open APIs. And India has by far the strongest growth story in the payments space with its Unified Payment Interface for real-time payments.
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TECHNOLOGY
players, banks can offer products beyond their own portfolio of deposit and lending products. New ecosystem-driven models allow banks and service providers to offer value they can’t provide on their own. What’s more, with analytics-powered insights across an ecosystem, these recommendations and offers can be made remarkably contextual.
At the heart of all these regulations, enabling innovative propositions and business models are simple lines of code—the APIs. Here, we look at some of these new API-driven models and propositions: 1. Payment initiation Payment initiation service providers (PISPs) are authorised third party providers that can initiate transfers to or from a customer’s account. These include the new financial management applications that perform automated transfers as per the permission provided by a customer. An example is the unified payment interface (UPI) in India. Banks and payment service providers can easily integrate UPI in their iOS or Android applications to provide convenient real-time payments to their customers. 2. Account aggregator Account information service providers (AISPs) allow customers to access their data across all their banking relationships on a single interface or application. Innovative AISP services include product comparison applications. By using a bank’s product data, AISPs can provide a generic comparison, and by combining customer and account-related APIs with bank or product APIs, their algorithms can generate personalised comparison based on the customer’s context to make decisions infinitely easier for the customer. 3. Product or API marketplace Some banks have adopted an API marketplace model to provide other challenger banks and digital upstarts access to their APIs. The banks earn fee income in an outcome-based revenue model on the use of their APIs for customer-centric innovations. RBL bank in India has a developer portal with more than 500 APIs. Fintechs and third-party developer ecosystems such as MoneyTap are using the bank’s APIs to offer loans to customers in under four minutes.
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IN SHARP CONTRAST TO EXPENSIVE CLOSED-DOOR INNOVATION AND LIMITED DISCRETIONARY SPEND DUE TO HIGH REGULATORY COSTS, OPEN INNOVATION IS NOW FAST BECOMING THE NORM. — Rajashekara Maiya, Vice President — Business Consulting and Product Strategy, Infosys Finacle
Several leading and progressive banks have published open APIs on their developer portals. Categories range from payment functionalities, payment account data, non-payment account data, customer-related information to generic bank data such as branch or ATM locator. Spanish bank BBVA, at the end of 2017 had about 50 open APIs to its name across eight categories. The bank’s APIs support over 25 different functionalities today. In APAC, DBS Singapore has published APIs supporting 36 different functionalities. UK’s Open Banking project has exposed more than 200 APIs so far. 4. Cross-selling and ecosystem integration By using APIs to exchange information among diverse ecosystem players such as insurance providers and non-banking
5. Data as a Service Access forms one of the most crucial aspects of a bank’s API strategy. Defining the right access to the right user groups including third-party ecosystems is central to the success of an API strategy. But now with the rise of open APIs, there is another strategic element for consideration banks can't afford to overlook. The above models make it sufficiently clear that banks need to take a more business-centric look at their APIs. But there’s more to it. Banks need to look at their systems, processes, and applications as business enablers to ensure they are conducive to the open world of banking. Compliance and regulatory mandates apply not only to transactions with one bank but to all the banking relationships of a customer. Banks need a core banking system built for these open banking realities. They need a system and application architecture that allows the free movement of data efficiently. Open APIs present a unique and extraordinary opportunity for banks and financial ser vice providers to monetise functionalities and innovate business models that were not possible until a couple of years ago. While the challenges of interoperability due to the absence of a global standard for APIs may persist for some time to come, banks must align and transform their systems and technology architecture to be able to capitalise on new opportunities and innovate fresh possibilities.
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