#220 July 2019 by CPI Financial

TAKING PRIVATE BANKING TO THE NEXT LEVEL Naushid Mithani, Head of GSAC EMEA and Private Bank Head, UAE Private Banking Clients at Standard Chartered

Reinventing the wheel

mutable 24 Alandscape

efficiency and broadening solutions 54 Increasing

transformation: Leveraging cloud computing and hyperconvegence 57 Digital

Dubai Technology and Media Free Zone Authority

JULY 2019 | ISSUE 220

KUWAIT BANKING EVENING RECEPTION 18 October 2019

On the occasion of the IMF-World Bank Annual Meeting Kuwait Banking Association will be hosting its reception during the IMF and World Bank Annual Meeting in Washington, D.C. The reception will bring together senior bankers from Kuwait & the Middle East as well as international bankers & business people attending the IMF meetings. Join us and meet other regional & international bankers and find out whatâ&#x20AC;&#x2122;s happening in the GCC & International region. Date: 18 October 2019 | Time: 6:00 pm - 8:00 pm Venue: Four Seasons Hotel, Seasons Hall. Washington, D.C Spaces are limited. Those interested are requested to register via www.kba.com.kw/imfkuwaitreception Organized by

Sponsored by

EDITOR’S NOTE

elebrating our 20-year anniversary this year, we welcome back one of our founders to the table. Amidst the powerful changes we have seen across the Middle East markets and within the financial sector itself, Nigel Rodrigues has returned to pilot us into the future. Having ridden the ups and downs of this market for the last couple of decades, Banker Middle East is a force to be reckoned with, and within these pages, Nigel reveals his vision for the future. When one talks about the future, keeping up with changing technology is something that is inevitable. The technology section that we’ve recently introduced in our magazine offers deep and comprehensive insights into the various technological advancements that can significantly impact the capability and efficiency of a financial institution. Financial centres and regulators alike have begun to proactively support the fast-changing nature of finance. For instance, the Abu Dhabi Global Market’s (ADGM) reulatory authority, the Financial Services Regulatory Authority (FSRA) has issued its framework for digital investment managers (roboadvisors). The ADGM has also issued digital banking licences, accepting applications from financial institutions to establish digital banks or branches of digital banks. From regulatory issues to investment capabilities, technology is almost always the answer.

Currently in the peak of summer, the pace of activity seems to be business as usual. We have seen various bond issuance announcements, international partnerships between governments and corporate entities alike as well as regulatory amendments. Our cover story this month delves into the opportune area of private banking, speaking to one of the most prominent institutions in the market. This issue also tackles various aspects of the financial services industry—retail and SME banking, trade finance and investment opportunities. We also have an extensive piece on petrochemicals and the how Middle East countries should leverage this to secure a market leading position. As always, we aim to equip you with the strategic information you need to navigate this intriguing market. Wishing you a productive summer and an enlightening read.

Nabilah Annuar EDITOR, BANKER MIDDLE EAST

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CONTENTS

JULY 2019 | ISSUE 220

FOUNDER’S MESSAGE 8 Reinventing the wheel

ANALYSIS

14 Geopolitical risk continue to loom over GCC’s banking sector

NEWS

18 News Highlights

THE MARKETS

22 Brighter prospects for Middle East petchems

LEGAL PERSPECTIVE

24 A mutable landscape 28 Reducing the cost of compliance with data analytics

COVER STORY

30 Taking private banking to the next level

COUNTRY FOCUS

36 Rising from the ashes

RETAIL BANKING

46 Transformation driven by innovation

22 4

For generations, the better way to bank. Over 40 years ago, Dubai Islamic Bank pioneered a way of banking that was truly better: Islamic banking. Since then, many generations of customers continue to enjoy world class products and services backed by the very latest in banking technology. For them as for you, this is still the better way to bank.

dib.ae

CONTENTS

JULY 2019 | ISSUE 220

INVESTMENT

50 An island of untapped opportunities

SME FINANCING

52 Delivering convenience

TRADE FINANCE

54 Increasing efficiency and broadening solutions

GET THE DIGITAL EDITION OF BANKER MIDDLE EAST ONLINE.

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

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bankerme.net JULY 2019 | ISSUE 220

MIDDLE EAST

CHAIRMAN

Saleh Al Akrabi

JULY 2019 | ISSUE 220

TAKING PRIVATE BANKING TO THE NEXT LEVEL Naushid Mithani, Head of GSAC EMEA and Private Bank Head, UAE Private Banking Clients at Standard Chartered

CHIEF EXECUTIVE OFFICER

NIGEL RODRIGUES nigelr@cpifinancial.net Tel: +971 4 391 3722

SHERIF R. ELHUSSEINI sherif@cpifinancial.net Tel: +971 4 391 5419

EDITOR - BANKER MIDDLE EAST

A CPI Financial Publication

Reinventing the wheel

A mutable 24 landscape

Increasing efficiency broadening solutions 54 and

Digital transformation: Leveraging computing and hyperconvegence 57 cloud

NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726

Dubai Technology and Media Free Zone Authority

TAKING PRIVATE BANKING TO THE NEXT LEVEL Naushid Mithani, Head of GSAC EMEA and Private Bank Head, UAE Private Banking Clients at Standard Chartered

CHIEF OPERATING OFFICER

JUNE 2019 | ISSUE 219

EDITORS

MIDDLE EAST

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

JUNE 2019 | ISSUE 219

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

IDENTIFYING THE RIGHT TECH STRATEGY Mohammed Al Khotani, Managing Director, SAP Saudi Arabia

EDITORIAL ASSISTANT

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

GROUP SALES MANAGER – BANKING & FINANCE

NEEMA SAJNANI neema.sajnani@cpifinancial.net Tel: +971 4 391 3717 GROUP SALES MANAGER – TECHNOLOGY

NAP ESTAMPADOR nap.estampador@cpifinancial.net Tel: +971 4 433 5320 ADVERTISING

sales@cpifinancial.net

EDITORIAL

IDENTIFYING THE RIGHT TECH STRATEGY

editorial@cpifinancial.net

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:

the Middle East 55 Digitalising

ISSUE 03

Dubai Technology and Media Free Zone Authority

Mohammed Al Khotani, Managing Director, SAP Saudi Arabia

CHIEF DESIGNER

SENIOR DESIGNER

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

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

EVENTS MANAGER

EVENTS MARKETING MANAGER

SHAIK MANSOOR shaik.mansoor@cpifinancial.net Tel: +971 4 3651 4538

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

CONFERENCE PRODUCER

HITESHWAR BHAKHRI hitesh.bhakhri@cpifinancial.net Tel: +971 4 433 5322

TECHNOLOGY

A Banker Middle East Supplement

59 Digital transformation: Leveraging cloud computing and hyperconvegence 62 How the AI and data combination accelerates smart finance 64 GCC leads open banking revolution

FINANCE MANAGER

DIGITAL TRANSFORMATION: LEVERAGING CLOUD COMPUTING AND HYPERCONVERGENCE Aaron White, Regional Director – Middle

East, Nutanix

DIGITAL MANAGER

UMANG HANJ umang.hanj@cpifinancial.net Tel: +971 4 391 3727

DEOGENES E. ABEJUELA JR deo.abejuela@cpifinancial.net Tel: +971 4 391 3722

HR & OFFICE MANAGER

ADMINISTRATION & SUBSCRIPTIONS

RIZZA INFANTE rizza@cpifinancial.net Tel: +971 4 391 4682

CAROL BASA carol@cpifinancial.net Tel: +971 4 391 3709

enquiries@cpifinancial.net ©2019 CPI Financial. All rights reserved. No part of this publication may be reproduced or used in any form of advertising without prior permission in writing from the editor. Printed by Al Ghurair Printing & Publishing - Dubai, UAE

64 PUBLISHED BY CPI FINANCIAL FZ LLC REGISTERED AT DUBAI MEDIA CITY, DUBAI, U.A.E.

FOUNDER'S MESSAGE

Reinventing the wheel Nigel Rodrigues, Founder and CEO of CPI Financial, returns to the helm. We sit down with our pioneer as he shares his thoughts on the market and sheds light on the future of Banker Middle East

s one of the founders of CPI Financial, the publisher of Banker Middle East, what have been your thoughts since returning to the role of CEO? As a board director and shareholder, I’ve always kept updated as to the challenges facing publishers in an everchanging world, one that is dictated by the rapid advances in technology. It’s an exciting time to be back at the ‘helm’ of CPI Financial. I am exceedingly proud to say that this year celebrates the 20th anniversary of Banker Middle East. I find the region to be quite transient, with people coming and going and the same applies to magazines and newspapers. When we launched Banker Middle East, our main aim was to satisfy the needs and requirements of our readers and clients alike and we clearly succeeded. Now, we’re embarking on our next journey.

What are your priorities for the future of CPI Financial? The embracing of new technology is the only way forward, identifying new opportunities. Of course, we mustn’t forget the key roles that editorial integrity and objectivity play, without this, we will be just another business magazine without an opinion! When I was a young and impulsive sales manager back in the 1990s, I was told by my client, “Nigel, if you don't listen, you don't learn”. It is so true; how can we learn if we don't listen! If we think we know best, we’re sadly mistaken. I have ingrained in me, the need for research into what our readers want and to listen to criticisms as well as accolades, as this makes us a stronger business and one that continues to be supported by the industry. It’s the simple law of ‘supply and demand’ done well. We have a new and

I HAVE NO DOUBT IN MY MIND THAT WE WILL BE AROUND IN ANOTHER 20 YEARS AS, LONG AS WE KEEP LISTENING AND ADAPTING."

Nigel Rodrigues

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FOUNDER'S MESSAGE

experienced team in place and I’m truly amazed at the talent we have at CPI Financial. Each and every team member excels in their field of expertise and the true excitement is what new technology will bring. Our tech team comprises sharp and slick young professionals from across the globe who know how to take advantage of the technology available, now and in the future. I have no doubt in my mind that we will be around in another 20 years as, long as we keep listening and adapting. Who knows what the world will look like then? Virtual banks! No banks! The Banker Middle East Industry Awards have been a landmark event in the banking and finance industry in the region for the last 20 years. What is your vision for the awards moving forward and what changes can we expect to see? We designed the Banker Middle East Awards to reward excellence in the banking community. Banks needed to be benchmarked and we knew things were going to change but we did not realise how fast those changes would be. Being a Dubai-based company, we witnessed and experienced the incredibly rapid growth of the banking and financial sector with the greater emphasis on compliance and corporate governance as well as huge profit opportunities. Competition is healthy and the hunger for the awards has always been strong. Once again, we listened and have chosen to make some changes to make the event and a more transparent and enjoyable evening. The Banker Middle East Industry Awards will return to being regional as there is so much more kudos and prestige in being ‘Best in the Middle East’. We have drastically reduced the number of categories and awards to 30. We expect the awards part of the ceremony to last no more than 45 minutes, so you can spend the majority

of your time enjoying the evening, talking to friends and colleagues as well as celebrating your successes. In addition, we have removed the ‘voting’ element which has been replaced by an expert judging panel of ratings agencies, accountancy firms and auditors as well as members of the CPI Financial team. Banking and financial institutions can nominate themselves in the relevant categories and will then be asked to make a submission from a template supplied by the Banker Middle East editorial team. These submissions will be reviewed in detail by the judging panel. The successful institutions that have been shortlisted, will be informed on 17th October and the winners will be announced on the night of the awards.

THE BANKER MIDDLE EAST INDUSTRY AWARDS WILL RETURN TO BEING REGIONAL AS THERE IS SO MUCH MORE KUDOS AND PRESTIGE IN BEING ‘BEST IN THE MIDDLE EAST’."

CPI Financial has undergone numerous managerial changes over the last couple of years. Does your return signal an end to this and what can we see from the company in the future? It’s always a challenge in any business finding the right people to lead. Ability, hunger, determination and passion are the four qualities that I value, and I look for the same when I'm recruiting. Sadly, it is very rare to find all four and three is often not good enough. As one of the founders and a shareholder, I believe I have an unrivalled and unique passion that cannot be found anywhere else. The key to success of any business is firstly, having the right product and service, and secondly, having the right team in place to deliver. I’m extremely confident in the abilities of all my colleagues and am always on the search for new talent to expand the business. There is already a new and stable level of confidence to drive the business to greater successes. As I said earlier, technology is the way forward. Whilst I’m desperate to tell you all about our plans, I think it best if you wait and experience the new products and services we will have to offer! What are your thoughts on the current banking and finance landscape in the Middle East? The Middle East is an economically and diverse region that includes countries with a common heritage, at various stages of economic and social development, but with vastly different degrees of natural resources. The banking and finance sector is at the heart of a country’s economic development. The region’s financial institutions have proved to be resilient despite the ‘nightmare’ years of 2008 onwards. However, with global regulatory reform becoming a priority, institutions are facing major challenges as well as sweeping changes. A secret of success is to turn

these challenges into opportunities. Opportunities for growth and diversification. Technology is once again the ‘major player’ here. The institutions who embrace and utilise the rapid advances in technology to enhance the service offering, will be those that exceed the expectations of customers and shareholders and deliver healthy returns. As a relatively young market compared to those that are more mature such as the US, UK and Europe, consolidation is a natural progression. The boom times always provide the perfect platform to launch new institutions but when markets stabilise, it is generally found that the law of ‘Economy of Scale’ kicks in and institutions acquire other institutions. This not only stamps out the competition but also provides access to domestic and international capital as well as being able to compete with larger banks to win and retain customers. I am sure we will see more mergers and acquisitions in the banking community as the industry looks to compete with new entrants. There is also no doubt that technology will change the global banking and financial sector forever. The deviation from petrodollars will be one of the major ‘markers’ in the near future. The region has demonstrated its ability to recognise this need and change accordingly, and I’m sure we will see and experience things that we would have never imagined! What role does Banker Middle East play in supporting the banking and finance community through the challenges that the industry often faces? I’ve always seen Banker Middle East as the ‘authoritative voice’ for banking and finance in the region and I am proud that we play an integral part as both a conduit and a platform for institutions to discuss developing trends and the current issues being faced by the banking and finance community. Our thought leadership platforms have proven to be an extremely

THE DEVIATION FROM PETRODOLLARS WILL BE ONE OF THE MAJOR ‘MARKERS’ IN THE NEAR FUTURE. THE REGION HAS DEMONSTRATED ITS ABILITY TO RECOGNISE THIS NEED AND CHANGE ACCORDINGLY, AND I’M SURE WE WILL SEE AND EXPERIENCE THINGS THAT WE WOULD HAVE NEVER IMAGINED!"

useful tool for institutions to actively meet and discuss their products and services with a targeted audience. We invest a great deal of time and money in research to ensure that we are always ‘ahead of the curve’, providing clients with the resource to make informed decisions on their business going forward. We frequently discuss the new technologies available and how they can enhance an institutions efficiency and client offering. We address ‘hot topics’ such as risk and compliance ,and given global trends, it is crucial that Middle East institutions fall in line. We will continue to debate the critical issues facing our industry in the hope that they will inspire further debate and will result in positive changes. Banker Middle East and CPI Financial are now in the 20th year. How are you planning to mark the occasion? It’s an extremely proud year for the team at CPI Financial, it’s not often you can say that you work for a 20-yearold Dubai-based banking magazine. Of course, it’s not just about magazines. We have been writing specialist books for the same period and continue to offer this unique service which is enjoying renewed popularity. In addition to our all our tailor-made events, we offer a comprehensive platform across print and digital formats. We are currently going through a restructuring process and have been evaluating all of the products and services we offer, to ensure they meet and exceeds the needs of our clients. We intend to celebrate with our loyal clients as we did for our 10th anniversary but it is a little early to discuss our plans! I would like to thank one of my fellow founders, Dominic de Sousa who sadly passed away three years ago. Dom was an inspirational businessman who not only made me laugh hysterically but gave everybody an opportunity to succeed or fail! His unique style is sorely missed.

bankerme.net

SAVE THE DATE! 26 NOVEMBER 2019

The Ritz-Carlton DIFC, Dubai, United Arab Emirates

BANKER MIDDLE EAST INDUSTRY AWARDS 2019

Best Bank in the Middle East

WINNER

For over 20 years, Banker Middle East has been serving the banking and financial community in the region. We are the longest-running GCC-based banking publication, continuously supporting the industry, providing informed commentaries, news, in-depth articles and analyses. As part of our integral role in the regionâ&#x20AC;&#x2122;s banking sector, we benchmark, recognise and actively encourage excellence within institutions. The Banker Middle East Industry Awards 2019 will give due recognition to the outstanding institutions that have shaped and continue to shape the financial landscape. Such achievements should be lauded accordingly, and as we have grown with the industry, we would like to thank you for your continuous support for the Banker Middle East Industry Awards, without which we would not be able to produce the most prestigious event in the banking calendar.

METHODOLOGY

SUPPORTED BY

ORGANISED BY

After each and every awards ceremony, together with feedback from the industry, throughout the year, we conduct our own research and look closely at what categories are most relevant in the current climate, new entrants that have impacted the industry, and most importantly, how we manage client expectations. We critically review our production and are always looking for improvement. As a result of our findings, we have identified 31 award categories that provide regional recognition to exceptional financial institutions across the wide spectrum of banking and finance. Institutions can nominate themselves in all relevant categories as deemed appropriate, provided the submission is sent in before the deadline, and in the required format. The judging panel comprises senior executives from ratings agencies, accountancy and auditing firms, together with members of the Banker Middle East editorial team. Award submissions will be critically evaluated and mutually analysed, utilising market knowledge, research and relevant company financial statements, before a shortlist is made. The winners will be chosen from this shortlist and announced at the awards ceremony. The evaluation period for all awards is typically based on a 12-month cycle.

AWARD CATEGORIES

ENTRY GUIDELINES There are two stages to complete an entry for our awards programme:

Best Bank in the Middle East

Stage 1

Banker of the Year

Candidates must first send in their nominations to awards@bankerme.net by the nomination deadline of 1st September 2019. Institutions can nominate themselves for as many categories as they wish, provided they are able to produce the supporting materials in Stage 2 of this process.

Lifetime Achievement Award

Fastest Growing Bank

Best Retail Bank

Best Islamic Bank

Stage 2

Best Corporate Bank

An entry submission template will only be sent to institutions that have nominated themselves. All submissions must strictly follow the submission template provided and must be sent back to awards@bankerme.net by 3rd October 2019.

Best SME Bank

Capital Market Transaction of the Year

10.

Most Innovative Digital Banking Proposition

11.

Best Insurance Provider

12.

Best Takaful Provider

13.

Best Investment Bank – Conventional

14.

Best Investment Bank – Islamic

15.

Best Private Bank

16.

Best Wealth Management Firm

17.

Best Investment Management Firm

18.

Best Private Equity Firm

19.

Best Trade Finance Institution

20.

Best Brokerage Solutions Provider

21.

Best Law Firm – Banking & Finance

RESULTS

22.

Best Law Firm – Private Equity

Following critical examination of all submissions, the judging panel will select their shortlisted institutions and this shortlist will be announced on or after 17th October 2019. The winners for each category will be announced at the Banker Middle East Industry Awards gala dinner on Tuesday 26th November 2019.

23.

Best Research & Consultancy Firm

24.

Best Ratings Agency

25.

Best Islamic Ratings Agency

26.

Best CSR Programme

ADDITIONAL INFORMATION

27.

Best Core Banking Service Provider

28.

Best User-Experience Innovator

29.

Best Cybersecurity Provider

30.

Best Payment Solutions Provider

31.

Best Communications Infrastructure Provider

Submissions received after the deadline date will not be considered. Whilst we understand the hectic yearly schedules, we aim to foster a competitive environment that is fair to all parties—both award participants as well as the judging panel. Submissions for an award category must distinctly point out how and why your institution stands out above the rest. Depending on the award contended for, each submission should highlight any new product/initiatives/innovation/level of service/comprehensiveness/ efficiency—any means that could demonstrate overall competitiveness and outperformance amongst your peers across these markets, relevant to the award in question. The submissions may also include any infographics that you deem helpful to support your case.

For further clarification on the awards submission process kindly contact: awards@bankerme.net For more information on the Awards Gala Dinner and to book tables, please kindly contact: events@cpifinancial.net

NOMINATION DEADLINE: 1st September 2019

ENTRY SUBMISSION DEADLINE: 3rd October 2019

SHORTLIST ANNOUNCEMENT: 17th October 2019

INDUSTRY AWARDS GALA DINNER: 26th November 2019, The Ritz-Carlton DIFC, Dubai, United Arab Emirates

ANALYSIS

GEOPOLITICAL RISK CONTINUE LOOM OVER GCC’S BANKING SECTOR Banking systems in GCC countries could potentially require sovereign support if geopolitical stability in the region deteriorates

he question that has been playing in the minds of investors over the past few weeks is the likelihood of an escalation in the US-Iran tensions, and how that would impact financial institutions and governments in GCC countries. Countless reports have been published on the probability of a military conflict between the two, with some asserting that it is highly likely in the near future and others suggesting that it is something that both countries would prefer to avoid. S&P Global Ratings has recently conducted an analysis assessing which country’s banking system would suffer the most under severe circumstances. Speaking to Banker Middle East, Timucin Engin, Senior Director at S&P Global Ratings said, “Tensions between the US and Iran, though increasing, have not prompted any changes to ratings or outlooks on corporate or infrastructure issuers we rate in the GCC. This is because, under our base-case scenario, we do not expect direct military conflict between the two countries or their regional allies,

and we believe that the Strait of Hormuz will remain open to the global oil trade. That said, heightened geopolitical risk is not necessarily supportive for the investor sentiment, which is important for the region’s real estate markets.”

THE POTENTIAL RELATED LOSS OF INVESTOR CONFIDENCE COULD WEIGH ON THE RATINGS OF GCC BANKS. IN SUCH A SCENARIO WE MAY SEE SIGNIFICANT CAPITAL OUTFLOWS, AS WELL AS LOWER LIQUIDITY BECOMING AVAILABLE FOR THE REGION’S CORPORATES. — Timucin Engin, Senior Director, S&P Global Ratings

THE IMPACT As in most parts of the world, the banking sector in each GCC state is inevitably a cornerstone of a country’s economy. Rising geopolitical risk may result in a confidence shock on these banking systems. Consequentially, a relatively high proportion of expat deposits is expected to leave the system—a large portion of the funding profiles of banks in the GCC. Engin explained, “If the strait were blocked (even for a few days), or if there is a significant escalation in tensions between allies of either the US or Iran that could affect Gulf countries, the potential related loss of investor confidence could weigh on the ratings of GCC banks. In such a scenario we may see significant capital outflows, as well as lower liquidity becoming available for the region’s corporates.”

Hypothetical Scenarios Hypothetical scenario 2: Highly unlikely at this stage

Under hypothetical scenario 1, we envision credible threats to block the strait or even a blockage put in place for a few days. As in the past, when closure threats were made by Iran, we believe international pressure would quickly be brought to bear or, alternatively, a military skirmish. Either way, due to the strait's international significance, we would expect the threats to subside and any blockage to be resolved relatively quickly.

Under hypothetical scenario 2, we envision the Strait of Hormuz being closed for an extended period.

The Strait of Hormuz is a critical shipping route for almost one-third of the world's seaborne crude oil supplies. The vast majority of hydrocarbon exports from Saudi Arabia, Qatar (LNG), Abu Dhabi, Kuwait, Iraq, and Bahrain pass through the strait. Oman, being outside the strait, would not have its non-Gulf exports physically blocked by a closure.

Under this hypothetical scenario, we assume that 25 per cent of total foreign interbank deposits and 40 per cent of foreign customer deposits would leave the GCC countries. Our assumption is underpinned by our view that the impact would be about 1.5x that observed during the boycott of Qatar (see below "What level of government support might GCC banks receive?"). We also assume in this hypothetical scenario that 30 per cent of expat deposits would be transferred abroad-equivalent to an estimated nine per cent of total deposits for the UAE and Qatar and an estimated three per cent of total deposits for the other countries. This ratio is lower than our assumption for nonresident customer deposits given the greater interest expatriates have in their host economies (including financial obligations and investments). Although banks in the GCC generally place most of their money with highly rated counterparties, we assume that it would not be possible for them to liquidate all assets in a timely manner and they would not be available in full to plug the flight of liabilities. Therefore we apply a five per cent haircut on interbank deposits and 10 per cent haircut on investment portfolios. We also assume in this hypothetical scenario that only 5 per cent of the lending book to nonresident clients matures and is not renewed.

(CREDIT: JARRETERA/SHUTTERSTOCK)

Hypothetical scenario 1: Unlikely at this stage

Under this hypothetical scenario, we assume 2.5x the magnitude of the Qatar boycott, or outflows of 45 per cent of interbank deposits and 70 per cent of foreign customer deposits. For expat deposits, we assume that 70 per cent would be transferred abroadâ&#x20AC;&#x201D;equivalent to an estimated 21 per cent of total deposits for the UAE and Qatar and an estimated seven per cent of total deposits for the other countries. We believe that, under this hypothetical scenario, expats would consider their options and prepare for a longer absence from the region. Furthermore, we assume that 10 per cent of other foreign funding (mostly bonds and other long-term instruments) matures and is not renewed. Although banks in the GCC generally place most of their money with highly rated counterparties, we assume a 10 per cent haircut on interbank deposits and a 20 per cent haircut on investment portfolios under this hypothetical scenario. We assume no additional repayment from foreign lending.

Source: S&P

bankerme.net

ANALYSIS

RETAIL AND GRE DEPOSITS UNDERPIN THE FUNDING PROFILES OF GCC BANKING SYSTEMS Retail and GRE deposits / % of total deposits

The funding profiles of most banking systems in the GCC is supported by strong customer bases. At the end of 2018, the loan-to-deposit ratio reached 99 per cent on average for the six GCC countries, with approximately 52 per cent of deposits coming from retail customers and government-related entities (GRE). S&P also estimated that expat deposits account for about 30 per cent of total domestic deposits in Qatar and the UAE. This ratio is higher than its estimate for other GCC countries (10 per cent), due to the larger percentage of expatriates in these two states.

80 70 60 50 40 30

2017

2018

10 0

2019F Qatar

Saudi Arabia United Arab Emirates

Kuwait

Bahrain

Oman*

2020F

Average

*S&P Global Ratings estimate. GCC – Gulf Cooperation Council. GRE – Government-related entity. F – Forecast. Source: S&P Global Ratings and central banks. Copyright© 2019 by Standard & Poor's Financial Services LLC. All rights reserved.

UNDER MORE SEVERE CIRCUMSTANCES, S&P EXPECTS POTENTIAL FUNDING GAPS IN ALL BANKING SYSTEMS APART FROM KUWAIT.

GCC GOVERNMENT SUPPORT OF BANKS/GDP % Kuwait

UAE*

Qatar

Saudi Arabia

Oman

Bairain

478

145

139

Scenario 1 funding gap (where negative)

(9)

(1)

Scenario 2 funding gap

(1)

(30)

(3)

(1)

(10)

478

144

109

Govt. liquid asset estimates

Another notable feature of the GCC banking system is that except for Qatar and to a lesser extent Bahrain, total external debt is relatively limited. According to the rating agency, three out of the six countries are in net external asset positions (Kuwait, Saudi Arabia and UAE) ranging from about 20 per cent of systemwide loans for Kuwait to about 4 per cent for the UAE at year-end 2018. “In addition, a prolonged period of heightened geopolitical risk in the region could have revenue implications for the tourism and retail industries,” said Engin. SOVEREIGN SUPPORT Banking systems in GCC countries are believed to be able to absorb foreign funding outflows without government support in a situation where geopolitical stresses are manageable.

Govt. liquid assets after Scenario 2

*Includes S&P Global Ratings' estimates of Abu Dhabi's government liquid assets. GCC – Gulf Cooperation Council. Source: S&P Global Ratings.

THE LARGE EXPAT POPULATIONS IN SOME GCC COUNTRIES COULD AFFECT DEPOSITS (CONT.) Expatriate population (%)*

Private sector domestic deposits (bil. $)§

Private sector domestic deposits (GDP %)§

UAE

294

72%

Kuwait

121

94%

Oman

49%

Bahrain

86%

*Sources: For Saudi Arabia, General Authority for Statistics; for Qatar, estimate based on Planning and Statistics Authority data, Labor Force Survey; for the UAE, estimate compiled from Statistics Center - Abu Dhabi, Dubai Statistics Center, and 2015 Sharjah census; for Kuwait, Public Authority for Civil Information, statistical reports; for Oman, National Centre For Statistics & Information; for Bahrain, Central Bank of Bahrain quarterly statistical bulletin. §Data from central banks and excludes GRE and government deposits where available, which we assume would remain in domestic banks under these stress scenarios.

Net banking sector external debt as a % of systemwide domestic loans

NET EXTERNAL DEBT IN THE GCC

A PROLONGED PERIOD OF HEIGHTENED GEOPOLITICAL RISK IN THE REGION COULD HAVE REVENUE IMPLICATIONS FOR THE TOURISM AND RETAIL INDUSTRIES. — Timucin Engin, Senior Director, S&P Global Ratings

30% 20%

Net external debt position

10% 0% -10% -20% -30%

2017

Net external asset position

2018 2019F

Kuwait

Saudi Arabia United Arab Emirates

Oman

Bahrain

Qatar

2020F

FUNDING GAPS 80 60 40

No funding gap (adjusted assets exceed liabilities)

Billion $

20 0 (20) (40)

Funding gap (liabilities exceed adjusted assets)

(50) (80)

Qatar

Saudi

Bahrain*

UAE

*Bahrain test conducted on the retail banking system only. GCC—Gulf Cooperation Council Source: S&P Global Ratings calculations. Copyright © 2019 by Standard & Poor's Financial Services LLC. All rights reserved.

However under more severe circumstances, S&P expects potential funding gaps in all banking systems apart from Kuwait’s, with Qatari and Bahraini banks requiring the most support as a proportion of GDP. Most GCC governments possess sufficient liquid assets and foreign exchange reserves to support banks, but such support could weigh on some sovereigns’ fiscal and external profiles.

Four of the six GCC governments is highly supportive of their banking systems. Apart from Bahrain and Oman, the ability to provide this support is underpinned by the substantial liquid assets available to GCC governments. According to estimates from the rating agency, authorities possess sufficient resources to support their banks under the hypothetical stress

Oman

Kuwait

Scenario 1

Scenario 2

scenarios. However, deploying these assets would be a drain on government assets and could weigh on sovereign fiscal and external assessments, putting downward pressure on the ratings. Governments could also move to shore up confidence in banks by deploying funds in addition to any potential shortfall, further pressuring liquid assets.

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NEWS HIGHLIGHTS Turkey weighs new reserve rules for banks to boost credit growth Turkey’s government is preparing to provide a boost to the economy through faster credit growth by tweaking some reserve rules for commercial lenders, reported Bloomberg. State banks stand to benefit the most from the changes because they’ve been at the forefront of government efforts to extend cheap loans. Authorities will set required reserves depending on how much banks lend, pushing through the changes in an omnibus economy bill that is being discussed in parliament and the legislation also allows the central bank to determine mandatory reserves for all balance-sheet assets and liabilities, including derivative products such as swaps. The bill is being discussed at the parliamentary planning and budget commission and will later be sent to the general assembly for approval and it aims to resolve financial difficulties that might arise, without elaborating.

Saudi Aramco plans to revive IPO preparations Saudi Arabia is restarting preparations for a potential initial public offering (IPO) of oil giant Saudi Aramco, months after putting the planned listing on hold, reported Bloomberg. Saudi Aramco, the world’s most profitable company, recently held talks with a select group of investment banks to discuss potential roles on the offering and detailed work on the IPO is expected to pick up speed later this year or early next year. Demand for the share sale is likely to be affected by lower oil prices as well as growing concerns among top institutional investors about pouring money into fossilfuel companies that contribute to climate change. The revived listing plan will still face significant hurdles, including the ability of the Kingdom to achieve the $2 trillion valuation it’s been seeking for the company.

Saudi Arabia and Kuwait make breakthrough in neutral zone oil talks Saudi Arabia and Kuwait are close to commencing oil production from the neutral zone shared by the neighbouring nations after making a breakthrough in recent talks. The neutral zone has not produced anything since fields there were shut down after spats between the two countries in 2014 and 2015. The strip of desert straddling Saudi Arabia and Kuwait can pump about 500,000 barrels a day, as much as OPECmember Ecuador, reported Bloomberg. Following a meeting in Riyadh last month, both sides are said to be drafting new documents ahead of further talks and the next meeting is expected to be held in Kuwait this month. Production will be able to resume from the fields of Khafji and Wafra once Saudi Arabia and Kuwait finalise some technical details.

IMF warns against Lebanon’s $7.3 billion plan to cut debt costs The International Monetary Fund (IMF) said that Lebanon’s central bank risks undermining its credibility if it agrees to a government proposal to buy treasury bills at belowmarket rates, reported Bloomberg. Finance Minister Ali Hassan Khalil has proposed issuing LBP 11 trillion ($7.3 billion) of treasury bonds to commercial banks at a rate of one per cent—about a tenth of the market rate—in order to cut LBP 1 trillion from debt-servicing costs. Banks have turned down the offer and an official said the central bank was likely to take up the proposal on its own. The IMF stated that Banque Du Liban (BdL) should let the market determine yields on government debt. “Buying the proposed low-interest government debt would worsen the BdL’s balance sheet and undermine its credibility, the central bank should gradually phase out its financial operations once fiscal adjustment and the subsequent decline in yields demanded by investors allow it to do so,” the IMF said. Riad Salameh, BdL Governor said that the central bank is still in negotiations with the finance ministry on how to reduce servicing costs on public debt, which is estimated at 160 per cent of gross domestic product.

Abu Dhabi Commercial Bank to cut around 2,000 jobs after merger Abu Dhabi Commercial Bank (ADCB), which completed a three-way merger earlier this year, may cut about 2,000 jobs as the lenders integrate operations. The expected losses are about double the 1000 cuts which analysts estimated in December, before the tie-up the three banks employed about 8,500 people, reported Bloomberg. The state-controlled lender started the job cuts once it began combining with Union National Bank and Al Hilal Bank and it will complete the process in the next few months. ADCB Group said that the merger, which created the Gulf region’s fifth-biggest lender with about $114 billion in assets, is expected to deliver cost savings of about $167 million annually.

Emirates Strategic Investments Company mulls debut dollar Sukuk issuance

China and Gulf expansion to boost Trade Bank of Iraq’s revenues The Chairman of Trade Bank of Iraq (TBI) said that the bank is expanding into China and the Gulf as is seeks to lift its revenues from retail banking and international operations to 30 per cent by 2022 from 25 per cent currently. The lender plans to open a representative office in China by 2020 as well as upgrade its licence in Abu Dhabi to an asset management company from a representative office. Faisal al-Haimus, the Chairman of TBI, said that with the bank’s expansion in China, UAE and Saudi Arabia, retail and international business will contribute 30 per cent of the bank’s total revenues in the next three years. In June, TBI inaugurated its first branch in Saudi Arabia and the branch which is expected to become fully operational in September will focus on trade finance. TBI abandoned plans to acquire a Gulf bank as the latter decided it does not want to sell and earlier the bank also cancelled plans to buy a commercial bank in Turkey because of the plunge in the Turkish lira, Al-Haimus said. TBI is also considering launching a fund in Q4 2019 focusing on lending to Iraqi banks for international trade as approvals are expected by October, reported Reuters.

Sheikh Mansour bin Zayed al-Nahyan’s Emirates Strategic Investments Company has hired banks to arrange investor meetings ahead of a debut US dollar-denominated Sukuk issuance, reported Reuters. Rated Baa3 by Moody’s, Emirates Strategic Investments Company has also mandated Dubai Islamic Bank and National Bank of Bahrain as joint lead managers along with Bank ABC, Emirates NBD Capital and Warba Bank. Investor meetings will start on 17 July 2019 in Singapore, Hong Kong as well as the UAE and London. The company, which has a portfolio of assets across different sectors in the UAE has hired Standard and First Abu Dhabi Bank as coordinators for the planned five-year Sukuk issuance.

UAE eases rules on 100 per cent foreign ownership to spur FDI The UAE will allow foreigners to own 100 per cent of businesses across industries as the Arab world’s secondlargest economy courts investors. Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates, and ruler of Dubai, said that federal government will leave it up to individual sheikdoms to decide the ownership percentage in each activity according to their circumstances, adding that the UAE seeks to open new economic sectors and attract new foreign investors. Full foreign ownership will be allowed in many industries including e-commerce, agriculture as well as renewable energy, entertainment, transport and construction. The new rules essentially lift a federal requirement that has long capped foreign ownership in local companies at 49 per cent, reported Bloomberg.

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NEWS HIGHLIGHTS Fitch cuts Turkey’s credit rating after the dismissal of TCMB chief Fitch Ratings downgraded Turkey’s long-term foreigncurrency issuer default rating (IDR) to BB- from BB with a negative outlook, days after the dismissal of Türkiye Cumhuriyet Merkez Bankası (TCMB)’s Governor, Murat Cetinkaya.The rating agency stated that the dismissal of the central bank governor Murat Cetinkaya heightens doubts over the authorities’ tolerance for a period of sustained below-trend growth and disinflation that Fitch considers consistent with rebalancing and stabilisation of the economy. The downgrade of Turkey’s IDR also highlights a deterioration in institutional independence and economic policy coherence and credibility, Fitch said. Turkey continues to run the risk of US sanctions, triggered by delivery of S400 missile components from Russia, which is reportedly close. The US has threatened to punish President Recep Tayyip Erdogan’s government over the purchase. The downgrade intensifies pressure on Turkey, which already is bracing for the fallout from its purchase of a Russian missile-defence system.

UAE banking system remains strong, says CBUAE The Central Bank of the UAE (CBUAE) said that the UAE banking system remains strong, with enough capitalisation and liquidity reserves, solid financial performance and high operating efficiency. The central bank said that its regulatory stress test demonstrated that the UAE banking system is resilient to potential macro-financial instability. CBUAE said that although the macro-financial outlook remains supportive of financial stability, members of the financial system must be mindful of potential global and regional macro-financial risks. HE Mubarak Rashed Al Mansoori, the Governor of CBUAE, said, “Looking at our achievements in 2018, an important milestone for us was the issuance of the Decretal Federal Law No. (14) of 2018 regarding the Central Bank & Organisation of Financial Institutions and Activities.” The regulator plans to continue to further enhance the regulatory and supervisory framework of the banking system, to ensure the continued resilience of the financial sector.

DIFC introduces new licencing categories and fees Dubai International Financial Centre (DIFC) has introduced four new licencing categories as well as fees which are designed to make establishing businesses within the centre easier and more affordable. The new enhancements to the licencing regime will provide a nurturing business environment balanced with appropriate levels of protection, in accordance with international best practise. The regulator stated that four new licencing categories were introduced as part of the new Operating Law and Regulations, including short-term and restricted licences as well as commercial permissions and dual licences. The new categories come with reduced licence fees and increased flexibility, allowing more firms to conduct business from the centre. Short-term licence fees ranges between $300 and $5100 and allows retail businesses and other non-financials to operate within DIFC at flexible rates over shorter timeframes. Additionally, restricted licences have been introduced to firms interested in developing or testing new or innovative products and services in the DIFC and the annual licence fees ranges from $1,000 to $4,000.

SHUAA Capital shareholders approve merger with ADFG SHUAA Capital’s shareholders approved the proposed merger with Abu Dhabi Financial Group (ADFG), which will create an entity with $12.8 billion in assets under management. The transaction is now subject to final regulatory approvals as well as satisfaction of conditions precedent and is expected to be completed soon. Under the agreement, SHUAA Capital will issue 1.47 billion new shares to Abu Dhabi Financial Group’s (ADFG) parent company, Abu Dhabi Capital Management, in return for the entire issued share of ADFG. On completion of the merger, ADFG’s shareholders will own 58 per cent of the merged entity while existing Shuaa shareholder will own 42 per cent and the agreed valuation represents a 60 per cent premium to the undisturbed SHUAA share price.

IMF commends Oman’s initiatives to boost economic growth

Saudi Arabia mulls dual-tranche debut euro bond issuance

The International Monetary Fund (IMF) has lauded Oman’s efforts to strengthen its fiscal position, enhance private sector-led growth and employment as well as the diversification of the economy since the 2014 oil price shock. Oman’s non-hydrocarbon economy is expected to grow by four per cent if the Sultanate continues with efforts to diversify the economy. In a report, the IMF stated that preliminary budget execution data indicates an improvement in the Sultanate’s overall fiscal balance last year, with the fiscal deficit estimated to have declined to about nine per cent of GDP from 13.9 per cent of GDP in 2017. Oman economic activity started to recover last year, and the overall fiscal and current account deficits improved as well, reflecting mainly higher oil prices. The IMF also encouraged the authorities to speed up the introduction of value-added tax (VAT) and measures to adjust government expenditure.

Saudi Arabia hired a syndicate of banks including Goldman Sachs and Societe Generale to arrange a global investor call ahead of an issuance of euro-denominated bonds as the Kingdom seeks to diversify its investor base. The Kingdom has become a regular debt issuer over the past few years to offset the impact of lower oil prices on its finances and its planned debut in the eurodenominated markets shows it is targeting new funding sources for future issues. Goldman Sachs and Societe Generale have been hired as global coordinators and bookrunners for the potential bond issue, while BNP Paribas, Morgan Stanley and Samba Capital have been appointed as lead managers and passive bookrunners. The deal, subject to market conditions, will be a Regulation S/144 A transaction, a format which allows the sale of securities to qualified institutional buyers in the US, reported Reuters.

ADGM to start issuing digital banking licences The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) is now issuing digital banking licences to local and global applicants to establish banks in its International Financial Centre based in Abu Dhabi. The regulator will accept applications from conventional banks to establish digital banks or branches of digital banks as well as applications from firms with innovative value propositions. ADGM stated that it will provide an ideal jurisdiction and environment for the digital bank model. According to the FSRA, the digital banking license the digital banking licence will require a base capital requirement of $10 million. Digital bank accepts deposits and carries on other related financial services activities through online, digital or electronic means rather than through the conventional physical interaction with bank customer services providers.

SOVEREIGN RATINGS AS OF 1 JULY 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

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MARKETS

BRIGHTER PROSPECTS FOR MIDDLE EAST PETCHEMS Shelley Kerr, Global Head of Petrochemicals Markets and Hetain Mistry, Lead Analyst, Petrochemicals, both at S&P Global Platts, explain how the region should retain its market leadership position

P Shelley Kerr

etrochemicals represent the world’s fastest-growing source of oil demand. Middle Eastern petrochemicals producers have enjoyed decades of market leadership but must now adapt to new competition from the US and the Middle East’s own client base in Asia. How can the historic epicentre of fossil fuels sharpen its competitive edge? For now, the Middle East dominates global polyethylene (PE) exports, controlling around 80 per cent of supply going into Asia and around 60 per cent into Europe. The region is expected to remain the largest global PE supplier in terms of net export trade, with S&P Global Platts Analytics expecting the region’s surplus to hold at around

12 million mt in 2019 and move to 16.9 million mt by 2029—a staggering 40 per cent climb in just a decade. And in the short term, the region’s producers are benefitting from the trade issues between the US and China. Despite this, Middle East producers need to consider how to counter the rapid growth of US market share buoyed by the abundant availability of lowcost shale gas. Historically, US export prices have commanded a premium over delivered markets in Asia, but the trend has now reversed. Just one year ago FAS Houston prices for low density polyethylene (LDPE) were close to $140/ tonne higher than in Asia, but prices this May were $70/tonne lower, according to prices assessed by S&P Global Platts. The US exponential growth of US liquefied natural gas (LNG) exports serve as a reminder to Middle Eastern petchem producers who may be pausing to catch their breath. Despite only starting LNG exports in 2016, the US will be the third largest exporter worldwide by 2020, behind Qatar and Australia, respectively. Relative acceleration will likely be echoed in the petchems market as we head into the 2020s. There is also another pressure point for the Middle East. The largest ever domestic capacity build is underway in China. With Asia as the Middle

1.7%

(CAGR) annually over the next 10 years

East’s biggest client this could impact the region’s appetite for imports. The Zhoushan refinery will come online later this year with 4 million mt/yr paraxylene. Together with 4.5 million mt/yr of Xylenes at China’s Dalian refinery and other sizeable product capacity at both facilities Middle East producers need to adapt. The good news? Appetite abounds. Petrochemicals are set to account for more than a third of thƒe growth in world oil demand to 2030 and nearly half the growth to 2050, according to IEA forecasts. Chemicals feedstock demand for oil as a per cent of oil supply is forecast to grow from around 13 per cent in 2019 to close to 20 per cent by 2040, according to S&P Global Platts Analytics.

THE REGION IS EXPECTED TO REMAIN THE LARGEST GLOBAL POLYETHYLENE SUPPLIER IN TERMS OF NET EXPORT TRADE, WITH S&P GLOBAL PLATTS ANALYTICS EXPECTING THE REGION’S SURPLUS TO HOLD AT AROUND 12 MILLION MT IN 2019 AND MOVE TO 16.9 MILLION MT BY 2029.

At the same time, due largely to other non- fossil fuel forms of transportation growing, the pull on oil demand for transportation (mostly vehicle) use could potentially decrease from close to 26 per cent in 2019 to 21 per cent by 2040, according to S&P Global Platts Analytics. The rising middle class across the global economy is driving demand for consumer goods and services, with petrochemicals playing an integral role in the manufacture of a near-endless list of products, from food production, consumer goods to industrial purposes. KEEP SHARPENING In this positive but competitive mix, how can the Middle East stay ahead? Governments and industry must keep investing in capacity expansions, leveraging the region’s own low-priced feedstocks. Projects such as Dow Chemical and Saudi Aramco’s joint-venture Sadara and the phased expansions of Petro-Rabigh have added PE capacity. There will also be PE capacity attached to SABIC and Saudi Aramco’s crude to chemicals complex in Yanbu, which is scheduled to come online in 2026. In Oman, the Liwa Plastics Industries Complex (LPIC) will include an 800,000 mt/yr mixed feedstock ethylene cracker. Plus, Saudi Aramco’s Jizan refinery has 420,000 mt/ yr capacity for benzene and 1,300,000

mt/yr of paraxylene, while the company’s Ras Tanura refinery is expected to come online by the end of 2020 with 285,000 mt/yr of benzene and 1,200,000 mt/yr paraxylene. And then significant volumes of capacity will be coming online by 2025, including Petrochemical Industries Company at Shuaiba in Kuwait and Borouge 4 at Ruwais in the UAE. Greater efficiency will also intensify the Middle East’s tail wind in the global race. The region’s demand is expected to climb by 1.7 per cent (CAGR) annually over the next 10 years, with current plant utilisation levels in the Gulf averaging 82 per cent for polyethylene. While adequate to help balance global markets using the digital tools of the 4th Industrial Revolution can help push this utilisation percentage higher, especially when market conditions become tighter at the backend of S&P Global Platts Analytics forecasts, when the industry comes out of a cyclical trough. Plus, the region’s population size—Saudi Arabia’s 34 million versus China’s 1.4 billion—means more domestic supply can be syphoned towards the export market. This is especially pertinent as re-emerging sanctions on Iran, a key petchem player, are a thorn in the region’s export plans. The Middle East can retain its market leadership position if it leverages over three decades of experience and revs up its speedometer.

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(PHOTO CREDIT: Philip Lange/SHUTTERSTOCK)

The region’s demand is expected to climb by

LEGAL PERSPECTIVE

A MUTABLE LANDSCAPE Jody Waugh, Partner and Head, Mark Brown, Partner, and Arina Gidwani, Senior Associate, all in the banking and finance practice at Al Tamimi & Company, shed light on the legal transformation affecting the banking sector in the region

hange is the only constant. This statement can describe some of the most dynamic recent times for Gulf and wider Middle Eastern financial institutions now. The substantial pace and depth of legal reforms in the sector has required ongoing learning by banks and the law firms that serve them. The landscape is changing in three key areas, namely: (i) legal and regulatory, (ii) banking operations due to modernisation; and (iii) market infrastructure as a result of rationalisation and consolidation.

There has been increasing regulatory oversight in the Middle East region as the financial regulators seem focused on a common goal to ensure the industry is at an international standard. In the UAE, this has resulted in the introduction of a new banking law, netting law, AML law and bankruptcy law. We are also seeing common themes in the region as several countries (i.e. UAE, Jordan, KSA and Egypt) have introduced laws relating to security creation. Another common theme is the

increasing focus on the regulation of securities and in particular the promotion and offering of securities. The regulators in the region are also considering or have passed data protection and consumer protection laws, which will have far reaching implications. Given the ever-changing regulatory landscape spanning from AML to bankruptcy, it is imperative that financial institutions operating in the region stay abreast of these changes. While the introduction of new legislation typically

FINANCIAL INSTITUTIONS WILL NEED TO CONSIDER LEGAL PRECEDENT (IF ANY) AND THE VIEW OF THE RELEVANT COURTS PRIOR TO IMPLEMENTING ANY CHANGES IN THEIR OPERATIONS TO ENSURE THE COURTS WILL BE ABLE TO COMPREHEND NEW TECHNOLOGYFOCUSED OPERATIONS. Jody Waugh

â&#x20AC;&#x201D; Jody Waugh, Partner and Head of Banking & Finance, Al Tamimi & Company

seeks to fill gaps and introduce certainty, the reality is that in the short term there can be uncertainty as the industry adapts. Navigating these grey waters will require operational learning and transformation as financial institutions need to simultaneously understand the requirements of the new legislation, update processes and documentation and provide appropriate training to its employees. Financial institutions are also under pressure to drive innovation in the delivery of services and user experience and employ fintech tools to serve their operational needs. Financial institutions now have virtual employees, blockchain platforms are being considered for bonds and mortgage registration and an artificial intelligence bank of the future is a work in progress.

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LEGAL PERSPECTIVE

FINANCIAL INSTITUTIONS WILL NEED TO REMAIN VIGILANT TO KEEP UP WITH THE CHANGING REGULATORY CLIMATE AND TO ENSURE ANY INNOVATION THAT IS INTRODUCED IS COMPLIANT WITH APPLICABLE LAWS. â&#x20AC;&#x201D; Mark Brown, Partner in the Banking and Finance practice, Al Tamimi & Company

Mark Brown

Financial institutions are looking to digitise operations to allow for a seamless and improved user experience. It is now possible in the UAE to open a retail bank account without physically visiting a branch, meeting a relationship manager or signing anything in wet ink (a significant departure from the paperheavy practices of old). While these efforts to modernise banking operations are a welcome sign of the times we live in, they are not without risk. Given how new these methods are, the big challenge for banks will be to anticipate the potential issues and hurdles. Financial institutions will need to consider legal precedent (if any) and the view of the relevant courts prior to implementing any changes in their operations to ensure the courts will be able to comprehend new technologyfocused operations. A particular model may be untested before the courts and while analogies could be found, modernisation brings with it uncertainty and exposes financial institutions to a new form of risk.

In particular, changing the way contracts are concluded will require that safeguards are put in place both from a documentation and processes perspective to protect the bank and provide a valid defence in the event of a customer challenge. Financial institutions will need to work closely with their advisers to ensure the right framework is implemented to modernise in a way that does not put its operations at risk (or, more likely, to ensure such risk is minimised to an acceptable level). Moving operations into the digital space also increases vulnerability to cyberattacks. While these are currently not common in the region, it is an area that should not be overlooked.

There has also been a move towards consolidation and rationalisation. Banks in the region have been rationalising their operations and closing nonperforming branches in a move to streamline and be more selective in an overbanked region. The industry has seen a large number of mergers in the last two years across the GCC and there are predictions that a new cycle of acquisitions is likely. The most recent M&A activity in the UAE resulted in the merger of Abu Dhabi Commercial Bank with Union National Bank, which then acquired Al Hilal Bank. This kind of activity results in the creation of financial behemoths which should help improve performance and stability of the financial sector generally. At the same time, the Kingdom of Saudi Arabia is experiencing its highest volume of applications from financial institutions looking to start or expand operations. This suggests that while consolidation in certain markets is prevalent, there is still opportunity and room for growth in the region. We will likely continue to see more of the same in the near future as several new laws are in the pipeline across the region and new technologies are constantly introduced. Financial institutions will need to remain vigilant to keep up with the changing regulatory climate and to ensure any innovation that is introduced is compliant with applicable laws. Transformation will remain an important theme and players in the market will need to both embrace and drive this process to remain relevant.

WE ARE ALSO SEEING COMMON THEMES IN THE REGION AS SEVERAL COUNTRIES (I.E. UAE, JORDAN, KSA AND EGYPT) HAVE INTRODUCED LAWS RELATING TO SECURITY CREATION. Arina Gidwani

â&#x20AC;&#x201D; Arina Gidwani, Senior Associate in the Banking and Finance, Al Tamimi & Company

23 SEPTEMBER 2019

Transforming Banking for the New Consumer

Mina Aâ&#x20AC;&#x2122;Salam, Madinat Jumeirah Dubai, United Arab Emirates

SPEAKERS INCLUDE:

Ahmad Abu Eideh

Chief Executive Officer United Arab Bank

Elissar Antonios

Chief Executive Officer Citibank UAE

Fahad Al Semari

Chief Transformation Officer Riyad Bank

Tristan Brandt

Principal Oliver Wyman

Stefan Kimmel Partner PwC

Rola Abu Manneh

Chief Executive Officer Standard Chartered Bank UAE

Supported by

Organised by

bmesummit.net

For more information, please email: events@cpifinancial.net or call +971 4 365 4538

LEGAL PERSPECTIVE

REDUCING THE COST OF COMPLIANCE WITH DATA ANALYTICS Over the last decade, the cost of compliance has skyrocketed, destabilising the budgets of most of the financial giants on the market, not least the banks. Many say these costs are disproportionally high when comparing to the value that compliance should provide to a company. James Daniell, Managing Director at Alvarez & Marsal in Dubai, looks at whether the money is being spent wisely on the most suitable and robust solutions

istorically, some banks have been hit hard with penalties by the regulators for a range of offences. As a result, they now take compliance much more seriously, responding to deficiencies by implementing new or improved policies, procedures and solutions to handle, monitor, control and report the information within their organisations a lot more effectively and transparently. Since in most cases the IT ecosystems are multi-layered complex environments, most stakeholders would prefer to simplify it by having a one-can-doeverything, unified and centralised

solution when it comes to compliance and data governance, but it isnâ&#x20AC;&#x2122;t cheap. Not only that, by the time such a new unified system is implemented, which may take years in some cases, it may already be obsolete in a rapidly changing technological environment. Another consideration is that for companies with wide-spread global operations, dispersed locations and data centres, it may not be necessary to bring all the data across into one place, and keep it constantly updated and monitored. A change in a single location can trigger an avalanche of amends not only to a centralised system but potentially also

to the scattered systems that feed or rely on the centralised compliance data centre. Perhaps by introducing dispersed ledgers and more robust eDiscovery solutions that can handle both structured and unstructured sources of information, and with addition of smart data analytics and predictive coding, a company can have full sight and control of its data and transactions without requiring a centralised solution. It would allow a business to have dynamic dashboards, predict trends, monitor information and pin-point outliers and inconsistencies, which could be shared with no need to bring all the data into once central location for compliance purposes.

James Daniell

We are dealing with so-called “Big Data” today, where the amount of information available in our systems, applications and transactions ledgers can be overwhelming, adding complexity and volumes, and potentially chaos, if the information is not managed properly. Bringing all this data under one centralised solution may not even be technically possible or recommended. By introducing data analytic solutions and predictive systems, we can filter out unnecessary information. Blockchains are a form of distributed ledgers technology and, although currently it is strongly associated with cryptocurrencies, the concept of distributed ledgers and blockchain can be used elsewhere. One example would be in cases of sharing and accessing information without the need for centralised systems or without extensive central authorisation or permissions. Although blockchain technology is still evolving and may still be inefficient, there are companies that already implement it for their information sharing functions, and it is likely that blockchains will become even more widely used in the future.

USE OF DATA ANALYTICS, E-DISCOVERY AND EVEN ARTIFICIAL INTELLIGENCE, OR DATA SCIENCE, SHOULD BE A PART OF EVERY COMPLIANCE SOLUTION. IT CAN DECREASE THE COSTS OF RUNNING COMPLIANCE IN THE LONG RUN, AND IT ALLOWS US TO RESPOND MORE EFFICIENTLY TO CHANGES. — James Daniell

Another answer could be centralised compliance solutions/systems combined with data analytics and e-Discovery solutions add-ons to enable predictive coding and scoring, dynamic responses, filtering, dashboarding, and machine learning; this way any compliance solution can be made significantly more efficient whilst simultaneously reducing implementation and running costs. Alvarez & Marsal recently assisted one of the banks in the Gulf region, who introduced a sophisticated Oracle system for their KYC, transaction monitoring, anti-money laundering and sanctions’ assessment. After realising that the number of alerts generated were increasing at an almost exponential rate each month (hitting tens of thousands), and not having enough resources or budget to review those alerts, the situation quickly started becoming unmanageable. Using data analytic techniques, we were able to rectify the issues and introduce more fluid and flexible assessment and more dynamic scenarios and thresholds that could respond to ever changing customer and transaction volumes and amounts. In the end, the number of alerts were reduced in some cases by between 50-90 per cent. However, the historical SARs/STRs were not eliminated in the process, thus providing the assurance that the company still had a robust process for detecting suspicious activity in the future. Use of data analytics, e-Discovery and even artificial intelligence, or Data Science, should be a part of every compliance solution. It can decrease the costs of running compliance in the long run, and it allows us to respond more efficiently to changes. Although it may involve a slight change in stakeholders’ mindset, that one of the most important aspects of doing business today is to understand that we are living in a constantly evolving environment, and there is no finish line to transformation.

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COVER INTERVIEW

TAKING PRIVATE BANKING TO THE NEXT LEVEL Naushid Mithani, Head of GSAC EMEA and Private Bank Head, UAE Private Banking Clients at Standard Chartered, sits down with Banker Middle East for a thorough discussion on the shifting trends in the private banking business

hat is your focus this year? Our focus is always on the client and making sure that we anticipate their needs and help them navigate the uncertain market conditions. To this end, we continue to look into digitisation initiatives to improve our offerings to clients. For example, we recently introduced the ADVICE Platform to deliver faster and more effective advise to our clients. We are also increasingly moving towards sustainable investing, supporting the five key United Nations Sustainable Development Goals (SDGs). Our recent survey shows that more than 50 per cent of investors in the UAE currently have between 10 per cent - 25 per cent of their assets allocated to sustainable investing. In terms of outlook, 78 per cent of investors in UAE said they would consider

shifting philanthropic contribution to sustainable investments. A recent study found that private high net worth wealth in Middle East and Africa is expected to grow at an annual rate of six per cent to 2023. Do you share the same view? Our growth across the MEA region comes mainly from family business growth. Family-owned conglomerates in the GCC have a significant impact on the development of the region—in fact, they generate more than $100 billion in revenue annually, according to a study by Gulf Family Business Council and McKinsey & Company. When it comes to family offices in this part of the world, one cannot help but note that countries such as Kuwait, Qatar and United Arab Emirates hold most of the family businesses in the region.

THE US-CHINA TRADE WAR CONTINUES TO LOOM OVER THE MARKET SENTIMENT. â&#x20AC;&#x201D; Naushid Mithani

Naushid Mithani

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The business of banking www.bankerme.net

More than

50% 10-25%

of investors in the UAE currently have between

of their assets allocated to sustainable investing

DIGITISATION IS A CRUCIAL AGENDA FOR US TO MEET THE EXPECTATIONS OF OUR INCREASINGLY TECHSAVVY CLIENTS. â&#x20AC;&#x201D; Naushid Mithani

What is your take on technology and the role it plays in increasing efficiency for wealth managers? Wealth management today has evolved from what we used to know. Again, technology plays an increasingly important role in shaping the future of the wealth management industry. Technology is a critical enabler of our business. We embarked on our digitisation journey three years ago and have launched several industry-leading platforms that have helped us improve the client experience. For example, we introduced Connect Suite, a platform that operates across asset classes, improves speed of response to clients and allows relationship managers (RMs) to have richer conversations. The SC Private Banking app, with its instant messaging and file-sharing capabilities, provides clients the ease of managing simple tasks on-the-go, while keeping interactivity with RMs. Nevertheless, it is crucial to strike a balance between personalisation and use of technology. Close RM-client relationship is still key. We still see a need for a personalised financial advice from our client base. The more sophisticated the product, the more need for a human touch to address their needs. What is your approach in managing client on-boarding, KYC and antimoney laundering issues?Â Underpinning our business priorities is the focus on conduct and governance.

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COVER INTERVIEW

We constantly conduct reviews to simplify processes and meet regulatory and market requirements. RMs undergo mandatory training on AML modules, and in addition to that, we partner with various academies that provide bespoke training programmes to our colleagues. For instance, in 2017, we launched our Private Banking Academy, and partnered with Fitch Learning, a pre-eminent training and professional development firm, and INSEAD, a leading business school, to create a bespoke training programme for our global front-line colleagues. The academy equips them with the skills they need to deliver an exceptional level of service and advice to our Private Banking clients. What are the biggest risks to your business this year? Clients are concerned about the overall global market volatility. They are apprehensive about their returns and protection of their capital. However, we at Standard Chartered help by managing the information overload, breaking down the complexity of investing so that our clients can better understand the investment opportunities. With a reduction in the IMFâ&#x20AC;&#x2122;s projections, the slowdown of global trade growth is also an area of concern. According to the IMF, higher trade policy uncertainty and concerns of escalation and retaliation would reduce business investment, disrupt supply chains, and dampen productivity growth. As a result, the depressed outlook for corporate profitability could dent financial market sentiment and further hamper growth.

78%

of investors in UAE would consider shifting philanthropic contribution to sustainable investments

GIVEN THAT MOST OF OUR CLIENTS ARE STILL THE FIRST OR SECOND-GENERATION BUSINESS OWNERS, THEY ARE CONCERNED ABOUT THE TRANSFER OF WEALTH AND THEIR BUSINESSES TO THE NEXT GENERATION, SO SUCCESSION PLANNING IS A MAJOR NEED. — Naushid Mithani, Head of GSAC EMEA and Private Bank Head, UAE Private Banking Clients for Standard Chartered

The US and China are locked in an escalating trade battle. Fears about a further escalation has rattled investors and hit stock markets. The IMF has warned that a full-blown trade war would weaken the global economy. The US-China Trade war continues to loom over the market sentiment. Given the rise in US dollar interest rates in the last two and a half years, after a long pause, investors are still anxious about the performance of the fixed income asset class, which has provided impressive return over the last 10 years. In the region, the lack of performance of assets such as equity and real estate over the last couple of years may provide some opportunities for investors locally over the coming months. We are committed to staying close to our clients and helping them to navigate the opportunities across our footprint. In terms of growing the business, what do you have in the pipeline? We aim to provide differentiated value to our clients across relationship management, digital channels and the quality of investment advice and global insights we offer. Digitisation is a crucial agenda for us to meet the expectations of our increasingly tech-savvy clients. Our clients need fast and relevant investment advice to meet the challenges of fast-moving markets. The increasing demand for unbiased advice has shaped our open architecture approach. Our impartial decision-making process aims to provide clients with bias-free investment solutions. Given that most of our clients are still the first or second-generation business owners, they are concerned about the transfer of wealth and their businesses to the next generation, so succession planning is a major need. Across our key markets, a lot of wealth is set to change hands to the next generation. Our clients can tap our strong legacy planning and trust solutions. Additionally, we offer a unique next generation programme which

Family owned businesses in the region generate more than

$100 billion in revenue annually

is focused on helping the next generation of our ultra-high net worth clients to hone their talents across leadership and entrepreneurship, philanthropy, sustainability and communication. There is a rising interest in more socially responsible investments. Research has shown that millennials are twice as likely to invest in companies or funds with ESG outcomes. Next generation investors are mostly millennials who have different perspectives in terms of investment expectations and demand. They are more astute in investment and financial planning, seeking more digital capabilities and demand for more sophisticated advisory and personalised services. It is therefore critical to recognise this and transform our products and services to cater to this new set of expectations. What is your leadership style? I like to lead by example. I lead from the front by taking action, demonstrating what needs to be done, and keeping my team organised to make sure we’re all on the same page and contributing equally. People who interact with me know well that I am great at delegating and finding the strengths of other team members. I try to give each person a chance to do what they’re best at and create a team effort that delivers a result that is greater than the sum of its parts. Everyone has a great role to play in delivering the bank’s products and services, that is my motto.

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COUNTRY FOCUS

RISING FROM THE ASHES

Investors have a newfound interest in Iraq and the countryâ&#x20AC;&#x2122;s recent contracts with major oil companies have the potential to greatly expand revenues

Iraq is the

lack of stability and good governance has held Iraq back, however, there is still a chance for the oil-rich country to turn a page in the second half of 2019. Iraq has the third-largest oil reserves in the Middle East and following the 2003 US invasion that damaged wells as well as refineries, the government began a long recovery and has more than doubled production since 2010 to a record 4.6 million barrels a day. SECURITY CONCERNS Iraq’s economic recovery has been chaotic, and the postwar oil industry has been difficult for investors to penetrate despite the ousting of Islamist militants. The country is enjoying the restoration of stability, remaining less vulnerable to the on-going regional tensions and security concerns. This is due to its low debt costs and funding needs, which are met by domestic banks and concessional

2nd biggest 5,000,000 barrels 7,500,000 barrels producer in OPEC, able to pump around

a day and with plans to reach

per day in 2025

lending, a limited amount of short-term external liabilities and less reliance on foreign direct investment (FDI) financing. Although signs of economic growth exist, security concerns remain a major issue for companies operating in the country. In May, ExxonMobil reacted to a perceived increased threat level by suspending operations at its Basra oil fields and flew its foreign staff to safety in Dubai due to the rising tensions in the Strait of Hormuz and the Gulf of Oman as well as Houthi attacks on oil operations in Saudi Arabia.

Additionally, in June, a rocket attack also struck a site operated by the stateowned Iraqi Drilling Company, but no production facilities were affected. Nonetheless, Iraq’s newfound stability means increased bullishness on investment into the country. S&P said that 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.

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COUNTRY FOCUS

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. LIFEBLOOD OF IRAQ Volume and scale is key—Saudi Arabia is the world’s biggest exporter and has the capacity to pump about 12.5 million barrels a day, but Iraq’s ascent is posing an increasing threat to the Kingdom’s dominance of the Organisation of Oil Production Countries (OPEC), suggested PwC in a recent report. Potential foreign investors now view Iraq with much more interest and the country’s recent contracts with major oil companies have the potential to greatly expand oil revenues, but the government will need to upgrade its refinery and export infrastructure to enable these deals to reach their potential. According to Bloomberg, the former Iraqi oil minister, Hussain al-Shahristani laid the groundwork early this decade by boosting the country’s crude reserves assessments and cementing partnerships with ExxonMobil, Russia’s Lukoil as well as BP and other companies to develop long-neglected fields across Iraq. Those efforts have paid off, with Iraq having increased production capacity to around five million barrels a day and plans to pump even more, targeting 7.5 million barrels per day in 2025. The economic outlook has improved due to higher oil prices and improving the security situation—which has been met by the growth of Iraqi’s banking industry and reconstruction efforts— but constraints on capital spending will impede a recovery-driven growth acceleration. Growth is expected to spike to 8.1 per cent in 2020 due mainly to higher oil output, despite the OPEC+ production cut agreement which Iraq has not fully committed to, says the IMF. Oil accounts for about 50 per cent of nominal GDP, nearly 100 per cent

of exports, and around 90 per cent of government revenues. However, because oil extraction is a capital-intensive industry it has done little to boost employment and spread the wealth among the citizens of Iraq—oil production accounts for only one per cent of total employment. According to the International Monetary Fund (IMF), Iraq’s real GDP is estimated to have grown by 0.6 per cent in 2018, thanks to a notable improvement in security conditions and higher oil prices, reversing the contraction of 1.7 per cent seen in 2017. The recovery in oil prices and Iraq’s partial compliance to OPEC’s production curbs have been conducive to better outcomes on external balance. The country’s current account surplus is estimated to have widened to 4.9 per cent in 2018. The World Bank stated that higher oil prices have supported a steady increase in international reserves from $49 billion in 2017 to $64 billion in 2018, rebuilding buffers to external shocks. Additionally, PwC said that Iraq possesses what could prove to be the largest oil reserves in the world and it is the only important oil and gas producer

IRAQ POSSESSES WHAT COULD PROVE TO BE THE LARGEST OIL RESERVES IN THE WORLD AND IT IS THE ONLY IMPORTANT OIL AND GAS PRODUCER IN THE WORLD WITH THE POTENTIAL AND THE INTENTION TO INCREASE PRODUCTION BY A FACTOR OF FOUR OR MORE TIMES OVER THE COMING DECADE. — PwC

in the world with the potential and the intention to increase production by a factor of four or more times over the coming decade. Iraq has more than doubled its oil production in the past decade and it has finally given the country a voice in oil debates and prompted its inclusion in the most recent round of cuts, despite joining the committee that monitors compliance, third-party data suggest that the country is disobeying the production curbs. Surging oil production is posing a challenge for Iraq. The country is under pressure in OPEC to sacrifice crucial income to help curb a global oil glut after years of pumping in all-out mode. The country still needs to sell more crude to rebuild damaged infrastructure, provide adequate services to stave off growing domestic unrest as well as keep the foreign companies running the fields happy. In May Iraq oil minister announced the signing of a $53 billion energy deal with Exxon Mobil and PetroChina and the deal is expected to raise production at the country’s Southern oil fields of Nahr Bin Umar and Ar-Ratawi to 500 thousand barrels per day, generating $400 billion in additional revenue for the government over a 30-year time horizon, says Moody’s. The end of the war with ISIS and a rebound in oil price is also believed to provide an opportunity to rebuild the country and address long-standing socioeconomic needs. MAKING FRIENDS WITH OLD ENEMIES Saudi Arabia and Iraq have been working on developing political relations, which had fallen by the wayside over the past 10 years for a multitude of reasons, including the country’s close ties to Iran. Iraq is stuck between a rock and a hard place by trying to maintain close ties to Saudi Arabia’s geo archrival, Iran, while seeking investments from the Kingdom and at the same time hosting US armed forces.

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COUNTRY FOCUS

Saudi Arabia intends to invest $1 billion in development projects in Iraq and open a consulate in the capital, reversing a longstanding policy of disengagement there as it seeks to curb rival Iran’s growing influence in the Middle East. In April, a Saudi ministerial and business delegation visited Iraq to discuss investments for some of the Kingdom’s biggest companies such as Saudi Aramco, SABIC and the Kingdom’s mining company, Maaden. It is during the same visit that Majid Al-Qasabi, the Saudi Commerce and Investment Minister pledged that Riyadh will open a consulate in Iraq’s capital and three others in different provinces at a later time to facilitate visa procedures as well as facilitating the construction of a sports city as a gift to Iraqi people.

IRAQ’S REAL GDP IS ESTIMATED TO HAVE GROWN BY 0.6 PER CENT IN 2018, THANKS TO A NOTABLE IMPROVEMENT IN SECURITY CONDITIONS AND HIGHER OIL PRICES, REVERSING THE CONTRACTION OF 1.7 PER CENT SEEN IN 2017.

RECONSTRUCTION EFFORTS The signing of energy deals with international companies such as Exxon Mobil, Saudi Aramco and BP is believed to support economic growth and government finances as well as the country’s external position. As p a r t o f t h e e n e r g y d e a l s , ExxonMobil and PetroChina will build new storage tanks, pumps as well as pipelines and offshore terminals that will simultaneously increase Iraq’s oil export capacity—the key constraint on the country’s ability to increase production. The project is also expected to boost non-oil growth and employment during the construction phase. Iraq is the second-biggest producer in OPEC, able to pump around five million barrels a day and with plans to reach 7.5 million barrels per day in 2025. Oil, which has more than doubled since 2016, is fueling the country’s recovery from decades of wars and sanctions, but Iraq still struggles with power outages and most economic indicators outside of energy still show little promise. The country’s cost of production per barrel of oil, as well as

field operating costs, are comparable to those of Kuwait and Saudi Arabia which are the lowest in the world. However, since the defeat of ISIS militias, the country has embarked on a reconstruction exercise to improve infrastructure development and encourage foreign direct investment. In April, Iraq approved a plan to develop power stations in the country with help from Munich-based Siemens, for a deal worth as much as $15 billion. Boosting power production is an urgent priority for Iraq, where sporadic outages and unpredictable supplies of electricity have disturbed economic activities ever since the US-led invasion of 2003. Additionally, the construction and engineering sectors are key to the reconstruction of houses, facilities, and infrastructure in Iraq but the pledges at the International Conference for Reconstruction of Iraq, last February in Kuwait, have fallen short of delivering the urban renewal of cities as existed prior to ISIS’s capture of Iraq’s second largest city. According to PwC, Iraq’s National Investment Commission is also heavily

— IMF

seeking private investments in various infrastructure and housing projects, c r e a t i n g m a ny o p p o r tu n i t i e s fo r foreign investment. THE FINANCIAL SECTOR Extra oil production from recent energy deals is projected to add around four per cent of GDP annually to government revenue and export receipts, strengthening the country’s foreignexchange reserves position. Higher oil production will support the government’s finances and external accounts. Moody’s said that higher oil prices since mid-2017 subsequently led to a 50 per cent increase in the

Iraq’s National Investment Commission is heavily seeking private investments in various infrastructure and housing projects. Photo credit: Bloomberg

average export price for Iraqi crude to $73.3 per barrel in October 2018 from $48.7 at the end of 2017, leading to a recovery in export receipts and foreignexchange reserves. In 2003, the Central Bank Iraq and the US-controlled Coalition Provisional Authority authorised the establishment of a Trade Bank of Iraq (TBI), to finance international trade. TBI recently opened its first international branch in Saudi Arabia and the lender’s presence in the Kingdom is expected to promote investment opportunities in Iraq as well as the establishment of strong ties with key banking institutions in the two countries.

Oil accounts for about

50% 100% 90%

of nominal GDP, nearly

of exports and

revenues

TBI owes its robust links with regional and international partners to the improved security situation within the country and a strong partnership with the Iraq government as it moves ahead with vital infrastructure repair and development projects which are key factors in TBI’s optimistic outlook and positive forecast for the years ahead. In 2018, the bank’s chairman announced that the TBI was in talks to acquire a Gulf bank with branches in the UAE and Qatar as part of a strategy to boost revenues outside its home market. Similarly, several Western banks such as Citigroup and Standard Charted Bank have been increasing their Iraqi footprint. In May, Standard Chartered Bank revived its stalled plans to open a third branch in the country in the wake of improved security in the OPEC nation. The UK-based lender expects to open a branch for corporate customers in the Southern oil hub of Basra in the first half of 2020. The lender opened its Baghdad branch in November 2013 and another one in Erbil in March 2014. Standard Chartered seeks to finance projects to upgrade electricity, oil as well as other vital infrastructure and plans to sign about $500 million in deals by early next year. Iraq’s exposure to the ongoing geopolitical tension, high dependency on oil economy without any proper structural reforms as well as lack of economic diversification efforts pose a threat to the country’s outlook. The rising tensions between the US and Iran is threatening stability in Iraq as well as the rest of Middle East, having potentially disrupted the flow of oil due to the suspension of shipping activities in the Strait of Hormuz. However, as political stability deepens and turmoil abates within the country, Iraq’s business climate has improved dramatically. Foreign investment is surging, investors from around the world are seeking ways to invest in Iraq endorsing the country’s positive outlook.

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COUNTRY FOCUS

IRAQ in numbers POPULATION

GDP REAL GROWTH RATE

13%

million 1m

50m

1.9%

Source: Worldometers; United Nations estimates (July 2019)

2016 est.

MEDIAN AGE

19.5

years

Source: Worldometers (July 2019)

NOMINAL GDP

$171.7 billion (2016) $192.7 billion (2017) $202.9 billion (2018) $225.3 billion (2019 est.)

-2.1%

0.6%

2018 est. 2019 est.

2017 est. Source: World Bank

CURRENT ACCOUNT SURPLUS/GDP

11.1%

8.9% 5.6% 3.3%

2016

2017

2018

2019 – projected

Source: Fitch Solutions

Source: World Bank

BUDGET DEFICIT/GDP GDP PER CAPITA (000s $)

16.5 (2016) 15.8 (2017) 15.5 (2018) 15.9 (2019 – projected) Source: World Bank

13.9%

5.2%

2016

2017

2.3%

1.8%

2018

2019

Source: Fitch Solutions

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DIFC_IFCampaign_BankerME_420x270mm.pdf

5/6/19

11:47 AM

DIFC THE BEST OF BOTH WORLDS

IF ONLY there was a place where finance and culture existed seamlessly. IF ONLY there was a place that was the key to emerging markets. Where FinTech companies, venture capital firms and accelerator programmes thrive. IF ONLY there was a place that was internationally recognised and independently regulated. IF ONLY there was an established leading financial centre for the Middle East, Africa and South Asia. Where nearly 24,000 professionals and 2,100 of the worldâ&#x20AC;&#x2122;s top companies work and live. There is. DIFC.

For more information difc.ae @difc

(PHOTO CREDIT: RONSTIK/SHUTTERSTOCK)

RETAIL BANKING

TRANSFORMATION DRIVEN BY INNOVATION Fahd Amjad, General Manager for Retail Banking at Oman Arab Bank, shares his approach to retail banking and his thoughts on its future

e have noticed a drastic change in the way OAB operates over the past few years. What has brought forth this change? Just under three years ago, Oman Arab Bank (OAB) began a journey that would see it transform itself from a largely traditional bank into one of the most technologically advanced and customer-centric retail banks in the country. The key driving force behind

our transformation was our passion to deliver exceptional customer experience. As a financial services institution we understand that in order to provide this service we have to ensure we innovate. To achieve this, we not only aimed to leverage existing technology to its fullest, but also to develop new solutions which have never been seen in the market. We have been actively building these services with simplicity and customer convenience as the driving force.

What singular system or component of the bankâ&#x20AC;&#x2122;s operations, in your opinion, has seen the most drastic change or advancement as a result of your transformation strategy? That would have to be our new omnichannel digital banking platform, which we launched in 2017 and is of the key pillars of our retail innovation strategy and bank transformation. This new platform was designed with the sole aim of offering customers an advanced, yet easy to use,

SPONSORED CONTENT

n light of current economic conditions and the general reluctance of banks in giving out loans to businesses, what is Mashreq’s view on the matter? Mashreq, as one of the oldest banks in the UAE, has supported small businesses for a long time. We continue to lend to small business with viable business models that have the ability to repay the debt they undertake. With the credit bureau and the recent experience of the 2014 meltdown in the small and medium enterprise (SME) segment, lending has become more prudent across the industry and Mashreq is no exception. How much of the business banking sector makes up Mashreq’s total portfolio? How has this changed in the last two years? The SME business for Mashreq enjoys a market share of approximately 12 per cent and we continue to maintain that. We were recently awarded the Agility Award for the Best SME Business in the UAE and we continue to invest and grow our SME portfolio. What challenges do banks face in addressing the financing needs of businesses in today’s landscape? Today, assessing risk remains the main challenge for banks. Risk is not only limited to credit risk and compliance but also extends to international regulation as a key risk as well. The geopolitical landscape also affects the continuity of business and credit decisions.

TODAY, ASSESSING RISK REMAINS THE MAIN CHALLENGE FOR BANKS. RISK IS NOT ONLY LIMITED TO CREDIT RISK AND COMPLIANCE BUT ALSO EXTENDS TO INTERNATIONAL REGULATION AS A KEY RISK AS WELL.

Mashreq enjoys a market share of approximately

12%

of the SME business

What do you think is the best way to service businesses in the region? Mashreq has always been a customercentric organisation and we believe in differentiation through service. The best way to deliver this service is to move to a digital platform. We have been ver y successful in leveraging our digital platforms and approximately 90 per cent of all our transactions in this segment are originated digitally. This provides great convenience and choice to customers at a reduced cost. We therefore continue to augment the digital platform.

MASHREQ’S FOCUS ON START-UPS SMEs and start-ups are the backbone of any economy. Innovation is at the core of Mashreq’s business and the bank continues to invest in initiatives that has the potential to not only deliver benefits for the business and its customers but also support the overall start-up ecosystem in the UAE. Mashreq’s products and services are carefully designed to cater to the young aspiring businesses as well as well-established entrepreneurs in the region. There is a dedicated focus on SMEs within Mashreq and tailored products and services are built to service these customers. In line with this objective, Mashreq has partnered with DIFC in the Fintech Hive start-up boot camp where conglomeration of new start-ups had presented their product and business ideas. The senior management at Mashreq further helped these start-ups refine their ideas and mentored them in conducting a proof of concept with their product. Mashreq is also one of the two banks to sponsor the DTEC entrepreneur acceleration programme at Dubai Silicon Oasis where the bank provided insights into financial management and banking processes to budding entrepreneurs. In addition to the above, Mashreq has a strategic alliance with DED and has created a tailor-made product for DED E-Trader customers. These E-Trader entrepreneurs mostly trade on social media platforms and requires swift transaction with minimum commitments. Considering these requirements, Mashreq has created a specific product to support DED E-Trader customers. Furthermore, Mashreq has introduced several new technologies with a keen focus on SMEs. Some of the bank’s concepts include Interactive Teller Machines, Self-service Kiosk and Bulk Cash Deposit Machines, amongst others. These digital technologies are not only equipped to support faster transactions for customers but are also leveraged heavily within the organisation to process and automate the bank’s internal processes. These innovative services are put in place to ensure that we are able to deliver quality services to our discerning customers including SMEs. Mashreq recognises the importance of small businesses and consequently has always been at the forefront of introducing innovative ideas to support its retail and SME customers.

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TRADE FINANCE

INCREASING EFFICIENCY AND BROADENING SOLUTIONS In an exclusive interview, Haytham Elmaayergi, Global Head of Transaction Banking at Abu Dhabi Islamic Bank, talks about Shariâ&#x20AC;&#x2122;ahcompliant trade finance

(PHOTO CREDIT: JAMESBOY NUCHAIKONG/SHUTTERSTOCK)

W The global transaction banking market set to be worth

$509 billion by 2025

hat are your views on the trade finance landscape in the region and how does ADIB play a role in it? Trade finance plays a crucial role in driving the UAE’s economic growth by boosting the country’s access to goods and services, as well as help achieve the development goals underpinned by job creation, national prosperity, and better living standards. Trade finance also drives the nation’s economic diversification efforts and fosters the UAE’s goal of becoming a major regional and international trading hub. Currently, the UAE remains the largest exporter and importer in the region, with non-oil foreign trade valued at AED1.63 trillion per annum. ADIB supports this by providing an extensive suite of Shari’ahcompliant solutions designed to facilitate fast and efficient trade transactions, including financing, payment facilitation, risk mitigation and data management. These solutions help importers and exporters finance their cross-border flows whether on documentary trade or open account trade.

GLOBAL TRANSACTION BANKING IS A GROWTH BUSINESS FOR ADIB, AND THE BANK IS INVESTING HEAVILY IN BUILDING DIGITAL SOLUTIONS TO MEET THE WORKING CAPITAL NEEDS OF COMPANIES ACROSS ALL INDUSTRY SEGMENTS. — Haytham Elmaayergi

How does the transaction banking needs of various types of clients differ? As a long-term proponent of the UAE private sector, ADIB provides a broad spectrum of Shari’ah-compliant products that support local businesses, particularly exporters and business customers, allowing them to manage their working capital in an efficient and effective manner. We have experience working across different sectors, understanding the objectives of the particular client in question and then delivering a tailored package of products which can enable them to meet these goals. What challenges do you face in conducting the business? While the trade finance sector has grown over the years, it is still laden with challenges as a result of over-reliance on paper. This includes inefficiencies, high costs and risks associated with manual processes. A lack of standardisation also poses a significant constraint on potential growth, with a lack of appropriate regulations likely to slow progress. Differences in interpretation and variations in product structures, and reporting standards are areas that still need to be improved. Another point of contention is the shortage of financing available for small to medium-sized enterprises (SMEs). According to estimates from the Asian Development Bank, the global trade finance gap is currently at about $1.4 trillion. Taking the above into consideration where do you see opportunities? Banks in the Middle East are set to catch a larger portion of the global transaction banking market set to be worth $509 billion by 2025, given its strategic position as the gateway to international trade.

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TRADE FINANCE

A LACK OF STANDARDISATION ALSO POSES A SIGNIFICANT CONSTRAINT ON POTENTIAL GROWTH, WITH A LACK OF APPROPRIATE REGULATIONS LIKELY TO SLOW PROGRESS. DIFFERENCES IN INTERPRETATION AND VARIATIONS IN PRODUCT STRUCTURES, AND REPORTING STANDARDS ARE AREAS THAT STILL NEED TO BE IMPROVED. — Haytham Elmaayergi, Global Head of Transaction Banking, Abu Dhabi Islamic Bank

Haytham Elmaayergi

Trade finance is an area that could reap advantages from blockchain technology as it could reduce paperwork and complexity. Through digitalisation, ADIB sees opportunities to simplify the trade finance process, thereby driving efficiency, reducing time and costs, boosting transparency and mitigating risks, while broadening access to trade finance. In addition, a harmonisation in standards and regulations will tap into potential productivity and growth in trade transactions. ADIB also recognises the rising demand for Shari’ah-compliant financial instruments. Export finance and supply chain finance present the greatest opportunities for Islamic banks since these are the areas from which Islamic banks have traditionally been absent. At ADIB, we are developing sophisticated Islamic products that fill these gaps with appropriate Shari’ah structures, technology and an efficient service model to support this. How does your pipeline look like for the rest of the year and going into 2020? Global transaction banking is a growth business for ADIB, and the bank is investing heavily in building digital

solutions to meet the working capital needs of companies across all industry segments. ADIB’s digital transformation plan will define the tools that can transform the way in which our clients transact. Through our new online banking platform, clients can now execute transactions and obtain financing against the different trade instruments digitally. ADIB also taps into the huge potential of Islamic trade finance, which is currently under-represented in the global financial system despite the rising demand for Shari’ah-compliant financial instruments. We recently launched a significant number of products that focus on Islamic trade finance including export financing and trade receivables financing. These trade finance solutions were traditionally missing from the Islamic banking sphere and are the requirements which clients now look for in Islamic trade finance. What are your expansion plans for ADIB’s trade finance business? ADIB has joined a consortium of banks led by Etisalat Digital to use technology to improve efficiencies, automation, and transparency in the trade finance process.

Through this partnership, ADIB and Etisalat will develop the UAE Trade Connect (UTC), a nationwide trade finance platform that utilises blockchain, artificial intelligence, and advanced detection tools to validate the authenticity of transactions, and safeguard banks from potential risks related to double financing and fraud. We believe that a collaborative effort among banks to create a unified network necessary to support global payments is the biggest key in terms of transforming blockchain’s potential into reality. As part of its digital transformation strategy, ADIB is investing $100 million in technology, revamping all delivery channels and banking platforms to enable customers to conduct their banking in a simpler and more intuitive manner. ADIB’s plan to entirely digitalise Islamic trade finance is set to be completed very soon. When launched, it has the capability to deliver a complete and seamless end-to-end Islamic financing process, thereby driving transformative business value to clients. What is your outlook on 2019? We see digitalisation and standardisation as major disruptors in the trade finance sector. Banks will capitalise on advancements in technology, developing their product range to address the everchanging needs of customers. Islamic banks, as well as conventional players, need to be at the forefront of technological developments, exploring new paradigms, such as blockchain, to improve the end-toend client experience.

ISSUE 03

DIGITAL TRANSFORMATION: LEVERAGING CLOUD COMPUTING AND HYPERCONVERGENCE Aaron White, Regional Director â&#x20AC;&#x201C; Middle East, Nutanix

Photo credit: Bloomberg

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TECHNOLOGY

DIGITAL TRANSFORMATION: LEVERAGING CLOUD COMPUTING AND HYPERCONVERGENCE Aaron White, Regional Director – Middle East at Nutanix, discusses the importance of investing in cyberdefence technologies and developing broader strategies for financial institutions

s a technology solutions provider, what do you see as the biggest challenges facing banks today? Digital transformation has a more profound effect on the financial services industry (FSI) than any other business sector. Financial technology (fintech) is replacing or augmenting traditional business methods. Financial services companies— from banking to insurance to investment management—must move quickly or risk being left behind. The increasing importance of mobile transactions along with other recent technology innovations is increasing customer expectations and re-shaping financial services. Deli vering a seamless customer experience across all channels—online, mobile, and in person—has become a necessity. Financial companies of all types will have to come to terms with a number of critical business and technology priorities including cloud investments to enable digitalisation, the need for comprehensive cybersecurity,

Aaron White

bankerme.net

TECHNOLOGY

SUCCESS HINGES ON CREATING THE RIGHT SET OF CLOUD ENVIRONMENTS THAT CAN POWER NEXT-GENERATION APPLICATIONS AND BETTER SATISFY USER EXPECTATIONS— WHILE SUSTAINING THE TRADITIONAL APPLICATIONS THAT YOUR BUSINESS HAS RELIED ON FOR YEARS. — Aaron White, Regional Director – Middle East, Nutanix the adoption of artificial intelligence and increased automation, the rapid rise of public ledgers such as blockchain. Many financial institutions still struggle with ageing, siloed, and incompatible legacy infrastructure systems. These labyrinthine systems, often acquired over time from multiple vendors, are difficult to scale and tremendously expensive to maintain, requiring numerous teams of IT specialists just to keep the lights on, and consuming vast amounts of power and space. To make matters worse, they often produce poor return on investment, provide unreliable application performance, and are so complex that IT service delivery slows to a crawl, stymieing productivity and innovation. Designed for an earlier era, they are also ill-equipped to defend a g a i n s t t o d a y ’s s o p h i s t i c a t e d and relentless cyber threats. The financial services ecosystem is increasingly interconnected, which only exacerbates these vulnerabilities. Lastly, the ascendance of public cloud offerings means that enterprises now expect internal infrastructure teams to not only deliver cloud-like capabilities from their on-premises data centres, but also manage hybrid and multicloud deployments. Success hinges on creating the right set of cloud environments that can power next-generation applications and better satisfy user expectations—while sustaining the traditional applications that your business has relied on

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for years. With the cloud landscape changing rapidly, it can be difficult to determine the smartest strategy to satisfy diverse application needs, ensure security, and enable continued innovation, while avoiding infrastructure choices that will limit your business’s flexibility down the road. There is also the compliance and cybersecurity challenge. The financial services sector is one of the most highly regulated industries worldwide. New regulations continue to be written in response to the increasing exposure of personally identifiable information (PII). General Data Protection Regulation (GDPR) came into effect in May 2018 with w i d e - r e a ch i n g i m p l i c a t i o n s f o r enterprises worldwide. U n f o rt u n a t e l y, r e g u l a t o r y requirements—even when satisfied to the letter—are not synonymous with better security. Well publicised attacks like the breach of a major consumer credit reporting company are occurring with increasing frequency. As financial services companies accelerate digital transformation, cybersecurity has to be a primary consideration for every application and service, whether on-premises in a private cloud, running at a service provider, or in a public cloud. What would be the most efficient solutions to the above? FSI IT teams have to carefully navigate the evolving cloud landscape to be successful. Recent data from IDC suggests that the typical enterprise

runs about 60 per cent of IT on-premises today with 40 per cent in the cloud. By 2021, the split is expected to be close to 50/50. So, you’ll need to strike a balance between on-premises and cloud operations. This will require mature processes for deciding which applications and services to run in which cloud—whether that is an on-premises private cloud, a CSP, or a big public cloud. And, because half of your operations will be on-premises, you’ll need to transform your datacenter infrastructure to deliver cloud-like agility. Expectations for enterprise IT services in the cloud era have been fundamentally reset. Development teams as well as other internal and external consumers of IT services demand the agility and scalability found in public clouds. To build your next-generation infrastructure, you must look beyond legacy architecture to create datacenters that rival the cloud. But what does this new enterprise IT stack look like, and how can you leverage the latest innovations as you put your datacenter and cloud strategies into practise? A growing number of financial services organisations have discovered that an enterprise cloud that offers the agility of public cloud without sacrificing control over critical resources is the answer. In terms of cybersecurity, success requires continued diligence in five broad areas: • Host security – to harden servers against attacks. • Network security – to prevent intrusion from outside—and inside—your corporate firewall. • Endpoint security – to protect a growing number of enduser and other devices—both those inside your corporate networks and those that access corporate resources remotely.

• Data security – to ensure that critical data is protected by strong encryption with secure key management. • Identity and access management – in which access to applications and information is restricted based on a combination of host, network, endpoint, and data security combined with an access control layer. As with every aspect of IT operations at scale, your security efforts simply will not succeed without significant automation. It goes without saying that security must be a primary consideration in every IT decision that financial services IT teams make. Choose vendors and partners that take security seriously. Security features should be designed in from the start, not bolted on as an after-thought to solutions that would otherwise be insecure. In the cloud era, security needs to become an integral and invisible attribute of your infrastructure. Security must be built into the culture, and security considerations need to be an essential part of product development to meet the high bar required by financial services companies. Extensive automation must be incorporated into the process of maintaining infrastructure security, delivering seamless scalability without increasing risk.

What’s your view on the awareness of banks on these issues? In general, financial institutions are early adopters of technology and CIOs and IT managers within this sector are aware that digital transformation is not just a matter of competitive advantage, but rather an imperative for survival. Because of regulatory and other concerns, financial services companies as a group have tended to favour on-premises infrastructure, hosted IT, or private cloud over public clouds and cloud service providers. However, many established firms now recognise the need to ‘make the leap’ to the cloud to increase agility and deliver more effective digital services. But it is important to have a solid cloud strategy in place before making the transition. In terms of the security aspect, financial institutions are all too aware of the cybersecurity threat. They have lost millions in theft and fraud over the years as they are extremely attractive targets. They must continue to invest in cyberdefence technologies and when it comes to the cloud, they need to take a security-first approach that achieves a state of continuous cloud compliance. In parallel, they also need to develop broader strategies to engage with governments, other banks, their clients and recipients of their investment and the general public.

CHOOSE VENDORS AND PARTNERS THAT TAKE SECURITY SERIOUSLY. SECURITY FEATURES SHOULD BE DESIGNED IN FROM THE START, NOT BOLTED ON AS AN AFTER-THOUGHT TO SOLUTIONS THAT WOULD OTHERWISE BE INSECURE. — Aaron White

Tell us about Nutanix and your targets for 2019. Cloud computing and hyperconvergence are becoming the fundamental technology engine for digital transformation initiatives, including customer engagement, internal operations, and updated business models. Our company has set for itself an ambitious but attainable goal of hitting $3 billion in billings from software and support by our 2021 financial year. In line with the global vision, on a regional level we will continue to position Nutanix as the next generation operating system for the enterprise cloud. We want to be the first vendor that comes to mind as a trusted partner when enterprises in the region are ready to transform their data centres, their IT operations, and their businesses. We will continue introducing market-changing new technologies and onboarding of top new talent and partners to enable the company to stay ahead in a very competitive marketplace. How did the company come to what it is today? Nutanix was founded on September 23, 2009 by Dheeraj Pandey, Mohit Aron and Ajeet Singh. The company was an original innovator in the world of hyper-convergence infrastructure (HCI) and has become synonymous with this technology. Although the company’s roots are still firmly planted in HCI, that product line now forms the foundation for a broader set of technologies. All of which are intended to help organisations build ‘enterprise cloud environments’, of which hyperconvergence is one part. To enable the vision of the enterprise cloud, Nutanix has developed its own full stack, from the hypervisor to management to a multi-cloud governance platform.

bankerme.net

TECHNOLOGY

HOW THE AI AND DATA COMBINATION ACCELERATES SMART FINANCE Alaa ElShimy, Managing Director & Vice President—Enterprise Business at Huawei Middle East, breaks down how data and artificial intelligence enhances the banking experience for customers

wo disruptive forces are sweeping the finance sector in the region. The first is the wave of consolidation and rightsizing as major players seek synergies to optimise operational costs and boost profitability. This is perhaps a response by the banking industry to the second epochal change—the digitisation of financial services that gains momentum from the GCC’s high levels of smartphone penetration and a blossoming e-commerce ecosystem. Financial institutions in the region have shown a general recognition of these two trends, yet many organisations are now playing catch up to the international headwinds. One report by McKinsey notes that the Middle East has achieved 8.4 per cent of its digital potential, which while commendable, compares to 18 per cent in the US and 15 per cent in Western Europe. Countries in the GCC are raising the bar, specifically the UAE

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(at 16.4 per cent), Bahrain (13.6 per cent) and Saudi Arabia (11.5 per cent). With governments in the Gulf now focusing on investments in digital transformation—and the propagation of Artificial Intelligence (AI) in particular—a new era of smart finance may help regional institutions to leapfrog their global counterparts.

EARLY ADAPTORS

Not surprisingly, the most significant growth in the region’s digital start-up scene is accounted by fintech, which

80 to 90% of respondents in the UAE and Saudi Arabia now use digital banking channels

Alaa ElShimy

— McKinsey

according to entrepreneurial network MAGNiTT, accounted for 12 per cent of all deals in 2018 and is now estimated to be a $2 billion market. These digital enterprises are chalking out innovative approaches that can bring unprecedented changes in the way the industry functions by leveraging the power of big data together with AI; what we refer to as a combined “AI + DATA” model. Wealth management and equity trading were among the first-movers in adopting AI commercially, but the scope is widening. Even more so as the banking sector seeks AI-led innovation to become more customer-centric, to automate their processes, to meet the lifestyle aspirations of an increasingly digital-savvy population, as well as to strengthen cybersecurity standards. From a purely customer perspective, one McKinsey survey reports that 80 to 90 per cent of respondents in the UAE and Saudi Arabia now use digital banking channels. Three out of four of them do so frequently, and some 50 per cent said they would open an account with a purely digital bank. AI + DATA is central to accelerating this digital shift that customers seek.

The Middle East has achieved

8.4%

of its digital potential In comparison to

18% 15% in the US and

in Western Europe

— McKinsey

THE RELATIONSHIP BETWEEN AI + DATA

In today’s 4.0 era of the financial services sector, AI + DATA is invaluable to driving innovation across all customer touch points by helping financial service providers to remodel their closed ICT systems into open cloud platforms. This enables them to extract meaningful information from enormous amounts

THE 4.0 ERA IS ABOUT A FINANCE SYSTEM THAT SEAMLESSLY INTEGRATES FINANCIAL SERVICES—BANKING, INSURANCE, EQUITY, WEALTH MANAGEMENT—THROUGH AI, PLACING THE CUSTOMER AT THE CORE OF ALL FUNCTIONS. — Alaa ElShimy

of raw, unstructured financial data faster and easier. That information in turn provides real-time insights into customer behaviour that can be used to make business decisions. However, these big data insights alone are not new. The real value-add today is the combination of data plus AI. This allows for a true omnichannel business culture to be adopted within the region’s banking sector; one that is perfectly in sync with the digital-first mindset of today’s customers. In other words, the 4.0 era is about a finance system that seamlessly integrates financial services— banking, insurance, equity, wealth management—through AI, placing the customer at the core of all functions. In addition to customers, financial institutions also benefit from the AI + DATA combination. For example, fintech research firm, Autonomous Next, estimates the cost-saving efficiency the finance sector can achieve through the adoption of AI at $1 trillion is a reduction in costs by 22 per cent. We believe AI + DATA delivers this through “pervasive intelligence”—one where robo-advisors and algorithm-driven tools will lead the smart finance ecosystem. Automated payment models will emerge; lending decisions will become near real-time with AI accelerating loan approvals; and customer claims will be even more swiftly redressed with less human bottlenecks. So, what’s standing in the way? The good news is that the core technology is already there to bring all of these scenarios to life. The real work is now being done between technology players and financial institutions to deepen data governance, create data ecosystems tailored for the securities industry, revisit the user experience design of AI-powered mobile products in a 5G environment, and support the right local talent to lead these initiatives into the future. By doing that, we can ultimately make smart finance more accessible to more people—a win-win situation for all.

bankerme.net

TECHNOLOGY

GCC LEADS OPEN BANKING REVOLUTION Middle Eastern banks have earned a reputation for embracing new technologies. Open banking is the next step in the technological transformation, asserts the Bahrain Economic Development Board

ith the convenience economy impacting almost every business sector, it was only a matter of time before the banking sector was affected. For expatriate residents and GCC nationals across the Middle East, the transition to open banking could not have come a moment too soon. With Bahrain taking the lead in the introduction of the open banking system, the region is poised to be a hotbed for revolutionary banking regulations. Described as a connected ecosystem of financial services that allows two or more unaffiliated banks to enrich their digital offerings in a safe and secure manner, open banking is bringing greater financial transparency and new and tailored customer services to the region.

Through the introduction of Application Programming Interfaces (APIs), a set of communication protocols used to develop computer applications, open banking platforms t ypically offer retail and enterprise clients the freedom to access their data in real time and share account information and transaction history with external parties such as vendors, suppliers, business partners and other banks. The nature of the technology enables each financial institution to adapt its offering in a manner best suited to its clients. As a result of this digitalisation, which usually takes place in collaboration with third-party financial technology companies, banking becomes more accessible and convenient.

ECOSYSTEM FOR TECHNOLOGICAL TRANSFORMATION Banks across the Gulf appreciate the need to maintain their leadership role in the financial sector and stay abreast of new developments. Open banking is the next step in a technological transformation that has seen regional banks embrace artificial intelligence through the use of chatbots, wearable technology through smart watch apps, and enhance the user experience with online banking. McKinsey research on urban consumers shows that over 80 per cent of GCC consumers now choose to do a portion of their banking online. The National Bank of Bahrain (NBB) is among a set of banks leading the trend

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TECHNOLOGY

WITH HIGH MOBILE PENETRATION RATES—RECORDED AT 228.3 PER CENT IN THE UAE IN 2017—FOR EXAMPLE, CUSTOMERS NOW VISIT BANK BRANCHES AND CALL CUSTOMER SUPPORT SERVICE HOTLINES ONLY TO MEET SPECIFIC AND MORE COMPLEX NEEDS. by adopting technologies that enable it to deliver new open banking services to its customers. A collaboration with Tarabut Gateway, a new specialist fintech and open banking infrastructure provider, will enable NBB clients to connect their account to any other bank operating in Bahrain for an amalgamated view of their finances from within NBB’s online and mobile banking apps. The partnership is the first of its kind between an open banking fintech and a major Middle Eastern bank.

LEADING DESTINATION FOR FINTECHS The launch follows guidelines from Bahraini authorities mandating the adoption of open banking methods

across the island by 30 June 2019. The stipulations are in line with Bahrain’s vision to become the leading destination for fintechs in the Middle East, while reinforcing the Kingdom’s role as a preeminent centre for financial services. Bahrain was the first country in the GCC to set up a banking system and is now home to over 400 financial institutions, all underpinned by a highly skilled and educated workforce. With high mobile penetration rates— recorded at 228.3 per cent in the UAE in 2017—for example, customers now visit bank branches and call customer support service hotlines only to meet specific and more complex needs. That shift to branchless and mobile banking is only likely to intensify going forward,

and regional financial institutions are responding with technology-enabled measures to accelerate innovation and boost transparency and efficiency for their customers. Combined with advancements such as e-wallets, real-time transfers across borders and near-field communications, the deployment of open banking platforms is expected to help regional financial brands catch up with sectors like retail and travel in delivering an enhanced customer experience. The future of the banking industry lies in greater digitisation, with mobile banking, faster payments and open banking APIs becoming the norm than an exception—and the Gulf is set to lead the way.