#221 August 2019

AUGUST 2019 | ISSUE 221

MIDDLE EAST

AUGUST 2019 | ISSUE 221

A CPI Financial Publication

Jean Christophe Durand, CEO, National Bank of Bahrain economic stability 14 Fair

risk for the UAE 28 Mitigating

a future through sustainable financing 38 Creating

Staying one step ahead 47 Cybersecurity:

Dubai Technology and Media Free Zone Authority

FLYING THE BAHRAIN FLAG Jean Christophe Durand, CEO, National Bank of Bahrain

FLYING THE BAHRAINI FLAG

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 what’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

D

espite being in the peak of summer, MENA markets appear to be buzzing with activity. In the last couple of weeks alone we have seen a slew of deals progress to reach a close. Some of the notable deals were: Kuwait Investment Authority’s sale of its stake in Gulf Bank, Dana Gas’ plans to sell its Egyptian assets, National Bank of Bahrain’s commencement of its due diligence to acquire a stake in Bahrain Islamic Bank, Saudi Arabia’s Public Investment Fund expressing interest in funding a UK start-up, Emirates NBD’s acquisition of Turkey’s Denizbank, and ADFG’s merger with SHUAA Capital.

Tackling two main trends that have shaped the banking and finance industry in the region, our issue this month takes a deep dive into M&As and consolidation, as well as ESG investment and sustainable financing. Within these pages you’ll find a breakdown of deals that have transpired in the first half of 2019 as well as the digital realities and estimate spend involved in a merger exercise. Following the UN’s announcement of its 2030 Sustainable Development Goals, investors—both individual and institutional—have shifted their funds to sustainable projects and ventures. We speak to three institutions gauging their views on investment trends within this space and find out where they see opportunities.

Our cover star this month is National Bank of Bahrain. I sat down with Jean Christophe Durand, Chief Executive Officer of the national banking institution, as he discusses his three-year strategy for the bank—a well-rounded plan that encompasses expanding business streams and breaking into new markets, as well as a digital transformation agenda involving banking services and talent development. Embracing the inevitable changes across the industry, Durand remains optimistic both from a macroeconomic perspective and on the domestic front.

This positive sentiment is echoed within the industry as bankers express more optimism for regional growth in spite of the existing geopolitical risks.

Economic growth and public finances in MENA countries have notably improved amid higher oil prices, infrastructure development, economic diversification programmes and fiscal reform. As we inch towards the end of summer, a slight pickup is expected in the second half of the year—interesting times ahead.

Wishing you a productive read as always.

Nabilah Annuar EDITOR, BANKER MIDDLE EAST

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CONTENTS

AUGUST 2019 | ISSUE 221

ANALYSIS

8 M&As: An optimistic outlook for MENA

NEWS

16

10 News Highlights

THE MARKETS 14 Fair economic stability

COVER INTERVIEW

16 Flying the Bahraini flag

COUNTRY FOCUS: PALESTINE 22 The troubled Palestinian twins

INSURANCE

28 Mitigating risk for the UAE

INFRASTRUCTURE FINANCING 32 Exploring other avenues

ISLAMIC FINANCE 36 A continuous battle

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28 4

36

For generations, the better way to bank.

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

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CONTENTS

AUGUST 2019 | ISSUE 221

SUSTAINABLE FINANCING 38 Creating a future through sustainable financing 40 Renewables: The full potential

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DIGITALISATION

44 Building a digital future

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

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AUGUST 2019 | ISSUE 221 MIDDLE EAST

CHAIRMAN

Saleh Al Akrabi

AUGUST 2019 | ISSUE 221

CHIEF EXECUTIVE OFFICER

FLYING THE BAHRAIN FLAG Jean Christophe Durand, CEO, National Bank of Bahrain

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

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EDITOR - BANKER MIDDLE EAST

FLYING THE BAHRAINI FLAG A CPI Financial Publication

Jean Christophe Durand, CEO, National Bank of Bahrain

38

economic stability 14 Fair

risk for the UAE 28 Mitigating

a future through sustainable financing 38 Creating

Staying one step ahead 47 Cybersecurity:

Dubai Technology and Media Free Zone Authority

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

JULY 2019 | ISSUE 220

EDITORS

MIDDLE EAST

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

JULY 2019 | ISSUE 220

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

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

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A CPI Financial Publication

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Reinventing the wheel

A mutable 24 landscape

Increasing efficiency broadening solutions 54 and

Digital transformation: Leveraging computing and hyperconvegence 57 cloud

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TECHNOLOGY

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Cybersecurity: Staying one step ahead Digital realities and the comeback of industry-shaping M&A

FINANCE MANAGER

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ANALYSIS

M&As: AN OPTIMISTIC OUTLOOK FOR MENA On the back of encouraging deal values as well as positive sentiments on the global and regional economy, corporates appear to be hungry for more strategic investments

8

T

he first half (H1) of 2019 witnessed a total of 216 announced M&A deals. Valued at $115.5 billion, this was 220.8 per cent increase from $36.0 billion in H1 of 2018. A report by EY found that in spite of the value increase, deal volumes declined 10.7 per cent— 242 deals were recorded in H1 of 2018.

The spike in deal value is attributed Saudi Aramco’s massive acquisition of a 70 per cent stake in SABIC worth $69.1 billion. EY estimates suggest that stateowned entities including Aramco, Abu Dhabi National Oil Company (ADNOC) and Abu Dhabi Investment Authority (ADIA), were involved in a total of 55 deals (25 per cent of total deals) amounting to $104.5 billion, equivalent to 90 per cent of the total deal value in H1 of 2019.

M&A ACTIVITY The MENA region witnessed an increase in deal value to $79.3 billion across 111 deals in the first half of this year, compared to 96 deals worth $5.5 billion in the corresponding period last year, reported EY. The numbers were driven by two mega deals on the back of consolidation in Saudi Arabia’s chemicals sector—a transaction worth $69.1 billion—and a deal in UAE’s financial sector—a transaction worth $4 billion. The main highlight of the year thus far was Uber’s acquisition of Careem Networks for $3.1 billion, the region’s largest technology sector transaction to date.

The chemicals sector had the highest deal value at $69.3 billion for the landmark Saudi Aramco-SABIC deal, followed by the oil and gas sector recording $14.2 billion. The provider care sector recorded $10.3 billion, while the banking and capital markets sector recorded $5.1 billion in deal value, followed by the technology sector striking a deal value of $4.3 billion.

In terms of outbound M&A, although a slight dip in volume, MENA recorded 65 deals worth $21 billion compared to 77 deals worth $18.2 billion in H1 2018.

This was driven by strategic investments

COMPANIES ARE FOUND TO BE REVIEWING THEIR PORTFOLIOS EVERY QUARTER AND MORE FREQUENTLY THAN GLOBAL ORGANISATIONS. WITH MORE FREQUENT PORTFOLIO REVIEWS, SEVERAL NON-CORE BUSINESSES ARE SET ASIDE FOR DIVESTMENT THEREBY FUELLING DEAL ACTIVITY. from sovereign wealth funds and stateowned enterprises, including mega deals involving Abu Dhabi Investment Authority and Saudi Aramco.

As for inbound investments, 40 deals worth $15.1 billion were made in H1 2019 compared to 69 deals recorded at a value of $12.3 billion in the corresponding period last year. According to EY, the UAE ranked the highest in terms of inbound M&A investment in the region, with 20 deals amounting to $14.4 billion. While the bulk of the inbound investment was received by the oil and gas sector, at $10.8 billion, four out of the six deals in the sector were in the UAE, including three mega deals, involving the ADNOC stake sale in its oil refining and pipeline business.

H1 of 2019 saw 216 M&A deals worth

$115.5 billion $15.1 billion Inbound investments were made up of 40 deals worth

Source: EY

OUTLOOK Commenting on this progress, Anil Menon, MENA M&A and Equity Capital Markets Leader at EY, highlighted that market players across the region are relatively more optimistic about the improving economic prospects whilst keeping an eye on evolving geopolitical risks. MENA executives are found to be proactively pursuing strategic options to strengthen competitive advantage and accelerate growth in an era where technology continues to disrupt traditional business models. On the back of strong inward investment, EY believes that it is indeed an opportune time for strategic acquisitions in the region.

Based on their findings in the EY Capital Confidence Baromete report, Matthew Benson, MENA Transaction Advisory Services Leader at EY, stated that MENA corporates are currently looking for innovative ways to raise capital and have stepped up the frequency of their portfolio reviews. Companies are found to be reviewing their portfolios every quarter and more frequently than global organisations. With more frequent portfolio reviews, several non-core businesses are set aside for divestment thereby fuelling deal activity.

With improving sentiments on the global economy, MENA executives believe that the same will be reflected in the domestic economies in the region.

Companies are expected to continue to reshape their portfolios to remain resilient to potential headwinds on the horizon, even as they actively pursue their ambitious growth objectives.

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NEWS HIGHLIGHTS FAB proposes removing foreign ownership cap First Abu Dhabi Bank’s (FAB) Board of Directors proposed removing a limit on the foreign ownership limit in its sharers after the UAE started loosening rules to attract international investors.

In a statement, FAB said that as part of efforts to support the UAE in attracting capital, foreign investments and in promoting economic growth, the board has proposed to remove foreign ownership limit cap with the potential that other public companies in the UAE may apply similar measures.

The Board of Directors’ proposal is subject to the supervision of regulatory authorities and would require amendments to the current laws and policies.

Earlier in July, the UAE announced that it will allow foreigners to own 100 per cent of businesses across industries and the federal government will leave it to individual emirates to decide the ownership percentage in each activity according to their circumstances.

The UAE currently caps foreign ownership of businesses at 49 per cent, except in economic free zones.

Emirates Strategic Investments Company issues debut dollar Sukuk Sheikh Mansour bin Zayed Al Nahyan’s Emirates Strategic Investments Company (ESIC) issued a debut $600 million Sukuk with a tenor of five years at a profit rate of 3.93 per cent.

The senior unsecured certificates were issued under the company’s recently established $1 billion Sukuk programme which is listed on the London Stock Exchange.

ESIC stated that more than 135 investors from over 20 countries participated and 61 per cent of the Sukuk was allocated to international investors (33 per cent to Asia, 24 per cent to Europe and four per cent to US) while 39 per cent was allocated to GCC investors.

The issuance was jointly coordinated by First Abu Dhabi Bank and Standard Chartered Bank.

DP World lists $1.3 billion Sukuk and bond on Nasdaq Dubai The UAE’s DP World listed its $1 billion Sukuk and a $300 million conventional bond on Nasdaq Dubai.

In a statement, Nasdaq Dubai said that the state-owned port operator is the largest UAE debt issuer by value on the region’s international exchange, with Sukuk and conventional bond listings now totalling $8.09 billion.

The $300 million conventional bond was a tap issuance on a $1 billion bond that DP World issued in September 2018.

The listing of conventional bond and Sukuk follows the company’s announcement last week that it plans to acquire Topaz Energy and Marine for around $1 billion.

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Bankers question whether Saudi Aramco IPO deal is worth the effort Some banks, which worked on the Saudi Aramco deal for more than two years before the oil giant put it on hold, are having internal discussions about whether to re-pitch for a role as the Kingdom restarts preparations for the listing, reported Bloomberg.

When Saudi Arabia announced plans to sell shares in Saudi Aramco, international bankers scrambled to get a piece of the action. Three years on they are questioning whether what could be the world’s biggest IPO is worth their time and effort.

Several banks expanded their operations in the Kingdom in anticipation of winning a cut of the $100 billion Saudi Aramco planned share sell.

Banks originally associated with the plans—Evercore, Moelis & Co. as well as HSBC Holdings, JPMorgan Chase & Co. and Morgan Stanley—were celebrated for landing roles.

Additionally, Goldman Sachs Group and Citigroup were also among banks in contention for top advisory roles before the listing plan was suspended.

Emirates NBD plans to expand its Saudi Arabia footprint Emirates NBD plans to expand its Saudi Arabia footprint, following approval from the Saudi Arabian Monetary Authority (SAMA) to open 20 additional branches in the Kingdom.

The lender currently operates four full-fledged branches across the Kingdom with two branches in Riyadh, a branch in Jeddah and in the Eastern province in Khobar.

The bank stated that it’s full-fledged offering in Saudi Arabia includes retail banking, wealth management services and trade finance, in addition to corporate finance advisory as well as project and syndicated finance through the bank’s investment banking arm, Emirates NBD Capital’s Saudi unit.

Emirates NBD reported a net profit of AED 7.5 billion in H1 2019 a 49 per cent surge compared with AED 5.02 billion the same period last year, on the lender’s gains from the sale of a stake in its digital payments firm, Network International, strong non-interest income on foreign exchange revenue and increased investment banking activity.

ADGM regulation, guidance regime for robo-advisers credit positive for the sector ADIB and Al Baraka Banking Group sign MoU to expand network Abu Dhabi Islamic Bank (ADIB) has signed an MoU with Bahrain’s Al Baraka Banking Group for a correspondent banking arrangement that provides clients with greater flexibility and access to a wider network in order to conduct seamless cross-border fund transactions.

The Abu Dhabi-based lender stated that its existing customers will be able to manage accounts and make remote fund transfers to multiple markets using a single digital platform, ADIB Direct.

ADIB Direct provides innovative financial solutions in account management, electronic payments as well as trade finance and global transactions.

The partnership will enable ADIB to leverage Al Baraka’s wide geographic presence spanning 17 countries.

Moody’s said that the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market’s (ADGM) robo-advisors regulation and digital banks guidance are credit positive for the UAE banking industry.

The guidance outlines regulatory permissions that may be required to provide digital investment services as well as how the regulator will apply its authorisation criteria in key existing areas of technology governance, suitability and disclosure, and newer areas such as algorithm governance.

The rating agency stated that these frameworks are credit positive for the UAE’s banking system because they maintain high regulatory barriers to entry protecting incumbent banks while safeguarding systemic stability through a well-regulated environment for fintechs.

The FSRA’s frameworks also offer incumbent banks a conducive regulatory framework to set up digital challengers on their own or in partnership with technology companies, which expected to improve efficiency and support business volumes.

ADNOC, CNOOC sign exploration, oil refining and LNG trade MoU Abu Dhabi National Oil Company (ADNOC) signed an MoU with China National Offshore Oil Corporation (CNOOC) to explore new opportunities for collaboration in both the upstream and downstream sectors, oil refinery and Liquefied Natural Gas (LNG) trade, reported WAM. ADNOC has expanded its strategic partnership and co-investment model, creating new investment opportunities across all areas of its value chain over the last two years.

Dr. Sultan Ahmed Al Jaber, UAE Minister of State and ADNOC Group CEO, said that the framework agreement offers exciting new growth opportunities as well as mutually beneficial investment initiatives between ADNOC and CNOOC. The two companies agreed to consider enlisting Offshore Oil Engineering Company (COOEC) as well as China Oilfield Services as contractors for design, purchase and construction as well as oilfield service providers for ADNOC. The duo will cooperate in LNG exploration, marketing and purchase opportunities as well as evaluate potential partnerships and joint-investment opportunities across the entire LNG value chain.

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NEWS HIGHLIGHTS Oman’s budget authorities go silent for months Downgraded by all three major rating companies and facing speculation whether a bailout might be needed, Oman had stopped providing data on its budget performance this year until last week, reported Bloomberg.

The Sultanate’s budget has been slow to recover after the oil rout five years ago, as the government lagged behind on fiscal reforms and ran an average deficit of 17 per cent in 2015-2017.

Oman’s monthly bulletin published by the central bank a week ago, which includes a breakdown of government revenue and expenditure, only covers a period through November 2018. But in a report dated 18 July, the National Center for Statistics and Information said the deficit narrowed in the first five months of the year to OMR 358.4 million ($931 million), down from OMR 1.1 billion a year earlier.

Oman’s delay in publishing economic statistics risked testing the market’s nerves.

Oman, which S&P estimates relies on hydrocarbons for 70 per cent of its fiscal receipts, has started to make some headway, imposing an exercise that could generate close to OMR 100 million in annual revenue.

According to the IMF even as the Sultanate succeeded last year in bringing down its currentaccount deficit by over 10 percentage points of GDP, its government debt continued to increase, which also cut its estimate for Oman’s economic growth in 2019 to near zero.

Dubai’s real estate slump catches up with the city’s finance hub The Dubai International Financial Centre (DIFC) is not being spared a slump in the emirate’s retail and property market as it struggles to attract tenants to its AED 1 billion ($272 million) Gate Avenue expansion—a marblelined underground promenade linking the hub’s main district to nearby towers, reported Bloomberg.

The financial hub appears to be reacting to the disappointing showing, about half a dozen executives have left the DIFC Authority, which manages the free zone, in recent months.

Peyman Al Awadhi, the DIFC Authority’s head of marketing, said, “We can confirm as with any evolving organisation, individuals have departed to pursue other opportunities either locally or internationally.”

The hub has also been impacted as global banks retreat to their home markets and has been turning to African and Asian institutions to fill office space. Barclays and Deutsche Bank have reduced their presence in recent years.

12

DFSA says Abraaj Group probe focused on senior management The Dubai Financial Service Authority (DFSA) said that its probe into collapsed private equity firm Abraaj Group will focus on senior management who were responsible for the conduct of the affairs and funds as well as people who may have failed in their responsibilities to identify or report irregularities.

Dubai-based Abraaj Group, which once managed about $14 billion, was forced into liquidation last year after being accused of mismanaging investor funds.

According to the DFSA, the investigation is highly complex, and is being pursued vigorously on a wide scale.

The regulator also said that it may make changes to its oversight procedures following last year’s collapse of Abraaj Group.

IMF approves last instalment of $12 billion loan to Egypt The International Monetary Fund (IMF) has approved the last instalment of a $12 billion loan programme, marking the end of a three-year programme that helped the country overcome a crippling foreign currency shortage but drew criticism for painful austerity measures.

Egypt has since attracted tens of billions of dollars into its debt market and the central bank’s foreign reserves have surged to more than $44 billion.

The Washington-based fund stated that the approval brings total disbursements to SDR 8,596.57 million ($11.9 billion), which is the full amount approved by the IMF executive board in November 2016.

Egypt secured the agreement in 2016 after taking measures that included devaluing its currency and slashing fuel subsidies.

Kuwait Investment Authority sells 16.1 per cent stake in Gulf Bank Kuwait Investment Authority (KIA) has sold a 16.1 per cent stake in Gulf Bank to Alghanim Trading Group for KWD 152.93 million ($503 million), making the business conglomerate the biggest shareholder of the country’s fourth-biggest lender.

The purchase will almost double Alghanim Group’s stake to about 33 per cent from a previous level of around 16.7 per cent.

Boursa Kuwait stated that the Kuwaiti sovereign wealth fund sold its 490 million shares stake in Gulf Bank at an initial price of 312 fils per share.

Alghanim, which has interests in manufacturing, automotive and food businesses, is controlled by Omar Kutayba Ahmad Alghanim, the Chairman of Gulf Bank.

UAE, Indonesia firms sign agreements worth $9.7 billion

Saudi Aramco plans to finish pipeline expansion, reducing reliance on Hormuz

UAE and Indonesian firms have signed agreements worth a total of $9.7 billion during an official visit by Sheikh Mohammed bin Zayed to the Southeast Asian country, according to local newswire, WAM. The Abu Dhabi National Oil Company (ADNOC) signed an agreement with Indonesia’s state-owned energy company Pertamina Persero for oil and gas collaboration in both countries and globally, which has a potential value of $2.5 billion.

Additionally, the UAE’s Mubadala, OMV and Indonesia’s Chandra Asri Petrochemical, as well as Chandra Asri Perkasa, also signed an MoU to explore opportunities for collaboration in the petrochemical sector in the Southeast Asian country.

The parties affirmed the intention to explore potential opportunities for collaboration in the area of petrochemicals in Indonesia, the companies will set up working groups to jointly define a schedule for the evaluation of the opportunities.

Similarly, DP World signed two preliminary agreements with Indonesia’s Maspion Group to create a $1.2 billion container port and industrial logistics park in East Java.

Saudi Aramco expects to complete the expansion of an oil pipeline that runs east-west across the country by September, increasing the amount the Kingdom can ship from the Red Sea and avoid the increasingly tense Strait of Hormuz, reported Bloomberg.

The state oil company aims to finish the project

by September, increasing the line’s capacity to carry crude oil from five million to seven million barrels a day.

The link currently operates well below capacity, but the long-planned expansion will give the Kingdom the option to ship more oil from the Red Sea rather than the Arabian Gulf, bypassing the Strait of Hormuz.

About a fifth of the world’s oil production passes through the narrow seaway, but its vulnerability has been brought into focus in recent months as tensions between and the US and Iran escalated.

SOVEREIGN RATINGS AS OF 1 AUGUST 2019 Issuer

Foreign Currency Rating

Last CreditWatch/Outlook Update

1 Bahrain

B+/Stable/B

01-Dec-2017

2 Central Bank of Bahrain

B+/Stable/B

02-Dec-2017

3 Egypt

B/Stable/B

12-May-2018

4 Iraq

B-/Stable/B

03-Sep-2015

5 Jordan

B+/Stable/B

20-Oct-2017

6 Kuwait

AA/Stable/A-1+

20-Jul-2011

7 Lebanon

B-/Negative/B

04-Mar-2019

8 Morocco

BBB-/Negative/A-3

06-Oct-2018

9 Oman

(BB/Negative/B)

11-Oct-2017

10 Qatar

AA-/Stable/A-1+

08-Dec-2018

11 Saudi Arabia

A-/Stable/A-2

17-Feb-2016

12 Abu Dhabi

AA/Stable/A-1+

02-Jul-2007

13 Ras Al Khaimah

A/Stable/A-1

05-Dec-2018

14 Sharjah

BBB+/Stable/A-2

27-Jan-2017

Copyright © 2019 S&P Global Ratings. All rights reserved.

bankerme.net

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MARKETS

FAIR ECONOMIC STABILITY

T

he economic outlook of the Gulf Cooperation Council (GCC) countries remains positive as governments are taking the lead to boost economic growth and improve consumer and investor sentiments despite challenging times. The growth in the GCC recovered to 2.2 per cent in 2018 but is expected at two per cent in 2019 after economies began slowing down as a result of their commitment to the recent organisation of the Petroleum Exporting Countries (OPEC) production-cut agreement.

Dr. Hussain Abusaaq, Chief Economist and Head of Research at KPMG in Saudi Arabia, has a positive outlook on the GCC economy amidst global challenges

Dr. Hussain Abusaaq

14

(Photo credit: David Steele/shutterstock.com)

In addition, expansionary fiscal policy will continue to drive non-oil growth, which has picked up modestly from 2.5 per cent in 2018 to 3.2 per cent this year after a contraction of 0.4 per cent in 2017, as stated by many international institutions.

However, global trade tensions are likely to hamper GCC growth indirectly.

The region may be impacted secondarily due to the possibility of a fall in global crude oil prices, a slowdown in trade and the logistics industries, tariffs on aluminium, and an outflow of capital. That said, the strong economic foundations of GCC economies are expected to absorb the shocks of a global trade war.

In 2018, the US Federal Reserve raised the federal funds target rate by 75 basis points and signalled more monetary tightening by the end of 2019. However, the Federal Reserve has sent signals of a slowdown in the pace of interest rate increases because of the weaker global economic environment in 2019 due to slow demands in China and Europe, policy uncertainty concerning Brexit, and trade tension. The current pause will help to prevent possible negative effects on economic growth due to risks from overseas.

Growth in the GCC recovered to

2.2% 2%

in 2018 but is expected at

in 2019

Meanwhile, monetary policy among the GCC members remains focused on stabilising the currency pegs to the US dollar. In 2018, key policy rates increased following a recent hike in the greenback.

The tighter monetary policy has had a negative effect on the GCC region by constraining the expansion plans of the governments, increasing borrowing costs, and weakening private sector growth. However, given the Federal Reserve’s shift toward a slower pace of rate hikes, borrowing costs are likely to stay lower for longer this year, leading to a boost in the region’s growth.

A FURTHER INCREASE IN POLICY RATES IN 2019, IN LINE WITH THE US FEDERAL RESERVE’S ACTIONS, MAY TIGHTEN FINANCIAL CONDITIONS AND PUT SOME PRESSURE ON CREDIT GROWTH, WHICH WILL EVENTUALLY HIT NON-OIL SECTORS.

Financial systems in the GCC have developed significantly in recent years, mainly due to banks, but there appears to be room for further progress, as stated by the International Monetary Fund. Financial soundness indicators suggest that the banking systems are well positioned, with strong capitalisation and adequate liquidity, and well equipped to absorb potential shocks. A further increase in policy rates in 2019, in line with the US Federal Reserve’s actions, may tighten financial conditions and put some pressure on credit growth, which will eventually hit non-oil sectors.

Overall, the banking systems in GCC countries remain steady and show improvement in their operating conditions. Despite some weakening, loan performance still remains strong, supported by a robust capital flow due to the recent increases in oil prices. Credit is expected to grow due to increased government spending , expanding economic activity.

Though the legacy of problem loans in recent years is still a challenge for the GCC banking sector, the percentage of non-performing loans is expected to remain steady by year-end. Besides, we do not expect any major shocks in the GCC banking system, which is expected to stay stable in 2019, as long as oil prices and the geopolitical situation remains steady.

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15

COVER INTERVIEW

FLYING THE BAHRAINI FLAG Jean Christophe Durand, CEO of the National Bank of Bahrain, discusses his strategy to position the national bank as a market leader not only in Bahrain but also amongst its regional peers

W

hat keeps you up at night at the moment?

There are two aspects that keeps me awake at night— the first is risk management. As a banker, risk management is always on your mind, as is low investment. Thus, having an efficient risk management system is of prime importance.

The second one—this doesn’t bother me so much—but it's a concern for the long term. NBB strives to lead the market in Bahrain. Hence, the bank needs to be aware of what the market requirements are, which products and services are being provided elsewhere, but not replicating without researching the viability of the products in Bahrain.

If the bank adopts different banking products from the UAE, the UK or Italy, we should be in a position to know if we can replicate the product andevaluate if the product or service will be compatible with the local market.

Banking products from other markets may be important to our clients, and some products makes operations more efficient. However, this creates questions such as, “Are we keeping up? Are we still

16

doing the right thing? Are we adapting fast enough but not too fast?”

The banking sector is also moving quickly not only in terms of adaptation but also in terms of size. Consolidations, bank sizes compared to the operational environment, as well as areas of growth, are important aspects that, as a national bank, we try to assist in terms of areas of economic growth to enable us to come up. However, it’s not an immediate risk but it is something that we should consider because growing and developing the bank is good, and adapting technology is key.

In terms of strategy, the questions that come to my mind are: “Going forward, does the bank need to develop a completely new proposition? Do we need to associate with an industry that is completely different from ours?” NBB is open for consolidation, we have a 29 per cent stake in Bahrain Islamic Bank and we are weighing whether to increase the stake, although the plans have been delayed. The idea is that as a national bank working in Saudi Arabia or other huge cooperates, we need a bank with an Islamic financing capacity or either we create one or create more synergies with this bank.

YOU OFTEN HEAR PEOPLE SAY THAT THEY DO NOT WANT BRANCHES ANYMORE—IN THE GCC REGION THAT COULD BE TRUE IN THE NEXT 10 YEARS.

Jean Christophe Durand

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17

So, the bank is open to ideas because we understand by growing, we can improve the efficiency, increase growth, and increase our client intake, and at the end of the day we need something bigger.

How do you plan to increase NBB’s presence in the UAE and Saudi Arabia?

NBB currently has two branches in Riyadh and the UAE. We plan to leverage the bilateral trade and business relations between Bahrain and its neighbours to increase our presence in the region.

NBB is looking forward to diversifying through strategic expansion in regional markets. As a Bahraini bank, NBB has a real advantage in regional countries leveraging long-held relationships.

Similarly, having been strong in the local market, NBB plans to replicate the local model and use its vast infrastructure and headcount to succeed in the regional markets. Both Saudi and the UAE-based banks are regionally active compared to NBB. So we have ambitious expansion plans and aim to have Saudi Arabia represent about 20 per cent of our profits, however, since we are coming from a very low point this plan will take some time.

There are few Bahraini banks present in the UAE and Saudi Arabia, and we plan to be more active in those markets through increasing our client base, grow our services in line with what we do here in the local market, expand our in trade finance business, offering digital services and more importantly service the corporate industry until we are established enough to venture into retail banking.

Tell us more about NBB’s three-year business plan?

The three-year business plan is based on the bank’s transformation efforts. We are in the first year of a three-year business plan that is about modernisation, more participation in the local economy, as well as support for SMEs, larger financial projects and corporates.

THE NATIONAL BANK OF BAHRAIN SEEKS TO CREATE NEW BUSINESSES BY BEING MORE ACTIVE IN TRADE FINANCE, STRUCTURED FINANCE AND DEBT CAPITAL MARKETS. — Jean Christophe Durand, CEO, National Bank of Bahrain

The National Bank of Bahrain seeks to create new businesses by being more active in trade finance, structured finance and debt capital markets. We also want to be more proactive in advising clients on forex trade. These will be new products that we plan to offer.

NBB was not sufficiently involved with clients and now we want to know our clients better so that they remember the bank as top of the market in Bahrain.

In other markets, we plan to partner with an international bank to provide our services. In corporate banking, we aim to be able process transactions in the local market and lead syndication when companies start borrowing. Thus, the bank’s biggest area of change will be full services including lending and advisory to corporates and SMEs.

Give us an insight on the current economic landscape in Bahrain.

The economic growth in Bahrain in the last few years has been sustainable. In 2017, the Kingdom reported the strongest growth in the GCC. The economic growth in Bahrain was assisted by several government projects, infrastructure developments as well as industrial sector projects.

However, in spite of the downgrades from rating agencies late last year, I can still say that the future is promising.

The Bahraini Government has introduced several financial and fiscal reforms which are accompanied by financial aid from Kuwait, Saudi Arabia, and the UAE. The financial aid by these GCC allies has been very well-perceived in the markets due to its credibility and investors have confidence that it is feasible.

Bahrain has started implementing some fiscal reforms in the form of subsidies, value added tax (VAT) and reduction of incentives service. The fiscal reforms were well-received—not only in global markets, but to all communities in the Kingdom. This is because extensive consultations and dialogue were conducted at all levels with the business community, the parliament and decision makers.

The local credibility of Bahrain’s fiscal reforms is important because it means that the package will work and that it is going to be relevant. The local response to the fiscal reforms has had a strong, immediate effect as noticed in the way rating agencies are contemplating a potential upgrade of the Kingdom’s credit rating, as well as a major overhaul expected in markets. These indicators are a positive for the economy as the inflow of funds mean expansion of some of the projects that are currently underway, which means business for the banks.

Last year was a difficult period and the difficulties were more on the financial side of things than they were economical, but with these fiscal reforms and financial aid package,

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19

COVER INTERVIEW

a rebound is expected. We are cautiously positive that major projects will continue in the region. In Bahrain a number of infrastructure projects such as the metro system and the King Fahd Causeway are progressing according to plan—it is a good mix and it is important for the future of the country.

What opportunities do you presently see for the bank?

The bank sees opportunities in expanding its regional footprint, increase clients, corporate and investment banking business as well as improving our products and creating partnerships. The bank also aims to increase its operations in Bahrain but it’s not going to be total game changer if we are to become more active, especially in Saudi Arabia and the UAE. The National Bank of Bahrain is recognised as a pillar of the Kingdom’s banking industry and it is our primary objective to further consolidate this position by providing an even broader range of services and solutions to serve all our clients better and become their bank of preference.

What are your plans on the tech side of things?

NBB hired a new team to pursue its digitalisation strategy. We aim to lead in digitalisation without creating a separate bank, therefore we are digitalising processes, services as well as touchpoints where clients interact with the bank. The digitalisation drive is NBB’s in-house strategy, however the bank is working on technological transformation with consultancy firms, and the strategy is based on the bank’s objective as well as our current clients and those the bank seeks to attract.

As a national bank, NBB aims to lead the market in digitalisation to appeal to a younger generation. Hence, the challenge is not purely to grow but also to attract clients. The bank is opening digital branches in Bahrain. These digital branches are different from the traditional

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SEVERAL COMPANIES HAVE RECENTLY GONE PUBLIC— ADVENTUROUSLY SOME PRIVATE GROUPS, AS WELL AS FAMILY OFFICES ARE LISTING ON THE STOCK MARKETS, AND THAT IS THE NEXT FRONTIER. — Jean Christophe Durand, CEO, National Bank of Bahrain

walk-in branches, in that bankers are more like advisers on clients’ accounts, financing and investment, with the operations conducted in the form of a machine.

Similarly, you often hear people say that they do not want branches anymore—in the GCC region that could be true in the next 10 years. As a national bank we need to ensure that there is a convergence of digital and conventional banking in our service offerings.

Bahrain has a more active capital market compared to its regional peers.

What are your thoughts?

There is more to be done. While governments and GREs are active, it is encouraging to see corporates actively

What are your plans for family offices in Bahrain?

We have reaffirmed our strong commitment to the development of the local economy, which remains at the core of the bank’s strategy and in which NBB has a special role to play. As a national bank, we plan to enter into partnerships to serve family offices, wealth individuals and high net wealth individuals (HNWI).

We know our clients, we have access to our clients, and the bank understands their requirements. The right move will be to compliment them with the right products in compliance with market regulations.

The bank is well-positioned and family offices is a sector we have not yet served. However, as a national bank and with the reach we have in Bahrain, it is a market that we should be active in.

NBB also plans to extend its footprint into other GCC markets that the bank is present, to gain market share in serving this group of clients and in cases like these, partnerships is key.

National Bank of Bahrain plans to open digital branches across the country, where bankers act as financial advisers and operations be conducted through a machine.

participating in the debt capital market.

The development in this space is a positive sign—there is also some activity on the stock exchange, and it is another sector which needs acceleration. Several companies have recently gone public, adventurously some private groups, as well as family offices are listing on the stock markets, and that is the next frontier.

Bahrain leads in terms of creating ideas—it was the first to establish a financial hub regionally—so the Kingdom should aim to maintain that success because it’s not a large market; if it gets replicated somewhere, it will be 10 times bigger.

Bahrain needs to be at the forefront and in that perspective it will be interesting to see private groups tapping the local market.

NBB IS OPEN FOR CONSOLIDATION, WE HAVE A 29 PER CENT STAKE IN BAHRAIN ISLAMIC BANK AND WE ARE WEIGHING WHETHER TO INCREASE THE STAKE ALTHOUGH THE PLANS HAVE BEEN DELAYED. — Jean Christophe Durand

What risks do you expect NBB to encounter in the next 18 months?

NBB aims to become the market benchmark in terms of compliance with regulations, corporate governance and risk management, this is one of the bank’s main changes and transformational goals.

In the last two years the bank has built a strong risk department. Risk is not only credit risk but also includes cyber threats, market risk, liquidity risk and reputational risk—all these risks need to be managed.

Today for instance, a bank can be hit, and although credit risk is important, reputational risk and compliance is more important.

Market risk causes losses, as do credit risk, cyberrisks and reputational risk, so banks need to be on top of managing these as well as to stay disciplined and technically accurate in conducting their daily banking business. Risk management is therefore key for the future.

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COUNTRY FOCUS

THE TROUBLED PALESTINIAN TWINS The Palestine territory is suffering from dwindling donor support, a precarious domestic political impasse, a stifling security situation and a burgeoning humanitarian crisis

22

Estimated at

$2.4 billion 15%

T

he Palestinian economy is divided into two different halves just like the territory itself, where financial and economic accomplishments in the West Bank are erased by its troubled twin in the Gaza Strip. According to COFACE the structure of the Gaza Strip and West Bank economies, which was essentially similar until the early 2000s, will continue to move in different directions in 2019.

Longstanding constraints continue to act as a hindrance to economic growth., While the West Bank is seeing promising expansion, sharp declines in Gaza have weighed heavily on both sides.

The World Bank said that while growth, although weak will be significant in 2019, the overall Palestinian territory result will conceal substantial differences with the West Bank estimated to record a 2.2 per cent growth, while the Gaza Strip is expected to continue its recession because of the economic blockade imposed on the region.

annually,

of Palestine’s GDP, Clearance revenues are the backbone of the Palestinian Authorities’ budget Source: Carnegie Endowment for International Peace

Palestinian Authorities (PA) have pointed to the Israeli occupation as the single biggest impediment to the growth of their economy, along with its restrictions on the movement of people and goods, unpredictable delays, confiscations of property as well as lack of natural resources.In a 2019 economic forecast report, the Palestine Monetary Authority (PMA) stated that slowdown in the performance of the economy has continued throughout the previous years because of political and economic developments and change, which has had a negative impact on key economic drivers, weakening economic activity.

The Palestine territory is suffering from dwindling donor support, a precarious domestic political impasse, a stifling security situation and a burgeoning humanitarian crisis, just to mention a few.

In June 2019, a group of finance ministers and business elites from Europe, Israel and the Arab world gathered in Bahrain to discuss Jared Kushner’s ‘Middle East peace plan’.

The who’s who of the European Union and Arab world together with their US counterparts sought to promote the allegedly imaginative interventions to transform the Israeli-Palestinian conflict,

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23

COUNTRY FOCUS

The Palestinian banking industry is seeing arguably more progress than any other sector.

a plan which purportedly fell flat after a boycott from the Palestinians, who distanced themselves from the Trump administration brand since the White House’s decision to move the US Embassy to Jerusalem from Tel Aviv in recognition of the former as the capital of Israel.

THE BANKING INDUSTRY The PMA continues to strengthen its Arab, regional, as well as international relations in order to reinforce links between the Palestinian banking sector and its international peers. The aim is to fend off risks and concerns surrounding

24

THE STRUCTURE OF THE GAZA STRIP AND WEST BANK ECONOMIES, WHICH WAS ESSENTIALLY SIMILAR UNTIL THE EARLY 2000S, WILL CONTINUE TO MOVE IN DIFFERENT DIRECTIONS IN 2019.

— COFACE

the country’s banking sector due to the prevailing instability in the country.

The regulator’s continued efforts to strengthen financial inclusion through researches and specialised economic, banking and financial reports have proved to positively impact the financial indicators of Palestine’s banking sector. Additionally, the PMA’s quest to strengthen financial inclusion also saw a significant improvement in liquidity levels amongst banks and this coincided with an increase in assets as well as strong public confidence in a safe and stable banking sector.

The banking industry is possibly seeing more progress than any other sector in Palestine. The IMF said that a new higher limit on transferring shekel cash from the West Bank to Israel, in place since late 2017 should help banks in the West Bank to better manage their liquidity. The monetary authority also called for the replenishing of banks’ capital buffers to a minimum of $75 million and progress towards implementing Basel III regulator y requirements which are important steps to safeguard the banking system.

The Palestinian regulator also helped steer a restructuring of affected loans last year, representing about five per cent of system-wide credit to the private sector.

DIGITALISATION S&P Global Ratings predicted that the fintech scene in the Middle East was likely to benefit from more regulatory easing and support, especially in the form of sandboxes. The PMA recently launched its own sandbox jumping on the bandwagon with other governments across the Middle East. According to Azzam Shawwa, the Governor of the PMA, the monetary authority is following in the footsteps of regulators in the UK, Australia and Singapore by creating its own fintech sandbox.

Palestine has a handful of fintech companies, most prominent of which is PalPay, a mobile payments company that is a joint initiative of the Bank of Palestine and Palestinian tech firm, PCNC IT Solutions.The sector also made significant strides towards digitalisation, with the PA vowing to establish a fintech innovation lab curtesy of generous funding from the Government of India.

H o w e v e r, t h e t e r m i n a t i o n o f correspondent banking relationships (CBRs) by Israeli banks could have a significant economic impact on the Palestinian territories due to the highly interlinked structure of the two banking

A NEW HIGHER LIMIT ON TRANSFERRING SHEKEL CASH FROM THE WEST BANK TO ISRAEL, IN PLACE SINCE LATE 2017 SHOULD HELP BANKS IN THE WEST BANK TO BETTER MANAGE THEIR LIQUIDITY. — IMF

systems and the use of Israeli Shekel as the primary currency in the Palestinian economy. According to the World Bank, key Israeli banks signaled plans to limit or terminate correspondent banking services to Palestinian banks, citing money laundering and financing of terrorism concerns.

Israeli-Palestinian CBRs remains intact but has recently been strained by the two authorities’ diverging positions. The PA is preparing for a comprehensive evaluation of the World Bank Group’s (WBG) antimoney laundering and combatting the financing of terrorism (AML/CFT) regime which is expected to commence in 2020.

While the banking sector remains generally sound, the frail economy and fiscal position add to vulnerabilities.

The IMF stated that Palestine’s banking sector profitability and liquidity remains comfortable although it has declined over the past few years. According to WBG, while banks’ direct lending to the PA remains comfortably below the regulatory limit, the IMF said that they have a similar level of additional exposures to the PA via credit to PA employees and holdings of promissory notes.

The lenders’ overall exposure to the Palestine territory remains high, reflecting direct financing and indirect (lending to employees and suppliers) that continues to be an issue that adversely impacts the performance of Palestine lenders.

THE PEACE TO PROSPERITY In June 2019, Senior White House adviser and President Donald Trump’s son-in-law, Jared Kushner, proposed a $50 billion package designed to boost the Palestinian economy, presenting a vision of regional prosperity that remains contingent on an Israeli-Palestinian peace agreement.

The Trump administration’s $50 billion economic formula for Israeli-Palestinian peace—which was presented at the Peace to Prosperity Workshop in Manama—stated that an investment programme for the Palestinians was a precondition for ending the decades-old conflict. Although no Palestinian or Israeli representatives attended the workshop, Washington hoped that wealthy Gulf Arab states will show a concrete interest in the plan which expects donor nations and investors to contribute $50 billion to the Palestinian territories, Jordan, Egypt and Lebanon.

While the Trump administration’s proposal details its 179 target projects remain, it does not include any guaranteed economic assistance to the ailing Palestinian economy nor any financial pledges from assumed Middle East-based companies or regional governments.

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COUNTRY FOCUS

The engineers of the ‘Deal of the Century’ theoretically assume that their economic formula will stimulate a discussion about the economic possibilities of regional peace and add pressure on Palestinians to seriously consider a peace agreement with Israel in light of the economic possibilities.

Additionally, the much anticipated but still unreleased Middle East peace plan which called for a mix of public and private financing intending to create at least a million new jobs for Palestinians, is said to be lacking practicalit y by virtue of leaving out Israel and Palestine, the two main protagonists.

According to a Bloomberg report, the plan calls for projects worth $27.5 billion in the West Bank and Gaza and $9.1 billion, $7.4 billion and $6.3 billion for Palestinians in Egypt, Jordan and Lebanon respectively.

The PMA stated that the country’s economic challenges are expected to overshadow the economic prospects, especially if the political stalemate counties to linger on causing more pressure on economic activity.

EMPTY COFFERS The PA is facing a crippling financial crisis due to the tax revenues withheld by Israel and the decline of donor countries.

Carnegie Endowment for International Peace stated that in February 2019, the Israeli Government withheld $138 million of the Palestinian tax and customs money—clearance revenues (CRs)— that it collects on behalf of the PA and transfers monthly to the Palestinian coffers, in accordance with the 1994 Paris Protocol.

Estimated at $2.4 billion annually (15 per cent of GDP), the CRs are the backbone of PA’s budget and they account for 65 per cent of total PA revenues, covering over half of government expenditures. According to the IMF, the withholding of clearance revenues under new Israeli legislation is

26

The relationship between the US administration and the PA deteriorated further when President Trump announced the US’ decision to recognise Jerusalem as Israel’s capital as well as the shifting of the US embassy.

THE SLOWDOWN IN THE PERFORMANCE OF THE ECONOMY CONTINUED THROUGHOUT RECENT YEARS DUE TO POLITICAL AND ECONOMIC DEVELOPMENTS AND CHANGE, WHICH HAS A NEGATIVE IMPACT ON KEY ECONOMIC DRIVERS AND WEAKENS ECONOMIC ACTIVITY. — Palestine Monetary Authority

seriously undermining the already fragile fiscal situation in the Palestine territory.

The Anti-Terrorism Clarification Act (ATCA) passed by the US Congress and then signed into law by President Donald Trump in 2017, indirectly supported the nipping of the PA’s international financial aid.

According to media reports, following the signing of ATCA IN 2017, the US Agency for International Development (USAID) ceased all assistance to Palestinians in the occupied West Bank and Gaza. The agency spent $268 million on public projects in the West Bank and Gaza as well as Palestinian private sector debt repayment in 2017.

Earlier in January in 2018, the Trump administration had made drastic cuts to its contribution to the UN agency for Palestinian refugees (UNRWA). The US was the largest donor to UNRWA, giving more than $360 million in 2017.

A FAMILY AFFAIR The ongoing closure of the Gaza strip, the partial closure of commercial border crossing to Gaza, and the political tension in the Gaza strip is also expected to further impede economic growth for 2019.

Additionally, the continued land seizure and settlement expansion in the West Bank, together with difficulties put in place by Israel authorities to stop the use of resources available to the Palestinian people worsens the humanitarian crisis in the Palestine territory. Gaza is suffering disproportionately, with its economy shrinking and unfolding humanitarian catastrophe, said the IMF. Similarly, the continued internal schism and hinderance of the Palestinian reconciliation efforts is also weighing on the economic growth in the Palestinian territory. The IMF said that the FatahHamas reconciliation is off-track and associated reunification plans, including contingency budgets and institutional mergers, have stalled.

The stand-off between Fatah-Hamas has led the PA to continue with a partial withholding of payments of salaries and allowances to PA employees in Gaza.

The intensified mediation efforts by the UN, Egypt and other parties, have yet to bear fruit.

The West Bank is not immune to pressures in Gaza, particularly due to the active financial connections. While the West Bank has seen promising economic growth, sharp declines from its twin, the Gaza strip, will continue to weigh heavily on both sides and the current longstanding constraints such as land seizures, crippling financial conditions and the Israel occupation, will continue to act as a barrier to economic growth.

COUNTRY FOCUS

PALESTINE in numbers GDP-COMPOSITION BY SECTOR OF ORIGIN

POPULATION

4.56

2.9%

19.5%

million

1m

5m

Source: World Bank (2018)

MEDIAN AGE

19.6

years

Source: Worldometers (July 2019)

UNEMPLOYMENT RATE

31% (2018) REAL GDP GROWTH 2.9%

2.3%

2.9% (2017) 2.3% (2018) 1.9% (projected 2019)

Source: World Bank

INFLATION (GDP deflator, )

0.9% (2017) 0.7% (projected 2018) 3.2% (projected 2019 Source: IMF

Source: CIA World Factbook

Note: excludes Gaza Strip

STOCK OF BROAD MONEY

$2.901 billion (31 Dec 2017 est.) $2.538 billion (31 Dec 2016 est.)

Source: CIA World Factbook

Source: World Bank

1.9%

77.6%

2.9% (2017 est.)

19.5% (2017 est.)

77.6% (2017 est.)

agriculture: industry: services:

STOCK OF DOMESTIC CREDIT

$2.041 billion (31 Dec 2017 est.) $1.712 billion (31 Dec 2016 est.)

Source: CIA World Factbook

CURRENT ACCOUNT BALANCES

-$1.444 billion (2017 est.)

-$1.348 billion (2016 est.)

Source: CIA World Factbook

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INSURANCE

MITIGATING RISK FOR THE UAE Banker Middle East sits down with Massimo Falcioni, CEO of Etihad Credit Insurance, to discuss the agency’s aims and goals a year after its launch

W

ith an aim to drive export and import activity in the country, what does ECI have in the pipeline for 2020?

Etihad Credit Insurance’s (ECI) goal is to support $3 billion exports and re-exports of UAE-based non-oil companies by the end of 2019, inline with the UAE Vision 2021 agenda. We hope to achieve this by educating the market on how to use the guarantees, by partnering with all the Chambers of Commerce and Industry in the UAE as well as by partnering with the Ministry of Economy.

To date, we have already partnered with the Abu Dhabi Chamber of Commerce and Industry, Dubai Chamber of Commerce and Industr y, RAK Chamber of Commerce and Industry, Fujairah Chamber of Commerce and Industr y and Sharjah Chamber of Commerce and Industry. We have created workshops for members of these organisations to educate them on how to secure coverage from ECI. We are also in talks with, Ajman Chamber where we intend to start implementing

28

these workshops to educate on the policies and guarantees to the members (UAE businesses).

What kind of challenges have you had to face thus far?

We have experienced a lot of interest.

During our start-up phase, the first initiative that we put in place was the customer voice project. This was very crucial for the establishment of ECI. We collaborated with the Chambers in Abu Dhabi, RAK, and Dubai, where the ECI team interacted with a diverse group consisting of 60 manufacturers, entrepreneurs, and exporters in order to understand their challenges.

The recommendations put forth by this group were further analysed and studied to identify the key areas of support. This categorisation put ECI on the right path to generate a suitable sample based on the ECI team’s interaction with another set of 80 entrepreneurs globally as well as by comparing the local and global scenarios. The cumulative responses later helped us to gain a deeper understanding

of the challenges faced by the exporters.

We used this information to create customised solutions based on their prevailing requirements that ranged from accessing new markets, investing abroad, to protection from existing customers.

Furthermore, our objective was to make UAE start-ups aware of the challenges and opportunities in the export credit and trade insurance sectors. Thus, the National Accelerator Programme was formed to motivate and educate them. In January this year, we celebrated the successful completion of this training programme by certifying nine UAE Nationals and absorbing them into our organisation.

How did you address the aforementioned challenges and how do you see this developing going into 2019?

ECI has a clear-cut mandate in 2019: to be fully operational and to connect with various industries in the marketplace through interactive workshops, sessions, and educating the UAE businesses about ECI’s solutions to support their growth and expansion plans.

(Photo credit: Cara-Foto/shutterstock.com)

The year 2019 is predicted to be a challenging year for the global economy. In order to manage the risks of the insured UAE businesses, it is crucial to understand the nature of the challenges and risks. ECI’s role is to mitigate the risks and stabilise the country’s development, especially the non-oil sectors by facilitating trade and investment, access to funding for local businesses thereby reducing the gaps in the marketplace. In short, ECI believes that a strong credit agency corresponds to a strong economy that in turn equates to a strong country.

Where do you see opportunities for ECI to tap into?

The opportunities that we foresee for ECI is in tapping the existing gaps in insurance penetration in the marketplace. In terms of a specific sector, manufacturing is one of the least insured. ECI understands that the reason behind these gaps is a lack of understanding about the needs and requirements of the manufacturing sector.

Overall, there is a dearth of knowledge on the risk associated with trade and exports. This presents a great opportunity for ECI to generate confidence among the insured by protecting them against the risk associated while accelerating the development to increase the exporters’ turnover. Thus, contributing to a stable economic environment in the UAE.

THERE IS A DEARTH OF KNOWLEDGE ON THE RISK ASSOCIATED WITH TRADE AND EXPORTS. THIS PRESENTS A GREAT OPPORTUNITY FOR ECI TO GENERATE CONFIDENCE AMONG THE INSURED BY PROTECTING THEM AGAINST THE RISK ASSOCIATED WHILE ACCELERATING THE DEVELOPMENT TO INCREASE THE EXPORTERS’ TURNOVER. — Massimo Falcioni What is the relationship between ECI and the banking system in the UAE? Etihad Credit Insurance can be classified under the state guarantees and we endeavour to support local banks by offering guarantees that will ease the process of lending and avail access to funding, especially to the SME sector. According to the advanced risk management measures methodology, banks can reduce their technical reserves by 20 per cent if they lend to their customers; provided this risk is mitigated by an insurer with a specific rating and policies that are not captive or owned by the bank.

ECI and the banks are engaged in a close partnership. We endeavour to support the banks in three categories, namely lowering trade receivables of the customer; protecting banks against their factoring solutions; helping banks while issuing surety bonding, performance bonds, etc. by issuing guarantees to the customer (UAE businesses). This will encourage the banks to provide loans, which will be a great relief to the customers (UAE businesses).

To sum up, ECI is focused on supporting the steady development of the banking sector in the UAE, and they are dedicated to supporting local, conventional, international and Islamic banks under Shari’ah-compliant window of solutions offered through ECI. Having operated for about a year, how far has ECI come in reaching its targets?

ECI has been ambitiously moving towards its mission of supporting and developing the UAE’s non-oil exports, trade, investments, and strategic sectors. Right from the inception in 2018, ECI has encouraged the UAE businesses to expand regionally or internationally and has built comprehensive platforms in various sectors across government, insurers, reinsurers, banks and lenders, regional and international export credit agencies, and trade promotion agencies.

In our first year of operations, we ensured completion of our structural set-up that began from hiring resources, setting up departments, process alignments, internal

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29

INSURANCE

ACCORDING TO THE ADVANCED RISK MANAGEMENT MEASURES METHODOLOGY, BANKS CAN REDUCE THEIR TECHNICAL RESERVES BY 20 PER CENT IF THEY LEND TO THEIR CUSTOMERS, PROVIDED THIS RISK IS MITIGATED

BY AN INSURER WITH A SPECIFIC RATING AND POLICIES THAT ARE NOT CAPTIVE OR OWNED

BY THE BANK. — Massimo Falcioni, CEO, Etihad Credit Insurance

Massimo Falcioni

and external company’s procedures as well as outlining the solutions that will be catered by ECI. By October last year, in a record time of 11 months, we officially launched Etihad Credit Insurance.

Our first mission to Italy was spearheaded by the HE Eng. Sultan bin Saeed Al Mansoori, UAE Minister of Economy and Deputy Chairman of ECI that concluded with a successful partnership with SACE, the Italian Export Credit Company (CDP Group). To strengthen our portfolio and boost cross-border investment opportunities, we further partnered with key export credit agencies such as the Islamic Corporation for the Insurance of

30

Investment and Export Credit (ICIEC), UK Export Finance and Export Credit Insurance Corporation (ECIC) and the South African Export Credit Agency.

Furthermore, to drive in more economic-trade activity and support local businesses to expand regionally and internationally, ECI joined hands with Chambers of Commerce in the UAE, including Abu Dhabi, Dubai, Fujairah, RAK, and Sharjah Chamber. Educational workshops and seminars on strategic support towards exports and re-exports were conducted at Abu Dhabi Chamber, Dubai Chamber, RAK Chamber, and Sharjah Chamber.

ECI went on broadening its portfolio by developing notable collaborations with First Abu Dhabi Bank (FAB), RAK Bank, Emirates Development Bank, Abu Dhabi Commercial Bank, Standard Chartered Bank, Emirates NBD and Natixis, in order to create seamless access of trade credit solutions and funding. For mutual cooperation to design and deliver conventional and Shari’ah-compliant trade-credit insurance solutions and support the non-oil export trade, international entities such as the Arab Investment & Export Credit Guarantee Corporation (Dhaman) and Markel International and Jordan Loan Guarantee Corporation were initiated.

Broadening the landscape of partners to develop trust amongst the trade companies, we partnered with Berne Union and Aman Union to access the network of government-backed official export credit agencies. ECI also awarded contracts to leading entities such as Tinubu Square, Fitch Solutions, EY and Coface to gain market intelligence and avail operational support for global trades.

To conclude, ECI is considering various collaborations to continue to grow its network to provide the best of tailormade solutions thereby contribute to the sustainable growth and development of the UAE economy.

S U P P O R T E D BY

O R G A N I S E D BY

NOMINATIONS ARE NOW OPEN! 26 NOVEMBER 2019

The Ritz-Carlton, DIFC, Dubai, United Arab Emirates Award Categories • Best Bank in the Middle East • Banker of the Year • Lifetime Achievement Award • Fastest Growing Bank • Best Retail Bank • Best Islamic Bank • Best Corporate Bank • Best SME Bank • Capital Market Transaction of the Year • Most Innovative Digital Banking Proposition • Best Insurance Provider • Best Takaful Provider • Best Investment Bank – Conventional • Best Investment Bank – Islamic • Best Private Bank • Best Wealth Management Firm

Join over 400 senior banking and finance officials from across the Middle East as we honor the outstanding institutions that shape the region’s financial landscape.

• Best Investment Management Firm • Best Private Equity Firm • Best Trade Finance Institution • Best Brokerage Solutions Provider

Now in its 20 year, the Banker Middle East Industry Awards programme is recognised as the most prestigious banking accolade celebrating financial excellence across the MENA region.

It acknowledges pioneering developments, innovative banking solutions, and achievements in the financial services industry. th

We encourage you to select your categories and send in your nominations to awards@bankerme.net by the 1st September 2019.

You are welcome to submit multiple entries.

• Best Law Firm – Banking & Finance • Best Law Firm – Private Equity • Best Research & Consultancy Firm • Best Ratings Agency • Best Islamic Ratings Agency • Best CSR Programme • Best Core Banking Service Provider • Best User-Experience Innovator • Best Cybersecurity Provider • Best Payment Solutions Provider

To learn more about the Awards process, please email: awards@bankerme.net

• Best Communications Infrastructure Provider • Best Commercial Bank

INSURANCE INFRASTRUCTURE FINANCING

EXPLORING OTHER AVENUES

It is time for the GCC to look beyond publicly financed infrastructure?

Johan Hesselsøe, Managing Director, Middle East & Africa and Tammam Al-Dandachi, Associate Director, Financing Group, Middle East & Africa, both at Atkins Acuity, a member of the SNC-Lavalin Group helps us answer this question

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he top-line numbers of the GCC infrastructure sector tell a story of a sector at the forefront of economic growth. As total active infrastructure projects have surged to $1.14 trillion, governments and developers' plans show no sign of slowing down, especially in the UAE and Saudi Arabia, with rail, metro, mega smart cities and smart infrastructure all on the table. The ambition of these plans has led to the need to think strategically about methods of infrastructure financing.

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While the infrastructure industry is an important pillar of economic growth, the region has broad priorities and tapping into alternative financing creates an opportunity to reduce the pressure on its’ fiscal positions allowing more flexibility to allocate spending to other socioeconomic areas and provide better infrastructure solutions such as efficient project delivery, provisions for innovative designs, and maintenance of highquality standards throughout the project lifecycle.

INVESTOR-FRIENDLY LEGAL AND REGULATORY FRAMEWORKS With governments seeking to encourage greater participation and investments by private establishments and companies in development projects, regulatory developments have gathered pace. Dubai issued its law governing public-private partnerships (PPPs) in 2015 and Saudi Arabia’s draft, which was put to consultation in 2018, is set to become law imminently as the Government prepares to launch infrastructure projects worth billions

(Photo credit: Ali Al-Awartany/shutterstock.com)

Total active infrastructure projects have surged to

$1.14 trillion in the GCC

of dollars and seeks to attract foreign investors. Amends to bankruptcy and relaxed pri vate owner ship rules in strategic sectors should also increase confidence among international players looking for investment opportunities.

Johan Hesselsøe

BY INTRODUCING PPPS AS A POTENTIAL PROCUREMENT MODEL FOR ITS INFRASTRUCTURE PROJECTS, THE REGION WOULD BE ABLE TO ATTRACT HIGHER PRIVATE SECTOR PARTICIPATION. — Johan Hesselsøe, Managing Director, Middle East & Africa, Atkins Acuity

TREND TOWARDS COLLABORATION We are witnessing increased innovation in the GCC infrastructure sector. As the rationalisation of project governance is moving forward, outmoded manual projects are being replaced by digitised and automated controls. Entry of new competitors, new technologies, realisation of the importance of private capital from institutional investors to bridge the funding gap and promising regulatory reforms are necessary to facilitate the delivery of major capex programmes, especially those related to mega projects.

I d e n t i f y i n g t h e a p p e t i t e f o r foreign investment, through PPPs and privatisation—both the UAE and KSA have made a concerted effort towards facilitating the flow of capital, and now is the time to further provide impetus to the idea of utilising alternati ve funding solutions and accessing global capital markets towards building the region’s infrastructure.

ALTERNATIVE FINANCING OPTIONS Other than oil and gas projects, there have been a relatively limited number of project bonds issued to capital markets to finance infrastructure projects in the GCC region. As green finance is likely to continue its growth momentum in the GCC with predictable pipeline of renewable projects, the development of a GCC project bond market is imperative.

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INFRASTRUCTURE FINANCING

Tammam Al-Dandachi

WHILE IT IS UNLIKELY PROJECT BONDS WILL COMPLETELY REPLACE BANK LENDING, WE EXPECT THAT GCC PROJECT SPONSORS WILL CONSIDER AN INCREASINGLY BROAD SUITE OF OPTIONS BLENDING BANK LENDING, PROJECT BONDS, GLOBAL MARKETS, AND PRIVATE EQUITY TO FINANCE INFRASTRUCTURE PROJECTS IN THE FUTURE. — Tammam Al-Dandachi, Associate Director, Financing Group, Middle East & Africa, Atkins Acuity

Project bonds open an alternative debt funding avenue to source financing for infrastructure related projects, and we expect project bonds to be an increasingly popular financing option for project sponsors in the GCC markets.

Project bonds offer long-term investors an attractive yield and significant credit spreads. Infrastructure companies are keen to expand their investor bases and, if this brings cost savings, they are even willing to attempt new structures.

These efforts are deepening the bond markets as many lower-rated issuers can raise funds.

While it is unlikely project bonds will completely replace bank lending, we expect that GCC project sponsors will

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consider an increasingly broad suite of options blending bank lending, project bonds, global markets, and private equity to finance infrastructure projects in the future.

By introducing PPPs as a potential procurement model for its infrastructure projects, the region would be able to attract higher private sector participation through the introduction of new technology and innovation in providing better public services through the improved operational efficiency.

PPPS TO DRIVE TRANSFORMATION: SAUDI, A NEW VISION Private participation enhances collaboration and Saudi Arabia today is

turning more towards private sector to help finance infrastructure projects as they bring in efficiencies with greater access to hybrid financial instruments and global markets, irrespective of the role they play in the supply chain or the project development lifecycle.

Earlier this year, HE Eng. Khalid Al Falih, Minister of Energy, Industry and Mineral Resources in Saudi Arabia announced that the Kingdom is seeking to attract SAR 1.6 trillion ($429 billion) in private sector investment over the next 10 years for an infrastructure and industrial programme. The plan aims to channel investments through the National Industrial Development and Logistics programme, which was established under the Vision 2030 programme. Plus, the establishment of the National Centre for privatisation and PPPs (NCP), and the issuance of the draft Private Sector Participation (PSP) law in Saudi Arabia are two important steps forward when it comes to establishing the necessary legal and regulatory frameworks to attract private capital for infrastructure financing.

With an ambitious economic transformation plan involving sizeable infrastructure projects, the Kingdom is planning to optimise its capital structure on infrastructure projects by continuing to leverage on the support provided by export-credit agencies (ECA) of the organisation for Economic Cooperation and Development (OECD) countries to local and regional commercial banks to finance projects. This trend will continue, and infrastructure projects will benefit from these associations.

PPPs play a critical role in achieving global scale and local impact. As the Gulf looks to seize the tremendous infrastructure opportunities, it becomes essential for the region to broaden its infra financing model, draw on international experience, leverage technology and innovation, and strengthen governance to ensure economic growth and sustainable development.

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ISLAMIC FINANCE

(Photo credit:Joat/shutterstock.com)

A CONTINUOUS BATTLE Islamic banks in the UAE have collectively recorded slower growth over the course of 2018. This is however in line with broader global trends on the back of volatility and lack of standardisation

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ISLAMIC FINANCE IN THE UAE rowth in financing amongst Islamic banks in the UAE continued to fall in 2018, in line with trends of its conventional counterpart.

Although it still benefitted from broader adoption, innovative structuring of Shari’ahcompliant products, as well as young and fast-growing, franchises in some Islamic banks, a research by Fitch Ratings have found that Islamic financing base reached 30 per cent of sector financing at the end-2018. Growth in Islamic deposits has slowed, and they make up 27 per cent of sector deposits.

Asset-quality metrics have also stabilised in 2018 but remained weak. The financing impairment charges-to-average gross financing ratio reduced and was in

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line with conventional banks as provisioning levels have already been built up. Operating profit/risk-weighted assets ratio improved in 2018 due to reduced financing impairment charges, however it remained slightly below conventional banks. Cost-to-income ratios have also reduced but remains significantly above conventional banks. This is mainly due to larger branch networks for the size of the banks’ franchise.

In terms of liquidity, the gross financing/ deposits ratio increased slightly to 93 per cent at the end of 2018 due to higher financing growth than deposit growth and was 140bps above conventional banks.

According to Fitch, Islamic banks continue to be mainly domestic deposit-funded (84 per cent of total funding; higher than conventional banks).

Capital ratios have also increased over the past three years due to lower financing growth with reasonable internal capital generation and a small number of rights issues. Total capital adequacy ratios are now in line with conventional banks, while core capital ratios remain below those of conventional banks although the difference has narrowed significantly.

GLOBAL METRICS The Islamic finance industry witnessed a slight dip in 2018. It grew by approximately two per cent last year, compared to the 10 per cent it recorded in 2017. According to estimates by S&P, most of this growth stemmed from large Sukuk issuances by GCC countries, however, this was followed

by a five per cent decline in issuances in 2018. Nevertheless, the industry is still bound to see some growth albeit gradually through 2019 and 2020. Key incentives such as global standardisation, fintech and environmental, social and governance (ESG) opportunities, continue to be key drivers to accelerate growth in the next few years.

Standardisation in Islamic finance structures and contracts has always been an issue for the industry. Uniformity in Shari’ah interpretation and legal documentation would go a long way in simplifying Sukuk issuances and increasing its appeal to potential issuers.

Standardisation should include the capacity to understand an investor’s risks related to their instruments and

avoid situations where they lose money due to a different interpretation of the legal provisions of a Sukuk contract.

In this sense it should also factor in the requirements of the market whilst creating room for innovation. The ultimate goal is to have the process of issuing a Sukuk equivalent from a time, effort, and price perspective to issuing a conventional bond.

The UAE continues to progress on Islamic banks regulations. Federal law No. 14 of 2018 established a Higher Shari’ah Authority, which operates under the umbrella of the UAE central bank and oversees Shari’ah compliance. Islamic banks must now adhere to Shari’ah standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and produce a gap analysis between current practises and AAOIFI standards by mid2019, followed by an impact assessment before year end.

Another factor that is believed to help accelerate growth in Islamic finance is fintech. A prerequisite for fintechs to effectively contribute to the Islamic finance industry is an adequate physical infrastructure facility as well as the implementation of the necessar y super vision and regulatory framework within. Fintechs are expected to stimulate growth by increasing efficiency and providing greater accessibility of Islamic finance ser vices. Apart from easing and speeding up transactions, through blockchain technology, transactions also have better traceability, reducing the industry’s exposure to security risks or identity theft. Fintech also helps improve governance—regulator y technology equips the industry with more robust tools for compliance with regulations and Shari’ah requirements (provided agreed Shari’ah standards are in place).

Since the UN rolled out its Sustainable Development Goals, issuers and investors have become more

sensitive to ESG issues. Regulators and policymakers around the world have begun to establish a more sustainable and socially responsible financial system, and this is where Islamic finance and sustainable finance finds its common ground. Apart from Shari’ah-compliant instruments supporting environmentally friendly projects, the social aspect of ESG opportunities has been overlooked.

Although the underlying principles and instruments exist, they have not been leveraged in a transparent, systematic manner. According to S&P, this could be because Islamic banks, as issuers themselves, do not appear to focus on their own social performance. From the perspective of financing activities, the lack of visibility of the social factor is underpinned by commercial interests, including financial performance. Socially responsible products do exist in Islamic finance and their size is reportedly substantia and these products could make a difference when it comes to socially responsible financing. However, a proper governance framework for their use will be required to reach this objective.

OUTLOOK Fitch Ratings expects asset-quality metrics for UAE Islamic banks to remain under pressure throughout the year, particularly for banks with weaker and younger franchises. Growth in financing is likely to be slightly above mid-single digits. Shari’ah standardisation should lead to greater market confidence but implementation and adoption risks remain, particularly in realigning existing products and processes, governance requirements and reporting procedures.

Analysts are not expecting a significant rebound this year due to volatility in major factors including oil prices and geopolitical risk. However, as the economic cycle turns, a low-single-digit growth rate is expected in Islamic banking assets over the next two years.

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SUSTAINABLE FINANCING

CREATING A FUTURE THROUGH SUSTAINABLE FINANCING

ESG factors have now become a priority for corporate and individual investors alike. Standard Chartered has demonstrated consistent commitment to the cause. The bank’s Regional CEO for Africa & the Middle East, Sunil Kaushal, helps shed light on these initiatives

A Sunil Kaushal

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mix of community awareness and public policy reform have made sustainability a focal point for international banking and the broader industrial and commercial settings of most economies. Environmental, social and governance (ESG) factors have become prime considerations for business, and the business bottom line is no longer composed of mere financial considerations. There is a growing international consensus that sustainability considerations must be at the forefront of all decision making, as our medium to long term wellbeing depends on a healthy environment supported by sustainable economic and social development.

Climate change has been described as the key challenge of our time. It’s the cause of rising temperature, land and sea erosion and salinity. To combat this, governments are raising awareness of initiatives launched by the United Nations (UN) such as the Sustainable Development Goals (SDG) and Paris Agreement which seeks to limit warming to 1.5 °C. While some advanced economies are closer to meeting these requirements set by the UN, emerging and developing countries are facing a funding gap that require support from banks and the private sector. Whilst 90 per cent of the SDG financing needs are covering in developed nations, only 60 per cent of the investment needs are addressed in

(Photo credit: Vladimir Arndt/shutterstock.com)

emerging and developing regions (and as low as 10 per cent in parts of Africa).

Looking closer to home, it is estimated that climate threats could impact the UAE’s GDP by up to 24 per cent.

China is predicted to face the biggest costs in absolute terms, whilst coastal communities in Sub-Saharan Africa are already being washed away, losing up to 30 – 35 metres of land each year.

As investors and companies continue to realise the vast implications which climate change presents, they also began taking the environment into consideration when making business decisions. Because of this, the term ‘sustainable investing’ has garnered traction across the globe. We are now seeing many initiatives being launched worldwide in support of the UN ESGs. Globally, various frameworks have been introduced in the green financing field, such as the Climate Bond Initiative, the European Commission’s Sustainable Blue Economy Finance Principles and the WWF’s Blue Finance Principles. Last year, Standard Chartered issued the world’s first blue bond, on behalf of The Republic of Seychelles, and raised $15 million from impact investors to finance the expansion and transition of its marine protected areas, improve governance of priority fisheries and develop its blue economy.

In the Middle East and North Africa region alone, there have been investments of $163 billion in clean energy. Changing demographic needs are driving demand for infrastructure investment.

Global green bond issuances are forecast to increase by

20% $200 billion reaching

in 2019

— Moody's The UAE energy sector is moving from hydrocarbon-based towards a diverse mix of energy sources—propelled by growing demands from rapid urbanisation in the country, oil market volatility, and greater momentum for sustainable growth. Standard Chartered also recently structured the financing for the largest renewables deal in the Gulf region for DEWA. The project is also the largest Green Belt and Road solar project and uses landmark technology which will allow Dubai to utilise solar power at a world record tariff around the clock.

Sustainability is a key driver of financial sector innovation and is being steered by financial imperatives whereby the borrower is incentivised to become more sustainable by receiving discounted financial terms. The bank also launched the world’s first Sustainable Deposit, dedicated to financing sustainable

assets in developing countries aligned to the United Nations’s SDGs, allowing investors access to dynamic markets and giving them an opportunity to put their money into a vehicle that addresses some of the world’s key long-term social and environmental threats.

Liquidity raised by the Deposit will be used to finance SMEs in developing countries, support microfinance and provide funds for a variety of sustainable projects. Indeed, the industry is seeing a sharp rise in the development of products that positively impact the environment such as social and green bonds. Additionally, according to Moody’s Investors Service, global green bond issuances are forecast to increase by 20 per cent, reaching $200 billion in 2019. In 2018, the Middle East witnessed the first green loan worth $2 billion with an Islamic format that links pricing to environmental performance, which Standard Chartered assisted with extending its maturity.

With awareness on the UN’s SDGs at an all-time high, and demand from investors increasingly looking for options that help make our world more sustainable, financial institutions are uniquely placed to create positive impact.

Driven by the fact that finance touches every aspect of the economic cycle, there are huge opportunities for banks to shift more of their balance sheets into sustainable projects to support economic and social development for the future wellbeing of the planet.

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SUSTAINABLE FINANCING

RENEWABLES: THE FULL POTENTIAL

Roberto Flammia, Local Partner at BonelliErede’s Dubai office, and member of the firm's energy and infrastructure focus team, highlights the investment opportunities in UAE’s renewable energy sector and relevant structures for them

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s the prices of crude oil and gas dropped in recent years, countries whose economies relied on non-renewable resources were alerted to the pressing need of diversifying their interests.

On the other end of the spectrum, steady population growth, rising energy demand, concerns of climate change and decreasing technology costs associated with renewable energy produced a shift in ideology making sustainable energy production a viable option for many.

SOLAR POTENTIAL The UAE has been at the forefront of the movement towards renewable energy in the region, setting a target of 44 per cent clean energy generation by 2050, as per the nation’s Energy Strategy 2050, with Dubai in particular aiming to

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generate 75 per cent of its energy from clean sources by that time. Despite the seemingly distant target date, the UAE has wasted no time in putting its renewable energy plans into motion and has seen considerable progress since, ranking third worldwide in the production of concentrated solar power in 2013.

With strong daily sunlight exposure and large areas of flat terrain near its power grid infrastructure, the UAE enjoys a significant geographical advantage when it comes to implementing solar energy projects, as evidenced by the scope of such projects that have begun to take shape throughout the UAE. Most notable of these is Dubai’s Mohammed bin Rashid Solar Park, a multi-phase, AED 50 billion project that, upon completion, is set to be the world’s largest singlesite solar park. Attributed to significant

investments in the solar energy industry, Abu Dhabi also boasts the world’s largest independent solar plant, Noor Abu Dhabi.

TRADITIONAL STRUCTURES Complex renewable energy projects are already being financed in the UAE through project financing structures.

Project finance is a financing method, usually of infrastructure and industrial projects, that depends on the capacity of a project to generate cash flows sufficient to repay the financial debt and remunerate the capital invested by the sponsor. Accordingly, in this type of financing, the creditworthiness of the sponsor plays a minor role in comparison to other available types of financing. The scope and increasing proliferation of renewable energy projects in the UAE have made such

(Photo credit: Dominic Dudley/shutterstock.com)

projects an attractive target for project financing, with solar energy in particular witnessing increased activity.

Using project financing to fund largescale renewable energy projects has numerous advantages, contributing to its rising popularity and increased use in the region. Since project finance typically uses long-term debt for the majority of the project’s cost, the corresponding equity requirements are reduced.

The lenders acquire security over the entirety of the project’s assets, therefore generally providing sufficient comfort for the transaction to be considered as fairly low risk, especially in light of the improved returns. Generally, the UAE has been open and welcoming to project financing, given the long-term transfer of technology and skills that such projects often generate.

SAMPLE PROJECT FINANCE STRUCTURE IN THE ENERGY SECTOR Lenders

Government Authorities

Project Sponsor

Project Company Network Distributor

Offtaker

Project Management Source: BonelliErede

Project Constructor (s) Source: BonelliErede

ADVANTAGES OF PPPS

Enabling long term investments

TO DATE, DUBAI IS THE ONLY EMIRATE THAT HAS ADOPTED A PPP LAW, LAW NO. 22 OF 2015, WHICH WAS INSTRUMENTAL IN THE DEVELOPMENT OF THE MOHAMMED BIN RASHID SOLAR PARK.

Developing effective plans and priorities

Improving delivery

- Boosts foreign direct investment; - Increases diversification of the economy; - Encourages involvement of the private sector, bringing in the associated knowledge and technical expertise; - Enhances the public sector with the latest technological developments; - Speeds up the completion of projects and makes some projects possible in the first place.

— Roberto Flammia Source: BonelliErede

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SUSTAINABLE FINANCING

in Dubai, as well as attracting small to medium size investments in the field.

Robert Flammia

SINCE PROJECT FINANCE TYPICALLY USES LONG-TERM DEBT FOR THE MAJORITY OF THE PROJECT’S COST, THE CORRESPONDING EQUITY REQUIREMENTS ARE REDUCED. — Roberto Flammia, Local Partner, BonelliErede, Dubai LEVERAGING ON PPPS Public private partnerships (PPPs) are also expected to play an increasingly larger role in renewable energy projects. A PPP is a co-operative agreement between a public sector institution and a private sector party whereby the latter assumes the initial substantial financial and operational costs of designing, financing, building and operating a specific project.

PPPs are an effective means of transferring private sector expertise and know-how to the public sector. To date, Dubai is the only emirate that has adopted a PPP law, Law No. 22 of 2015, which was instrumental in the development of the Mohammed bin Rashid Solar Park. The AED 1.2 billion second phase of the project was implemented through a PPP with EPC (energy, procurement and construction) contractors ACWA Power and TSK.

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While consumers might not immediately perceive the benefits of the large renewable energy projects already built or under construction, residents of Dubai may already take advantage of a unique initiative being implemented by DEWA, Dubai’s Electricity and Water Authority. Named ‘Shams Dubai’, or ‘Sun of Dubai’, the initiative invites and encourages both households and businesses to instal solar panels on any available rooftop space.

Once the panels are linked to DEWA’s net metering system, any excess electricity generated is then fed back into the grid and used to offset future utility bills of the user. With significant applicability for cost saving, especially for businesses with large premises, Shams Dubai has the potential to provide a significant boost in incentivising the widespread installation of solar panels

ROADMAP FOR THE FUTURE Investments in renewable energy in the UAE may also be encouraged by the recent developments in the legislation regarding foreign ownership. Currently, foreign investors wishing to incorporate a limited liability company in the UAE mainland are limited in their shareholding percentage to 49 per cent under UAE company law; UAE free zones are not subject to such ownership limitations, but are subject to different restrictions regarding the location where the companies incorporated in the relevant free zones can carry out their activities.

On 30 October 2018, the UAE issued Federal Decree Law No. 19 of 2018, which signalled the its intention to lessen such restrictions and authorised the UAE Cabinet to specify which sectors would reap such benefits. Although the latest edition of the UAE Official Gazette has not been published yet, renewable energy has been confirmed as one of the sectors specified to be eligible for up to 100 per cent foreign ownership, as per the outcome of the recent cabinet meeting as reported by the UAE’s official news agency.

The next few years are shaping up to be pivotal as the UAE approaches the next chapter of its development. The drive towards innovation and sustainability displayed by the Federal and Emiratelevel governments, coupled with the regulatory changes allowing greater foreign investment, means that the renewable energy sector is in store for even further projects.

With solar, and to a lesser extent wind, energy already established, other fields are expected to gain increasing prominence, such as waste to energy, water desalinisation and purification. With 2050 firmly in sight, the UAE is well on its way to solidifying its position as the renewable energy leader of the Middle East.

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DIGITALISATION

BUILDING A DIGITAL FUTURE Shaheen Al Ghanem, CEO of Warba Bank, tells Banker Middle East about its recently launched digital factory and how it facilitates a long-term digital future for the bank

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WE HAVE LAUNCHED THE FIRST DIGITAL FACTORY OF ITS KIND IN THE BANKING INDUSTRY IN KUWAIT CALLED 'AL WATEEN', WHICH IS A DIGITAL CENTRE BASED ON TEAMWORK AND COOPERATION ACROSS THE BANK DEPARTMENTS AND GROUPS FOR DIGITAL INNOVATION. — Shaheen Al Ghanem

We have been able to complete the first phase of the strategic change which resulted in development of sales and profitability structure. In 2018, the Bank started the second phase of its strategy, which focuses on strengthening its digital capabilities and making every possible effort to compete innovatively to catch up with the global trend in the banking industry. This deliberate approach enables the bank to overcome competition in the retail banking sector by providing distinctive digital services that can hit the target effectively.

How do you envision the bank's future?

Today, Warba Bank is firmly determined in its approach towards enhancing and driving digital transformation into the banking sector in accordance with the highest international standards, paving the way for its leading position in this sector. We have launched the first digital factory of its kind in the banking industry in Kuwait called “Al Wateen”, which is a digital centre based on

(Photo credit: Ibrahim Muhamed/shutterstock.com)

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ell us more about Warba Bank’s digital journey.

In 2017, we set a five-year strategy for the bank and we have been able to achieve a series of objectives, such as profitability growth, offering pioneering services to customers while continuing to build a corporate franchise, setting up the bank’s digital banking capabilities, and careful expansion.

According to our strategy, we are glad to say that Warba Bank is steadily moving into a new era of development and innovation in enhancing its digital structure. This is the result of a number of achievements that the bank has accomplished over the past years, by injecting investments to keep abreast in the technological era to cater to growing customer demands in digital banking services, in a time where smart phones have become virtual banks for customers enabling them to undertake several banking transactions smoothly, safely and easily.

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DIGITALISATION

Shaheen Al Ghanem, CEO, Warba Bank

teamwork and cooperation across the bank's departments and groups for digital innovation. At the digital factory, we apply the customer-centric approach, placing customer interest as top priority, drawing our focus and attention to provide them with top-notch, fast, reliable and secure services and proactively meet customer needs.

As a CEO, what challenges have you encountered in your digital transformation exercise?

Challenges accompanied our journey since inception, but we were on the level to overcome them. Since the beginning, Warba Bank’s main focus has been to introduce a new era in the Islamic banking industry. Emerging from Kuwait, the bank aims to serve every Kuwaiti on homeland and embarked on its journey facing all the challenges and economic difficulties that plagued the region at that time.

Warba Bank went on its journey with determination and perseverance driven by its responsibility towards shareholders and clients whose confidence and trust

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formed the solid base and motivation for the bank to launch innovative services, products and solutions, which have become exemplary for the Islamic banking industry in Kuwait. Thus, the 10year journey of hard work enabled Warba Bank to become one of the leading banks in Kuwait and is the fastest growing bank in the country’s banking sector.

With that said, despite all challenges, today, Warba Bank is firmly determined in its approach towards enhancing and driving digital transformation into the banking sector in accordance with the highest international standards, paving the way for its leading position in this sector.

What led to your decision to develop Al Wateen? How do you see this as an enabler for digital sustainability within the bank?

Under the slogan “One of You”, Warba Bank is at the forefront of its concerns that Al Wateen should be the source of inspiration to the entire Kuwaiti community from which it has emerged.

Each Kuwaiti is a shareholder at Warba,

which increases the bank’s responsibility to care for each person of the society and establish strong communication channels with all, while meeting all requirements of digital banking services that draw the future of this vital sector.

At the digital factory, we apply the customer-centric approach prioritising customer interest, to provide them with top-notch, fast, reliable and secure services and realise their needs. We can say that Al Wateen is the reliable driver towards our future, through which the bank’s team aims to challenge the traditional banking industry and infuse digital life into the sector, to benefit the customers and create communication channels amongst customers and their surroundings.

It is set to be an important source of inspiration for everyone interacting with Warba Bank, whether customer, employee or shareholder. Al Wateen is the first application of its kind to offer solutions that solidify relations with customers. The new application has been designed to give customers an enjoyable journey through using its feature. The application secures easy and versatile access to many services that enables the customer to perform transactions quickly and easily.

What are your views on the economic climate and banking sector in Kuwait?

The opportunities of the Kuwaiti economy are promising to achieve further development in the light of the positive macroeconomic indicators and the achieved growth in GDP both in the oil and non-oil sectors, in addition to monetary and financial stability, and the flexibility of the banking sector confirmed by capital adequacy ratios, profitability indicators and improved asset quality. We do expect more growth in the banking industry in light of Kuwait’s Development Plan which will create more investments’ and jobs’ opportunities.

ISSUE 03

CYBERSECURITY: STAYING ONE STEP AHEAD Stephan Berner, CEO, Help AG

23 SEPTEMBER 2019

Transforming Banking for the New Consumer

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Chief Digital Officer Dubai Islamic Bank

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Yazeed Al-Khalifa VP – Governance, Risk and Compliance Saudi Payments

Join our expert line-up of esteemed speakers and be part of the conversation.

CONFERENCE TOPICS INCLUDE: Digital Transformation | Efficient Compliance Practices | Technological Disruption | Big Data, AI & Machine Learning | Blockchain Banking | Digital Payments | Cybersecurity | Synergy with Fintech Organisations

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TECHNOLOGY

CYBERSECURITY: STAYING ONE STEP AHEAD Stephan Berner, CEO at Help AG, sheds light on how financial institutions should approach their cybersecurity strategies

A

s a technology solutions provider, what do you see as the biggest challenges facing banks today?

Financial institutions are driven by innovation and today, we see plenty of organisations moving from legacy to digital banking models. The reliance on digital technologies means that at any time, banks need to ensure that their IT environments are protected.

This requires their IT teams to strike that delicate balance between rapidly rolling out new digital services to cater to customer demands and ensuring that these are designed with security in mind.

Banks, like any other organisations, are developing rapidly when it comes to the IT front. Today the systems required to operate a consumer-focused financial infrastructure are vast. You may not consider it as a normal user, but when you pull out your phone to use your latest features in the banking app, or want to use your Apple or Android payment feature, there are specific IT processes supporting these, that had to be developed, tested and secured before they could go into production.

As technology becomes more and more important to deliver the best service, banks are slowly moving away from being financial institutions operating technology to technology companies operating a financial institution.

Stephan Berner

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TECHNOLOGY

Needless to say, the assets that banks hold are some of the most valuable and, from the perspective of security, can be compared to health and personal identification information (PII). This means that attackers are very interested in targeting banks. Their attacks can be directed at the consumer side where phishing and social engineering are major problems as consumers are tricked into giving away their details by attackers. Or it could take the form of attacks against a bank’s core IT systems—specifically the systems taking care of interbank transfers.

As the speed of roll out for new features keeps increasing along with new technology as well as consumer requirements, balancing security with functionality and convenience ultimately becomes a big challenge for any bank.

From a cybersecurity standpoint, the key for any bank is to understand their applications, and the associated security requirements. This is imperative to identifying immediate threats and risks in applications, as well as to understanding how well the existing security solutions can support the organisation’s ambition of being agile and secure.

Technologies like DevOps, APIs, private and public cloud are challenging legacy security systems. A new approach and breed of solutions is required to maintain security in a domain where the application dictates the security capability as opposed to security dictating the application. It is also for these reasons that today, there is no doubt that security in any fintech application has become a day-zero job.

What is your view on the awareness of banks on these issues?

In our experience working across several industry verticals, it is evident that cybersecurity maturity is highest within the banking sector. That said, sometimes organisations overlook the basics and invest in advanced technologies without first addressing critical vulnerabilities.

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Stephan Berner

FROM A CYBERSECURITY STANDPOINT, THE KEY FOR ANY BANK IS TO UNDERSTAND THEIR APPLICATIONS, AND THE ASSOCIATED SECURITY REQUIREMENTS. THIS IS IMPERATIVE TO IDENTIFYING IMMEDIATE THREATS AND RISKS IN APPLICATIONS. — Stephan Berner, CEO, Help AG

Unfortunately, without a solid technology base, it is only a matter of time before attackers uncover and exploit the underlying security flaws.

Tell us about Help AG and your targets for 2019.

Our mission in 2019 and beyond is to continue to be the leading provider of cybersecurity solutions, services and consultancy throughout the Middle East and Africa. As a business, we have been able to grow significantly year-on-year since our establishment in the region in 2004.

We have laid out a clear 5-year plan which is to provide a holistic 360-degree approach which will enable our customers to provision and consume any cybersecurity solution or service they require—from security analysis and strategic consulting, to technology integration and around-the-clock support.

And of course, as is currently possible, they will have the ability to leverage our Managed Security Services (MSS) to ensure they get 24x7x365 protection against issues, events and attacks.

Our approach is to focus on existing customers—to go deep and go wide, doing white space mapping to further complement and enhance the services and solutions we offer our customers.

As we look for further growth, we plan to increase from over 200 to over 400 customers. For this we intend to hire additional resources to drive business development and service delivery.

What is unique about your product strategy?

Help AG is a pure play cybersecurity advisor that goes far beyond the capabilities of the traditional systems integrators, with industry leading practises in Analysis, Consulting, Integration, Managed Security Services and Support. Our dedicated focus on all aspects of cybersecurity, and unmatched expertise across the most comprehensive portfolio of solutions and services has led to voluminous success.

THE ASSETS THAT BANKS HOLD ARE SOME OF THE MOST VALUABLE AND, FROM THE PERSPECTIVE OF SECURITY, CAN BE COMPARED TO HEALTH AND PERSONAL IDENTIFICATION INFORMATION (PII). THIS MEANS THAT ATTACKERS ARE VERY INTERESTED IN TARGETING BANKS. — Stephan Berner

One of the key things of any product within the Help AG portfolio is that it has been carefully selected based on a long-term strategy approach, whereby we try to identify the areas where we expect to see significant business requirements. We always try to stay a step ahead of what our customers’ current requirements are, evangelise in the market and make sure we follow an approach that is not just best suited for the present but is also future-proof.

A good example in this direction is our strategic focus on AI and ML- we are utilising AI and ML in the setting of cybersecurity and the partnerships we have specifically engaged within here coupled with our focus on Secure Cloud Enablement are further testament to our strategic focus.

A point worth noting here would be that this is not a new approach we have adopted recently. Help AG is proud to have to its credit the success of introducing and/or strengthening the market for leading vendors like Palo Alto Networks, F5 Networks, Infoblox, FireEye, Symantec, Sourcefire, IronPort and many more.

What’s important is that this kind of strategy doesn’t just apply to our products/solutions. Rather it spans

across our entire organisation. We make sure all our solutions and services delivery teams are well-equipped to provide the highest expertise to support our customers with their ever-evolving security needs.

While most channel organisations continue to focus on solution delivery as their core business and leverage a generic tools-based approach to services, Help AG has set itself apart from the competition by building an unmatched services portfolio. Our heavy investment into recruiting and training the most technically skilled employees gives us an edge in service delivery.

When you look at the short to medium term, what are the things that come to mind?

In the UAE, it’s fair to say that digital transformation across technology domains—blockchain, artificial intelligence, machine learning etc.—is relatively widespread. Government initiatives and market forces have resulted in organisations in the country having the ambition and initiative to be early adopters of new technologies.

This makes cybersecurity even more critical as with any nascent technology, there is always the potential to uncover new threat vectors.

bankerme.net

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TECHNOLOGY

DIGITAL REALITIES AND THE COMEBACK OF INDUSTRYSHAPING M&A Infosys Finacle provides a breakdown of the primary factors driving this modern wave of consolidation in the banking sector

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SPONSORED CONTENT

Leading banks spend about

$10 billion

every year on IT-related technology requirements

A

fter a steep slump in consolidation activity during the financial crisis—barring the inevitable capital infusions, government-sponsored deals, and restructuring to salvage institutions—the upswing in the years following the crisis, especially after 2013, was a clear sign of the industry ‘shrinking back to health’.

Key deals such as the merger of RBS with local players, Citigroup’s withdrawal from unprofitable segments, and ANZ bank’s multi-year divestment programme in Asia dotted the M&A landscape during the period, but in the vigilant wake of post-crisis regulatory scrutiny, activity was limited to small banks at large.

AS BANKS REINVENT THEIR BUSINESS MODEL TO STAVE OFF COMPETITION, THEY ALSO NEED TO TRANSFORM TRADITIONAL COST STRUCTURES, AND BECOME LEANER, MEANER, AND HUNGRIER TO WIN BIG. BECAUSE CLEARLY, THIS RISING DIGITAL TIDE IS NOT ONE THAT LIFTS ALL BOATS. (PHOTO CREDIT: METAMORWORKS/SHUTTERSTOCK)

However, the announcement of the BB&T-SunTrust merger in February this year, the biggest in a decade, has signalled a fresh surge in large banking deals. A similar trend is visible in other parts of the world too, where consolidation and restructuring are driving the response to market headwinds.

Earlier this year, in a first three-way merger in India, the Reserve Bank of India announced the consolidation of three public sector banks to form the country’s second-largest public lender.

In the Middle East, an exceedingly overbanked region, the success of the merger between First Gulf Bank and National Bank of Abu Dhabi is setting a favourable M&A trend in motion.

So, what are some of the primary factors driving this modern wave of consolidation in banking?

Pressure on ROE: Amidst decreasing interest margins and only a marginal increase in fees and commissions, the banking sector is plagued with declining ROE globally. Some banks in the EU and the US are battling to meet their cost of equity, and reportedly, EU banks were among the worst performing market sectors of 2018. Banks are facing tough questions from their investors and have little choice but to optimise investments and achieve sustainable profitability, for which consolidation is a viable pursuit.

bankerme.net

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TECHNOLOGY

Huge technology investments: Leading banks on an average spend about $10 billion every year on IT-related technology requirements. In times when banks are faced with multi-dimensional change and unprecedented competition, any bank that is serious about increasing shareholder value would rather not justify investments like these when recourse exists.

High cost of operation: Translating reduction in operating costs into profitable performance is also driving modern consolidation activity, as banks are compelled to look at real-estate synergies, optimise footprint by reducing rental overheads, rationalise physical expenditure, and pass on these benefits to customers and investors.

Rising competition: The largest wallet provider in Singapore today is not a financial service provider but a ridesharing company called Grab. Apart from competition from such unlikely quarters, FinTechs and BigTechs continue to increase the scepticism around whether banks can be the successful digital platforms of tomorrow. As banks reinvent their business model to stave off competition, they also need to transform traditional cost structures, and become leaner, meaner, and hungrier to win big. Because clearly, this rising digital tide is not one that lifts all boats.

Increasing regulatory costs: The regulatory mandate for capital adequacy in the years following the financial crisis severely affected the liquidity positions of banks. Regulatory pressures have only risen since then as new and emerging regulations continued to join existing ones to increase the cost of compliance.

Consider the continually evolving regulatory landscape from Basel II, Basel III to KYC, and more recently Open Banking, PSD2 and GDPR. The challenge of uncertainties associated with regulation and increasing compliance requirements can be overcome with consolidation, making it easier to navigate regulation

54

IN TIMES WHEN BANKS ARE FACED WITH MULTIDIMENSIONAL CHANGE AND UNPRECEDENTED COMPETITION, ANY BANK THAT IS SERIOUS ABOUT INCREASING SHAREHOLDER VALUE WOULD RATHER NOT JUSTIFY INVESTMENTS LIKE THESE WHEN RECOURSE EXISTS.

and share costs which run into trillions of dollars for individual banks on an average.

The reasons stated above point towards the clear advantage of scale with consolidation in the current environment of constant change. What’s more, mergers and acquisitions augment human capital and synergies by bringing together the best of tech and business brains. However, to achieve goals of improved efficiencies, greater economies of scale or even diversification, a thorough evaluation of the following considerations would hold banks in good stead: Culture: Many an acquisition come a cropper due to cultural conflicts. To bridge the gap between the cultures of two merging entities, a planned integration and open communication go a long way and prevent post-deal misalignment.

Value articulation: Addressing potential concerns of external stakeholders, that is, customers, investors, and partners is as vital as allaying concerns internally. It is important for the investor relations teams to create a communication strategy that goes beyond just publishing the rationale, intent, and objective to include timely intervention with the right messages from senior management and a thorough assessment of the market sentiment and pulse of investors.

Existing IT landscape: Successful mergers make the common business goals of the merging entities possible with fewer resources. A key focus for mergers and acquisitions has always been the ability to allow banks to spread their costs over a broader asset base, reduce staff, and decrease branches. But a new and extremely crucial consideration now, is also technology and IT. A large number of disparate systems often require the merging banks to bring in a third integrated platform for standardisation. A harmonised platform is essential to realise synergies and capitalise on the future digital possibilities, but it may defeat the purpose in the short to medium term due to costly IT investment at the outset.

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