#225 December 2019 by CPI Financial

DECEMBER 2019 | ISSUE 225 MIDDLE EAST

B R AT I

N G

DECEMBER 2019 | ISSUE 225

YEARS

SERVING THE BANKING INDUSTRY BUILDING ON BAHRAIN’S RICH FINANCIAL HERITAGE H.E. Rasheed Mohammed Al Maraj, Governor, Central Bank of Bahrain Dubai Technology and Media Free Zone Authority

BUILDING ON BAHRAIN’S RICH FINANCIAL HERITAGE

H.E. Rasheed Mohammed Al Maraj, Governor, Central Bank of Bahrain A CPI Financial Publication

INSURANCE 34 Mitigating the risks of innovation

TRADE FINANCE 40 Closing the trade finance gap

FUND MANAGEMENT 42 Thematic investing is transforming fund selection

50 AINVESTMENTS bullish view on US real estate

AN AWARD-WINNING REGIONAL BANK

Simpler Banking

EDITOR'S NOTE

T William Mullally Editor, CPI Financial

he Banker Middle East Industry Awards 2019 were a rousing success, and I would like to take a moment to thank all who attended. It was wonderful to see so many familiar faces, and to able to come together to celebrate the accomplishments of the industry again and again. In January, we will be publishing the Banker Middle East Industry Awards 2019 Winners magazine, for a more in depth look at all this year’s winners. In the meantime, I wanted to highlight some of the accomplishments of one of the individual winners, as one of those winners graces this issue’s cover. This year’s lifetime achievement award went to H.E. Rasheed Al Maraj, Governor, Central Bank of Bahrain. It was an honour to speak to him for this issue’s cover, which provides an in-depth look at the Central Bank of Bahrain’s current focus and initiatives, which gives great insight into the Kingdom. As the Governor does not like to focus on himself, and rather would focus on the accomplishments of Bahrain, let us take a moment to highlight some of his own achievements. H.E. Al Maraj has been Governor of the Central Bank since 2005. Has held senior positions within the Bahraini government, having served as Assistant Under-Secretary at the then Finance and National Economy Ministry and Under-Secretary at the Ministry of Transportation. Before that, H.E. Al Maraj was General Manager and Chief Executive Officer of the Arab Petroleum Investments Corporation (Apicorp), based in Dammam, Saudi Arabia. He also currently serves on the Boards of the Economic Development Board (EDB), National Oil and Gas Authority (NOGA) and member of the Board of Trustees of the Oxford Institute for Energy Studies, UK. Bahrain has a strong reputation for its regulatory environment and ease of doing business, as well as its strong focus on developing its financial ecosystem, and that can in part be attributed to H.E. Al Maraj. The Lifetime Achievement Award in no way implies that the individual’s achievements will stop here, of course, and we wish H.E. Al Maraj, the CBB, and the Kingdom of Bahrain nothing but success as the country and its financial industry continue its path towards an increasingly digital future. As Banker Middle East continues to celebrate its 20th anniversary, we are pushing forward as well. As you may have noticed, we have launched our new digital portal at www. cpifinancial.net, unifying all of our separate websites under one roof, improving functionality and providing new features such as a directory, classifieds and job listings. We hope you enjoy it. Beyond that, there is much for you to peruse. I wish you a productive read.

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CONTENTS DECEMBER 2019 | ISSUE 225

BANKER MIDDLE EAST INDUSTRY AWARDS 2019 8

Announcing the winners of the Banker Middle East Industry Awards 2019

ANALYSIS 10

GCC leads business climate ranking in 2019

NEWS 12

News highlights

THE MARKETS

The continuing market consequences of the Great Recession

COVER INTERVIEW 20

Building on Bahrain's rich financial heritage

REGIONAL ROUNDUP

26 Structural reforms to spur growth across GCC

CAPITAL MARKETS

32 How to approach first-time Sukuk issuance

INSURANCE 34

Mitigating the risks of innovation

PRIVATE BANKING

38 The future’s bright for private banking

in the region

TRADE FINANCE

40 Closing the trade finance gap

COVER INTERVIEW BUILDING ON BAHRAIN’S RICH FINANCIAL HERITAGE H.E. Rasheed Mohammed Al Maraj, Governor, Central Bank of Bahrain

FUND MANAGEMENT

42 Thematic investing is transforming fund selection

ISLAMIC FINANCE

46 Tracing the industry's positive trajectory

INVESTMENTS

50 A bullish view on US real estate 54 The impact of 'Davos in the Desert'

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BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

For Forgenerations, generations, For Forbetter generations, generations, the the betterway wayto tobank. bank. the thebetter betterway wayto tobank. bank.

Over Over 40 years ago, ago, Dubai Islamic BankBank pioneered a way of banking that was truly better: 40 years Dubai Islamic pioneered a way of banking that was truly better: Islamic banking. SinceSince then,then, many generations of customers continue to enjoy world class Islamic banking. many generations of customers continue to enjoy world class products and services backed by the very latest in banking technology. For them as forfor products andago, services backed by the very latest technology. For them as Over Over 40 40 years years ago, Dubai Dubai Islamic Islamic Bank Bank pioneered pioneered ainway a banking way ofof banking banking that that was was truly truly better: better: you,Islamic this isthis still way tomany bank. you, isthe stillbetter the better way togenerations bank. Islamic banking. banking. Since Since then, then, many generations ofof customers customers continue continue toto enjoy enjoy world world class class products products and and services services backed backed byby the the very very latest latest inin banking banking technology. technology. For For them them asas forfor you, you, this this is is still still the the better better way way toto bank. bank.

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CONTENTS DECEMBER 2019 | ISSUE 225

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TECHNOLOGY A Banker Middle East Supplement

57 Working in harmony in a digital future 60 Inside the Middle East's first regulated crypto exchange

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BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

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

The Mark of Excellence Private & Personalised Banking

For additional information, please contact us on (+973) 7700 0111 or private@kfh.com.bh

Licensed as an Islamic Retail Bank by the Central Bank of Bahrain

Kuwait Finance House-Bahrain BSC (c) PO Box 2066, Bahrain World Trade Center, Manama, Kingdom of Bahrain Tel: (+973) 7777 7777, Fax: (+973) 7700 0600, Website: www.kfh.bh Licensed as an Islamic Retail Bank by the Central Bank of Bahrain

BME INDUSTRY AWARDS 2019

Announcing the winners of the Banker Middle East Industry Awards 2019 The awards were bestowed at a gala dinner at the Ritz-Carlton DIFC in Dubai, honouring the top achievers in the region’s banking and financial industry from across the region

he Banker Middle East (BME) Industry Awards, the region’s most prestigious financial awards programme, announced the winners for its 2019 edition at a gala dinner at The Ritz-Carlton Hotel, DIFC, honouring the institutions that are driving the Middle East’s banking and financial industry forward. The Awards ceremony was attended by over 350 C-level executives, key decision-makers and thought leaders from 80 institutions across the Middle East. Banker Middle East is the longest-running and most widely-esteemed GCCbased banking publication, currently celebrating its 20th anniversary. The annual Awards programme, organised by

BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

Banker Middle East, benchmarks and promotes banking and financial excellence in the Middle East. It gives due recognition to the institutions that have navigated a challenging economic climate to continue the upwards trajectory of the industry, created innovative financial services and solutions to better serve their customers. “Congratulations to all the winners and finalists of the BME Industry Awards. The awards programme recognises the ‘champions’ of the banking and financial industry, celebrating the success and achievements of the institutions who are playing a key role in the region’s development,” said Nigel Rodrigues, Founder and CEO of CPI Financial—the publisher of Banker Middle East.

The 500 nominations and submissions from 32 categories were critically evaluated and mutually analysed by an esteemed panel of judges comprised of prominent industry experts from rating agencies, accountancy firms, and auditing institutions, leading to 120 shortlisted institutions. Winners were chosen through a rigorous evaluation of the entrants’ expertise in research and knowledge of the market, as well as assessment of all relevant company financial statements. In addition to the 32 categories, one special award and four individual awards were also announced at The BME Industry Awards. The Banker of the Year Award was conferred to Abdulhamid Saeed, Group CEO, First Abu Dhabi Bank; The Lifetime Achievement Award, meanwhile, was bestowed to H.E. Rasheed Al Maraj, Governor, Central Bank of Bahrain; the Leadership Excellence Award was presented to Dr. Adnan Chilwan, Group CEO, Dubai Islamic Bank; and the award for

Outstanding Contribution to Banking & Finance was given to Steve Bertamini, CEO, Al Rajhi Bank. “The world is changing and adapting to advanced technologies. These innovations, which are transforming the banking and financial landscape, are rooted in the constantly shifting demands of consumers. We believe that the best institutions consistently put their customers as their top priority, and actively demonstrate that commitment, beyond just words. We look forward to seeing the industry become much more innovative and adaptive to the needs of consumers in the future and the embracing of new technologies will show a very different banking landscape,” added Rodrigues. For comprehensive coverage of the Banker Middle East Industry Awards 2019, Banker Middle East will be publishing the Banker Middle East Industry Awards 2019 Winners Magazine in January 2020.

The full list of The Banker Middle East Industry Awards 2019 winners: Best Bank in the Middle East The National Commercial Bank Best Retail Bank Mashreq Bank

Best Investment Bank (Conventional) Saudi Fransi Capital Best Investment Bank (Islamic) Dubai Islamic Bank

Fastest Growing Bank Warba Bank

Best Private Bank First Abu Dhabi Bank

Best Islamic Bank Dubai Islamic Bank

Best Wealth Management Firm Standard Chartered

Best Corporate Bank National Bank of Fujairah

Best CSR Programme BLOM Bank

Best SME Bank National Bank of Fujairah

Best Core Banking Service Provider Infosys Finacle

Best Investment Management Firm ADS Investment Solutions Best Private Equity Firm GFH Financial Group Best Trade Finance Institution Noor Bank Best Project Finance Institution Ahli Bank Kuwait Best Brokerage Solutions Provider Albilad Capital

Best User-Experience Innovator Kuwait Finance House - Bahrain Best Cybersecurity Provider Help AG

Banker of the Year Abdulhamid Saeed Group CEO, First Abu Dhabi Bank Outstanding Contribution to Banking & Finance Steve Bertamini CEO, Al Rajhi Bank Lifetime Achievement Award H.E. Rasheed Al Maraj Governor, Central Bank of Bahrain

Best Commercial Bank The National Commercial Bank

Best Research & Consultancy Firm Century Financial Consultancy

Best Human Resource Development The National Commercial Bank

Most Innovative Digital Banking Proposition Mashreq Bank

Dr. Adnan Chilwan Group CEO, Dubai Islamic Bank

Best Communications Infrastructure Provider Avaya

Best Brand Positioning Liv Bank

Capital Market Transaction of the Year Albilad Capital

Leadership Excellence Award

Best Payment Solutions Provider Network International

Best Law Firm – Banking & Finance Al Tamimi & Company

Best Ratings Agency S&P Global Ratings

Individual Awards

Best Digital Transformation Provider Maveric Systems Best REIT Manager Emirates REIT Special Achievement in Digital Innovation Warba Bank

Best Takaful Provider Noor Takaful

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PHOTO CREDIT:Christopher Pike/Bloomberg)

ANALYSIS

The Abu Dhabi Global Market Authorities (AGDM) building, center, stands among commercial and residential properties on Al Maryah Island in Abu Dhabi, UAE

GCC leads business climate ranking in 2019 The Gulf region sharply improved in the World Bank’s ease of doing business rankings this year and the most improved countries over the previous year were the UAE, Saudi Arabia as well as Bahrain and Kuwait

ccording to the World Bank’s Doing Business Report 2019, for a country to realise economic gains, reduce corruption and encourage SMEs to flourish, unnecessary red tape should be eliminated. However, efficiency alone is not enough for regulation to function well; specific safeguards must be put in place to ensure high-quality business regulatory processes. Good rules create an environment where new entrants with drive and innovative ideas can get started in business and where productive firms can invest, expand as well as create new jobs, said the World Bank. The Gulf region sharply improved in the World Bank’s ease of doing business rankings this year and the most improved countries over the previous year were the UAE, Saudi Arabia as well as Bahrain and Kuwait.

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The UAE and Saudi Arabia among other GCC countries are restructuring and opening up their economic activities, rethinking the role of foreign investors as well as SMEs as they look to ease fiscal burdens and do away with dependence on oil, said the IMF. The introduction of insolvency and restructuring laws across the region is believed to be part of a broader strategic shift on the part of respective governments to prepare for an after-oil future, where oil’s global dominance is set to die down owing to adoption of electric cars and clean sources of energy.

LEGAL FRAMEWORK The global impact of the financial crisis associated with the 2014 oil slump and a growing realisation that insolvency and restructuring

laws in the Middle East have not kept pace with the speed of developments in the business environment fueled a recent wave of restructuring regimes in the GCC over the past few years. The UAE published the bankruptcy and financial restructuring law in September 2016, and it came into force the same year. As part of the government’s plans to modernise business laws, the new law introduced measures to rescue businesses in distress such as preventive compositions and debt restructuring as well as reformed the bankruptcy regime. The UAE’s Ministry of Finance (MoF) said that the Federal Law No. (9) of 2016 on bankruptcy law and financial restructuring procedures raises the level of credit and financial security in the country by enhancing investor confidence while at the same time stimulating the nation’s economy by allowing people in financial difficulty to reorganise their financial affairs and repay their debts. Similarly, in 2018 Saudi Arabia’s new bankruptcy laws came into effect in August while Bahrain adopted its new reorganisation and bankruptcy law published May of the same year. In both cases, amendments are focused on attracting foreign investors and modernising the existing regime to offer debtors greater opportunities for reorganisation, provide a simplified liquidation process, and ensure fair treatment of creditors. PwC stated that the new Saudi bankruptcy law will reduce the financial difficulties faced by bankrupt or distressed debtors by encouraging them to fulfil their obligations and reorganise their financials while protecting creditors’ rights with reduced costs and a timeframe to complete the bankruptcy procedures. In May 2019, Saudi Arabia’s Dammam Commercial Court accepted a filing by Ahmad Hamad Al-Gosaibi & Brothers to have its decade-long dispute with creditors resolved under the new bankruptcy law, rejecting a request to liquidate the company filed by HSBC and Raiffeisen Bank. Bahrain adopted its new Reorganisation and Bankruptcy Law (Bahrain Law No. 22/2018) on 30 May 2018 to maximise the value of bankrupt estates, creating a safety net for startups and encourage corporate reorganisation over liquidation. According to Bahrain Economic Development Board, the law introduces a purpose-built tool for commercial companies and merchants (with respect to their trade liabilities) that borrows restructuring concepts from the US Bankruptcy Code’s Chapter 11 and the UK’s pre-packaged insolvency procedures—both familiar and popular with international companies and investors.

SPECIAL RESIDENCY SCHEMES The Institute of Chartered Accountants in England and Wales said that the entire GCC is expected to post a 2.3 per cent economic growth of in 2019, a marginal improvement on the previous year of 0.3 percentage points. The Saudi Arabian Premium Residency Centre (SAPRC) recently granted 73 foreigners premium residency under a

UAE issued

6,800 AED 100 billion

visas to foreigners who invested

"GOOD RULES CREATE AN ENVIRONMENT WHERE NEW ENTRANTS WITH DRIVE AND INNOVATIVE IDEAS CAN GET STARTED IN BUSINESS AND WHERE PRODUCTIVE FIRMS CAN INVEST, EXPAND AS WELL AS CREATE NEW JOBS." — The World Bank

new programme called privileged Iqama to attract overseas investment by enabling selected people to buy property and do business without a Saudi sponsor. Additionally, the Kingdom also opened its doors to foreign tourists, launching a new visa for 49 countries and appealing to foreign companies to invest in a sector that is expected to contribute 10 per cent of gross domestic product by 2030. In November 2018, the UAE Cabinet approved a long-term visa system for investors, entrepreneurs as well as specialised talents and researchers in the fields of science, knowledge and outstanding students. The long-term visa is meant to facilitate business, create an attractive and encouraging investment environment for the growth of business for investors, entrepreneurs and professional talents. The UAE also launched a golden card permanent residency programme in May 2019, granting 6,800 permits to foreigners who together had invested AED 100 billion ($27 billion). The new golden card permanent residency visa scheme is intended to stimulate foreign investment and encourage entrepreneurship as well as attract top engineers, scientists and students. The decision also includes the terms to grant a long-term visa to two categories of entrepreneurs; having a previous project with a minimum of AED 500,000, or having the approval of an accredited business incubator in the country. Entrepreneurs will be granted a five-year visa with a possibility for upgrading to an investor’s visa provided they meet the requirements.

ECONOMIC DIVERSIFICATION PwC said that the introduction of VAT in Saudi Arabia brought in more funds than the expatriates levy and excise taxes combined, and it tripled the amount from taxes on income and capital gains. The Kingdom managed to contain the inflationary impact of VAT as well as limiting its impact on growth – ultimately raising more revenue than was initially expected. Overall, the new tax policy has been relatively successful in diversifying governments revenue in the UAE, Saudi Arabia and Bahrain without producing excessive inflation. Likewise, the UAE introduced support for the industrial sector by agreeing to reduce electricity fees for UAE factories. Under the plans, larger factories would receive a 29 per cent reduction in tariffs while small and medium-sized units would have fees reduced by between 10 and 22 per cent. The UAE’s Dubai International Financial Centre Courts (DIFC) and Abu Dhabi Global Markets Courts (ADGM) provides a legal framework that assures foreign investors rules and regulations that guarantees investor rights, property rights as well as arbitration, insolvency and corporate laws. The country’s new debt law is set to deepen the financial markets, allowing the Emirates to tap a wider pool of financing options and create a government yield curve. The new Public Debt Law enables the UAE to issue sovereign bonds, enabling the country to tap a wider pool of financing options and creating a government yield curve to bolster the secondary debt market in the UAE.

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NEWS HIGHLIGHTS

ADNOC, Intercontinental Exchange partner to launch ICE Futures Abu Dhabi Abu Dhabi National Oil Company (ADNOC) has partnered with US-based Intercontinental Exchange and nine of the world’s largest energy traders to launch ICE Futures Abu Dhabi (IFAD), a new exchange in Abu Dhabi Global Market that will host the world’s first Murban crude oil futures contracts. IFAD and ICE Murban futures will be launched in the first half of 2020, subject to relevant regulatory approvals. IFAD will be a physically delivered contract with delivery at Fujairah in the UAE on a free on board (FOB) basis. The other companies supporting the launch of ICE Futures Abu Dhabi are BP, South Korea’s GS Caltex as well as Thailand’s PTT and PetroChina. Similarly, Royal Dutch Shell, Japan’s INPEX Corporation and JXTG Holdings as well as Total and Vitol Group are the other companies supporting the launch of ICE Futures Abu Dhabi. Contracts traded at IFAD will be subject to regulatory approval, will be cleared at ICE Clear Europe and will clear alongside ICE Brent, ICE WTI as well as ICE (Platts) Dubai and ICE Low Sulphur Gasoil—allowing customers to benefit from associated margin offsets, delivering meaningful capital efficiencies. IFAD and ICE Clear Europe are working to receive regulatory approval from key jurisdictions and, subject to receiving these, expect to launch in the first half of 2020, according to local newswire, WAM.

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Saudi sovereign wealth fund signs $10 million syndicated bridge loan Saudi Arabia’s Public Investment Fund (PIF) has signed a $10 billion syndicated bridge loan and the proceeds will be used for general corporate purposes as well as enable the sovereign wealth fund to accelerate the implementation of its investment programme. The financing facility will be repaid on completion of the agreed sale of the sovereign wealth fund’s stake in Saudi Basic Industries Corporation (SABIC) to Saudi Aramco. Saudi Aramco agreed to acquire PIF’s 70 per cent stake in SABIC for $69 billion in March 2019, the sale consolidates upstream and downstream assets within the stateowned oil company ahead of a proposed share sell in December 2019. As outlined in PIF programme 20182020—launched in October 2017—the Kingdom’s sovereign wealth fund’s four sources of funding are capital injections by the government, asset transfers from the government as well as retained investment returns, and PIF loans and debt instruments independently issued by PIF.

National Bank of Bahrain offers to acquire Bahrain Islamic Bank The National Bank of Bahrain, which owns a 29 per cent stake in Bahrain Islamic Bank (BisB), has made an offer to acquire the entire Islamic lender following months of discussions as well as financial and legal due diligence for a potential offer for the Shari’ahcompliant lender’s issued shares. BisB stated that the deal is subject to Bahrain’s biggest lender acquiring a minimum 40.94 per cent of the Shari’ah compliant lender issued share capital, NBB’s total stake to a minimum of 70 per cent for either cash of BHD 0.117 Bahrain per share or a share exchange ratio of 0.167 NBB’s shares per BisB share. The price values the Islamic lender at BHD 124 million ($329 million). NBB is the secondbiggest shareholder in the Islamic lender alongside the government. Lower oil prices over the past five years are forcing Gulf lenders to consolidate for scale and to better compete in a crowded market. Subdued credit growth, competition for deposits, higher cost of funds and deteriorating asset quality are driving consolidation in the regional banking sector.

S&P Dow Jones, FTSE Russell could fast-track Saudi Aramco into indices Index providers S&P Dow Jones, MSCI and FTSE Russell told their clients that they could fast-track Saudi Aramco’s inclusion into their indices as soon as the end of December, reported Reuters. FTSE Russell and S&P Dow Jones started adding Saudi stocks to their emerging markets indexes in March 2019, while MSCI added Tadawul—Gulf region's largest market—into its Emerging Markets Index August 2019, with a weight of 2.8 per cent. Saudi Aramco launched its share sale process on 17 November 2019, aiming to raise $20 billion-$40 billion in a domestic initial public offering (IPO) in early December. In a briefing to clients, S&P Dow Jones said that it would consider the state-owned oil company big enough for fast-track inclusion into its Global Benchmark Indices, based on the minimum float-adjusted market capitalisation of at least $2 billion. Companies would normally be required to ensure that at least 10% of their stock was made available to trade by investors, but while Saudi Aramco would not meet this level, S&P said it could make an exception. S&P stated that its Index Committee has reviewed this case and ruled that, given the expected size and liquidity of this IPO, an exception to the foreign availability rule will be made for Saudi Aramco if it meets all other index criteria for fast-track IPO addition to SPDJI's Global Benchmark Indices. Similarly, MSCI, whose indexes are used by funds with trillions of dollars in assets globally, said that if Saudi Aramco starts trading on or before 12 December 2019, it would add it to the MSCI Equity Indexes from 17 December 2019.

Dubai’s flydubai secures $500 million financing facility Dubai-based flydubai has secured $500 million to refinance the budget airline’s debut five-year Islamic bond, which is set to mature on 26 November 2019. The proceeds will be used to refinance the budget carrier’s $500 million debut Sukuk which was issued in November 2014. The low-cost airline stated that Emirates NBD Capital and Noor Bank acted as global coordinators while Emirates NBD Bank and Noor Bank were appointed joint underwriters on the deal. Emirates NBD Capital and Noor Bank were joined by Dubai Islamic Bank to be the ‘mandated lead arrangers and bookrunners on the financing facility.

Abu Dhabi plans up to $1.5 billion Saudi Aramco IPO stake

Dubai’s DP World listed $2.3 billion Sukuk, bonds in 2019

Abu Dhabi is planning to put as much as $1.5 billion into Saudi Aramco’s initial public offering (IPO), as the oil giant taps friendly neighbours to prop up a deal that is so far failed to draw foreign investors, reported Bloomberg. The emirate is seeking to make the investment through one or more state-linked entities. Saudi Aramco representatives met officials of some top Abu Dhabi funds and companies this week to discuss the potential commitments. If Abu Dhabi puts in an order of that size it would mean that the institutional offering is almost certainly fully covered. Samba Capital, lead manager on the offering said that institutional subscriptions totalled SAR 58.4 billion ($15.6 billion), representing about 90 per cent of the institutional tranche. The Abu Dhabi government has not made a final decision on which state entities will participate in the deal and the precise size of the investment could change. Saudi Arabia plans to raise more than $25 billion, selling a 1.5 per cent stake in the company at a valuation of between $1.6 trillion and $1.7 trillion. Of that, one per cent is earmarked for institutional investors and the rest for Saudi retail buyers.

DP World said that it issued and listed two Sukuk and two conventional bonds on Nasdaq Dubai with a total value of $2.3 billion in 2019. The ports operator plans to use the capital raised for debt refinancing and funding of growth opportunities. The listings, carried out during 2019, comprise two Islamic bonds of $1 billion and $500 million as well as two conventional bonds of $500 million and $300 million. Nasdaq Dubai stated that DP World is the largest UAE debt issuer by value on the region’s international exchange, where its Sukuk and conventional bonds listings now total over $9 billion. HE Essa Kazim, the Governor of Dubai International Financial Centre (DIFC), said, “The issuance and listing of these Islamic and conventional instruments in Dubai reflect the high level of expertise in the UAE across all aspects of the debt markets.” DP World’s $1 billion Sukuk and $300 million conventional bond which were listed in July 2019 were followed by the listing of the $500 million Sukuk and $500 million conventional bond in September 2019.

DIB board approves share swap for the acquisition of Noor Bank

Italy’s UniCredit and Turkish-based Koc Holding have confirmed that they are in talks to change the ownership structure of Yapi Kredi Bank, which the two companies control via a joint venture called Koc Financial Services, however, the firms said that they have not yet reached a deal, reported Reuters. UniCredit seeks to reduce its exposure to Turkey’s third-biggest bank, in a move seen as a step toward UniCredit’s exit from the country, which has been mired in recession. As part of the plan, UniCredit would sell its 50 per cent stake in its joint venture Koc Financial Services (KFS), which controls Yapi Kredi, to its partner Koc Holding. Koc Holding stated that talks were ongoing with UniCredit on reorganising the shareholder structures of the joint venture and Yapi Kredi in such a manner to ensure that the parties shall not reach direct or indirect majority of Yapi Kredi. Koc Financial Services, in which Koc Holding like UniCredit has 50 per cent stake, owns around 82 per cent of Yapi Kredi.

Dubai Islamic Bank’s (DIB) Board of Directors has approved proposed terms of the proposed merger with privately-owned Noor Bank. In a bourse filing, DIB stated that the board approved a share swap that will see it offering one new share in DIB for every 5.49 Noor Bank shares and the deal will be satisfied through the issuance of 651 million new DIB shares. The Shari'ah-compliant banks have a common shareholder in the form of Investment Corporation of Dubai, the state investor fund that owns a 28.4 per cent stake in DIB and 23.9 per cent of Noor Islamic Bank. The UAE government also owns a 4.42 per cent stake in Noor Bank through the Emirates Investment Authority. The acquisition would create a lender with AED 277 billion ($75 billion) in assets. The GCC financial services industry is witnessing a wave of consolidation as banks seek ways to improve competitiveness and boost capital amid slowing economic growth.

UniCredit, Koc confirm talks over Turkey's Yapi Kredi ownership

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NEWS HIGHLIGHTS

Lebanon cuts interest rates to ease crisis engulfing the economy Banque du Liban (BdL) has imposed a temporary interest-rate cap of five per cent on dollar-denominated bank deposits and 8.5 per cent on local-currency deposits received or renewed after 4 December 2019, reported Bloomberg. Lebanon is facing its worst financial crisis in decades amid nationwide unrest that is toppled a government and raised investor concern that the country, one of the most indebted in the world, might struggle to pay bondholders. The Lebanese central bank said that the decision must be reflected in the pricing of benchmark lending rates by local banks. BdL took emergency measures in an attempt to ease the worst financial crisis hitting the country in decades. The central bank also said it would temporarily pay 50 per cent of the interest it owed banks for dollar deposits and dollardenominated certificates of deposits in Lebanese pounds and the measures will be in place for six months. Lebanese banks have already imposed a ban on transfers of money abroad and a strict cap on cash withdrawals in dollars. As it seeks to preserve its dwindling stockpile of foreign currency, the central bank is rationing supplies of dollars to cover the import of fuel, pharmaceuticals and wheat. BdL is also considering issuing a circular that would formalise the restrictions set by banks primarily the ban on money transfers.

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ADIB seeks to increase foreign ownership limit Abu Dhabi Islamic Bank’s (ADIB) Board of Directors plans to open up to more foreign shareholders as the UAE eases rules to attract foreign direct investment. In July 2019, 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. In a bourse filing, ADIB proposed the increase of non-UAE nationals ownership of the Shari’ah compliant lender to 40 per cent as well as to amend Clause No. 7of ADIB Articles of Association after obtaining necessary approvals. Emirates NBD announced that it intends to seek approvals from shareholders and regulators to boost its foreign ownership limit to 40 per cent in September 2019—currently, foreigners hold five per cent of Emirates NBD shares and the Dubai Government owns a 55.76 per cent stake.

Singapore's Hyflux secures SGD 400 million rescue package from Utico Singapore-based Hyflux, the embattled water treatment firm has secured a restructuring deal worth SGD 400 million ($293 million) from UAE-based utility Utico, reported Bloomberg. The agreement comes after debtladen Hyflux—once lauded as a national champion running a strategically important water source for the city-state— entered a court-supervised restructuring process this year that threatened to wipe out the holdings of tens of thousands of retail investors. In a statement, Hyflux said that the deal will see Utico subscribe to SGD 300 million in Hyflux shares, giving the utilities firm a 95 per cent stake and inject working capital of SDG 100 million. Under the proposed terms of the courtapproved restructuring, SDG 250 million is to be paid to the unsecured debt holders. Perpetual and preference shareholders can opt for an upfront cash payment or payment in instalments.

Emirates NBD raises AED 6.45 billion in an oversubscribed rights issue

Jordan's commitment to structural reforms supports its credit profile, says Moody's

Egypt sovereign wealth fund seeks more Gulf partners to lure investments

Dubai’s Emirates NBD Bank has raised AED 6.45 billion ($1.76 billion) by issuing new shares after the capital call was oversubscribed by about 2.8 times. The net proceeds raised from the rights issue will be used to strengthen the lender’s capital base and to support future growth of the business. The lender stated that the strong demand from the UAE, Middle East and international investors resulted in total funded commitments in excess of AED 18 billion. HH Sheikh Ahmed Bin Saeed Al Maktoum, the Chairman, Emirates NBD, said, “The positive response we have received will further strengthen our balance sheet and help progress milestones as we continue our growth journey and commitment to our shareholders.” Emirates NBD said that the overall demand in the bank’s rights issue from non-UAE investors was in excess of AED 11 billion, equivalent to 62.6 per cent of the total funded commitments due to the recent increase in the lender's foreign ownership limit from five to 20 per cent. Lenders across the GCC are trying to broaden the base of their investors as a combination of low oil prices, slowing economic growth and geopolitical upheavals drain inflows.

Moody's said that the Jordan government’s fiscal consolidation efforts and commitment to structural reforms are supporting the country’s credit profile, adding that the economy is expected to expand by 2.4 per cent between 2019-22. The rating agency stated that Jordan's credit profile (B1 stable) reflects the government's commitment to fiscal consolidation and structural economic reforms, as well as its strong international support and relative government effectiveness. Jordan's new finance minister cancelled new taxes in the 2020 budget in a bid to stave off protests that have rocked neighbouring Lebanon and Iraq. However, Moody’s said that credit challenges rising from weak growth, high unemployment as well as large current account deficits and very high government debt in the context of rising domestic social pressures and slowing global growth.

Egypt’s sovereign wealth fund is looking to more oil-rich Gulf allies to drum up foreign investment, as the Arab world’s most populous nation presses on with the next phase of its planned economic revamp, reported Bloomberg. Ayman Soliman, the CEO of Egypt wealth fund, said that after launching a $20 billion investment platform with the UAE, the sovereign wealth fund is now setting its sights on Saudi Arabia, Kuwait and Oman as partners. The partnerships could take several forms including setting up investment platforms or funds—talks with Oman are at the most advanced stage and could be completed by the end of 2019 and Saudi Arabia and Kuwait have an appetite to invest in Egypt, said Soliman. Egypt’s first sovereign wealth fund, which was established last year with paidin capital of EGP 5 billion ($310 million) and EGP 200 billion authorised capital, comes as the government tries to revive the nation’s economy. That bid began in earnest in 2016 with the devaluation of the pound and the securing of a $12 billion, three-year loan from the International Monetary Fund. Partnerships, such as the one for an investment platform reached with the UAE’s Abu Dhabi Development Holding Company, are key to realising that goal.

Sovereign Ratings as of 1 December 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 4 Iraq 5 Jordan 6 Kuwait 7 Lebanon 8 Morocco 9 Oman 10 Qatar 11 Saudi Arabia 12 Abu Dhabi 13 Ras Al Khaimah 14 Sharjah

B/Stable/B B-/Stable/B B+/Stable/B AA/Stable/A-1+ B-/Credit Watch Negative/B BBB-/Negative/A-3 (BB/Negative/B) AA-/Stable/A-1+ A-/Stable/A-2 AA/Stable/A-1+ A/Stable/A-1 BBB+/Stable/A-2

12-May-2018 03-Sep-2015 20-Oct-2017 20-Jul-2011 25-Oct-2019 06-Oct-2018 11-Oct-2017 08-Dec-2018 17-Feb-2016 02-Jul-2007 05-Dec-2018 27-Jan-2017

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PHOTO CREDIT: Michael Nagle/Bloomberg

THE MARKETS

A trader works on the floor of the New York Stock Exchange (NYSE).

The continuing market consequences of the Great Recession Colin Moore, Global CIO, Columbia Threadneedle Investments, on the six big developments that came from the seismic shift in the financial landscape more than ten years ago

ore than a decade into the recovery that followed the Great Recession of 2008-09, many commentators and market participants believe we are in the late stages of the economic cycle that began as that crisis started to recede. To be clear, I am not offering any predictions about the timing of the next downturn or the outlook for global growth. But as financial markets watch for early indications of change on the horizon, one conclusion is inescapable: the economic environment in 2019 still bears the imprint of the events that unfolded in 2008-09. Far

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from breaking free of its effects, the global economy continues to be powerfully influenced by factors that either contributed to, or resulted directly from, the Great Recession. Joe Brusuelas, Chief Economist at RSM, an audit and advisory firm, was quoted in the Washington Post last September, saying, “[The Great Recession] was such a shock to the economic system that it unleashed dynamics that we still don’t understand fully.” This is nowhere more obvious than in the low and zero interest rate environment that still dominates the world’s major economic blocs.

Highly unorthodox central bank policies intended to provide what former UK Chancellor Alastair Darling has called 'short-term shock therapy' have evolved into our new normal. There is no doubt that the unorthodox monetary policies in the immediate aftermath of the crisis such as QE1 helped to stave off a potential depression. But our inability to dispense with these crisis-era measures has become a major problem, undermining confidence in the strength of the recovery and encouraging a continuing sense of fragility. Against this background, I would highlight six crucial ways in which the causes and consequences of the Great Recession continue to dominate our outlook and define the room for maneuver.

DEBT HAS CONTINUED TO PILE UP Other than a brief pause during the worst of the crisis, the global stock of debt has carried on growing, aided by the sharp drop in interest rates by the major central banks from 2008 onwards and the introduction of quantitative easing. Having reached around $180 trillion on the eve of the crisis, it has since climbed to about $250 trillion. If excessive debt was partly responsible for the Great Recession, there is no sign that this problem has been resolved. Rather, its focus has shifted from private to public sector balance sheets, leaving governments reliant on deficit finance and central bank balance sheets bloated. This will afford them very limited scope to act should they be required to come to the rescue again.

“EUROPEAN BANKS ARE STILL GRADUALLY RECAPITALISING THEMSELVES MORE THAN 10 YEARS LATER, LEAVING EUROPEAN COMPANIES, WHICH ARE HEAVILY RELIANT ON BANK FINANCE, AT AN OBVIOUS DISADVANTAGE.” — Colin Moore

'TOO BIG TO FAIL' LIVES ON The term Too Big to Fail (TBTF) predates the Great Recession, having been popularised in 1984 during the takeover by the Federal Deposit Insurance Corporation of Continental Illinois. But TBTF gained a new lease of life during the financial crisis as it became clear that the banking system is so interconnected that a crisis in one area can easily engulf the whole. Today, governments and regulators have done what they can to manage the risks of TBTF—identifying systemically important institutions for additional oversight, mandating resolution plans for failing banks, and carrying out rigorous stress testing of assets and liquidity. But there is no end in sight for TBTF. In fact, in the US, for example, the largest banks have increased their share of deposits since the crisis, further concentrating the market.

THE PERFORMANCE OF THE DOW JONES INDUSTRIAL AVERAGE (DJIA) MARKET INDEX OVER THE LAST TEN YEARS

Source: Macrotrends

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THE MARKETS

Recession with the biggest stimulus package enacted in any country, largely channeled through its state-owned banks. Banking assets almost doubled to 250 per cent of GDP, and debt exploded from 248 per cent of GDP to 441 per cent by September 2018. China has never exerted greater influence over the direction of the global economy.

ECONOMIC RECOVERY LEFT TOO MANY BEHIND

Colin Moore, Global CIO, Columbia Threadneedle Investments

“THERE IS NO DOUBT THAT THE UNORTHODOX MONETARY POLICIES IN THE IMMEDIATE AFTERMATH OF THE CRISIS SUCH AS QE1 HELPED TO STAVE OFF A POTENTIAL DEPRESSION.” — UK Chancellor Alastair Darling

TBTF is here to stay because the Great Recession reminded us that governments cannot allow major banks to fail.

PRODUCTIVITY AND LABOR FORCE GROWTH HAVE STALLED Since the Great Recession, productivity growth in developed economies has slowed sharply and weak labor-force growth has led to tight employment markets and skills shortages, which are a growing problem in Europe and Japan, and are particularly noticeable in the US. These two factors tend to impede consumption and encourage increasing leverage. If productivity performance fails to improve, monetary policymakers may have little choice but to intervene.

CHINA’S INFLUENCE OVER THE WORLD ECONOMY HAS GROWN As China’s economy has claimed a steadily larger share of world economic output, the rest of the global economy has become more sensitive to any slowdown in China’s pace of growth. This matters because concerns have also grown over the country’s spiraling stock of debt, which Mark Carney, Governor of the Bank of England and former Chairman of the Financial Stability Board, has identified as a major threat to financial stability. China protected its economic expansion during the Great

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As of mid-2019, the US economic recovery following the Great Recession is the longest on record, but it is also one of the weakest. In contrast, the US stock market has staged one of the strongest recoveries on record, benefiting owners of capital but contributing to worsening income inequality in the US. In 1970, family income at the 90th percentile was seven times higher than at the 10th percentile. By 2016, the gap had jumped to 13 times, with family incomes at the 10th percentile having shown almost no growth over that period. Growing income inequality across the developed world is likely to have contributed to the rise of populist politics around the world.

GLOBALISATION HAS PETERED OUT The coordinated global reaction to the Great Recession was a prime example of international co-operation through the multilateral organisations set up following the Second World War. That spirit of co-operation has vanished. Instead, nationalistic politics dominate, with countries such as China and Russia asserting their 'great power' status increasingly aggressively and narrow self-interest dominating international relations. As a result, the globalisation that drove much of the world’s economic growth in the decades leading up to 2008 has ground to a halt. If another crisis were to take hold, it is not clear that countries would necessarily rekindle their former spirit of co-operation and connectedness. These are some of the major legacies of the Great Recession that continue to dominate the global outlook more than a decade later. But with the advantage of hindsight, what lessons should we take from it for the future? One clear conclusion is that countries that took swift, decisive action to address their problems reaped big benefits. The US’s enforced recapitalisation of its banking system allowed it to recover quickly and increase its support for the real economy. The contrast with Europe is telling. European banks are still gradually recapitalising themselves more than 10 years later, leaving European companies, which are heavily reliant on bank finance, at an obvious disadvantage. The US’s economic outperformance relative to Europe since the Great Recession is arguably due in part to its robust banking sector, which supports the real economy in a way European banks cannot. A second conclusion is that well-intentioned regulation in response to a crisis can sow the seeds of problems in the future. The Volker rule reduced the willingness of fixed income market makers on Wall Street to carry inventory in the way they had before the Great Recession. Rules intended to make Wall Street banks safer have increased the risk that fixed income markets could see their liquidity dry up during periods of stress. Given sustained expansion in the stock of investment grade credit over the past decade, this has troubling implications. The Great Recession may have given way to a period of sustained economic growth, especially in the US, but the crisis continues to cast a long shadow. As the world economy moves into its second decade of expansion, the effects of the previous crisis are still plain to see.

COVER INTERVIEW

Building on Bahrain’s rich financial heritage H.E. Rasheed Mohammed Al Maraj, Governor of the Central Bank of Bahrain (CBB), the winner of the Lifetime Achievement Award at the Banker Middle East Industry Awards 2019, sits down with Banker Middle East to share his views about the state of the Bahrainian financial sector and the CBB’s focus on fintech and consolidation

our Excellency, congratulations on the honour of Lifetime Achievement Award at the Banker Middle East Industry Awards 2019. What does this award mean for you?

I am honored to have been selected for this award which affirms recognition of the Central Bank of Bahrain as a forward-thinking regulator as well as the major milestones marked by the Kingdom of Bahrain in the financial services sector over the past decade. I am hopeful that we will continue to stay ahead of current trends and development in the region and to provide a sustainable financial ecosystem for future generations to come.

What are some of the key implementations that have affected the Bahrain economy/finance sector in the past few years? Bahrain’s banking sector has remained stable and resilient throughout the wave of shocks over the past years and the CBB has undertaken a number of measures to ensure financial stability. The capital adequacy ratio of the banking segment remains high with stable NPL ratios, while provisioning increased after IFRS9 was introduced at the start of 2018.

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“IN THE PAST YEAR AND A HALF ALONE, BAHRAIN HAS BROUGHT IN A BANKRUPTCY LAW TO ENCOURAGE REINVENTION AND INNOVATION, A DATA PROTECTION LAW TO PROMOTE THE SECURE COMMERCIAL USE OF DATA AND A COMPETITION LAW TO MAKE IT EASIER FOR START-UPS TO COMPETE ON A LEVEL PLAYING FIELD.” — H.E. Rasheed Mohammed Al Maraj

H.E. Rasheed Mohammed Al Maraj

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COVER INTERVIEW

The Bahrain Fintech Bay in Manama, Bahrain is a key initiative for the CBB in focusing on finance's tech future.

“WE ENCOURAGE CONSOLIDATION BECAUSE IT LEADS TO STRONGER INSTITUTIONS THAT WOULD BE ABLE TO UNDERTAKE LARGER TRANSACTIONS AND ENHANCE GOVERNANCE AND RISK MANAGEMENT AS WELL AS ATTRACT MORE SKILLED RESOURCES.” — H.E. Rasheed Mohammed Al Maraj, Governor, Central Bank of Bahrain

The CBB has also continued to make progress in implementing the 2017 FSAP recommendations by the IMF. In 2017, the CBB introduced the region’s first regulatory sandbox in Bahrain, for fintech start-ups to test and scale innovative new services. This has helped strengthen Bahrain’s position as a fintech and financial services hub in the GCC. Its graduates include Rain Financial, the first licenced cryptocurrency trading platform and Tarabut Gateway, the region’s first licensed open banking aggregator platform. In the past year and a half alone, Bahrain has brought in a bankruptcy law to encourage reinvention and innovation, a Data Protection Law to promote the secure commercial use of data and a Competition Law to make it easier for start-ups to compete on a level playing field.

Could you also shed some light on the GCC finance/ banking sector? Presently, Bahrain hosts around 400 domestic, regional, and international financial institutions. There is a strong appetite within our financial sector, which is undergoing

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a transformation, to explore collaboration with fintechs in order to adopt new and innovative solutions to drive their businesses forward. Fintech is proving a powerful force in transforming the customer experience and is working on posing a direct challenge to often outdated business practices. The power and legacy of the traditional banking firms are being challenged by the scalability, agility, and flexibility of new fintech companies. The GCC financial sector has developed significantly over the last few years. The development of debt and equity markets have been supported by a combination of robust economic activities, a growing Islamic finance sector, and financial sector reforms. As a result, the GCC financial system has deepened. And with the growing fintech ecosystem, the number of fintech start-ups in the GCC region is expected to increase significantly. The GCC has the opportunity to harness the next generation technologies and convert their potential ahead of others, if we bring in smart, enabling regulation before others do. It can also help solve existing problems with SME lending by decreasing information asymmetry, improving competition, and decreasing the overall costs of lending to SMEs. It can also significantly improve customer experience, thereby reducing customer complaints and bringing the unbanked and the underbanked into the financial sector.

What are your views on the wave of consolidation happening in Bahrain and all across the region’s banking industry? The current wave of consolidation is moving in the right direction. We are seeing greater awareness from customers who are demanding better service and more products. This is adding to the challenges facing smaller banks. In Bahrain, the CBB encourages such efforts and has been playing a facilitative role.

COVER INTERVIEW

We encourage consolidation because it leads to stronger institutions that would be able to undertake larger transactions and enhance governance and risk management as well as attract more skilled resources.

“SINCE INTRODUCING THE REGULATORY SANDBOX AND THE ESTABLISHMENT OF THE FINTECH AND INNOVATION UNIT WITHIN THE CBB, WE HAVE ISSUED AND REVISED SEVERAL OF OUR REGULATIONS TO CREATE ROOM FOR INNOVATION WITHIN BAHRAIN’S FINANCIAL SECTOR.” — H.E. Rasheed Mohammed Al Maraj

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What kind of challenges do you expect to face going into 2020? There are a number of challenges ahead of us going into 2020, from the trade tensions and regional geo-politics to Brexit and its spillover effects on liquidity, currency volatility and the MENA financial sector as a whole as well as the impact of rising corporate debt as a percentage of GDP in emerging market and its effect on regional economies. We are also facing the challenge of being able to stay ahead of technological development and deliver a regulatory regime that is both pro-innovation and protects the consumer from emerging technology related risks such as cyber security threats.

“FINANCIAL SERVICES, IN PARTICULAR, IS A STANDOUT SUCCESS AS IT IS NOW THE LARGEST CONTRIBUTOR TO GDP, BUILDING ON THE KINGDOM’S RICH HERITAGE AS A FINANCIAL CENTRE.” — H.E. Rasheed Mohammed Al Maraj, Governor, Central Bank of Bahrain

capital requirement for the crowdfunding platform operator, removed the prohibition on business-to-business lending, and increased the maximum amount of lending. The CBB issued this year rules on crypto-asset dealings and another rule on digital financial advice (roboadvisory). On the international front, the CBB became a member in the Global Financial Innovation Network (GFIN) which builds on the UK Financial Conduct Authority’s proposal to create a ‘global sandbox’. The CBB also signed an MoU with the Monetary Authority of Singapore (MAS) and the Abu Dhabi Global Market (ADGM) to cooperate on promoting and regulating fintech.

What are your projections on Bahrain’s financial and economic stability for the next couple of years? The trends that have seen Bahrain’s economy become more resilient, enjoy growth and attract increased inward investment are likely to continue in the next couple of years. Such sustainability is based on many factors, but perhaps the most important is our increased diversification. Oil accounts for less than 20 per cent of Bahrain’s GDP, with our financial services, technology, manufacturing and real estate sectors all growing and contributing higher investment and creating more jobs. Financial services, in particular, is a standout success as it is now the largest contributor to GDP, building on the Kingdom’s rich heritage as a financial centre. Commitment to the Fiscal Balance Programme agenda, in addition to the elevated efforts on structural reforms, would support the overall financial conditions of the market for the next couple of years and would mitigate any risks to Bahrain’s financial and economic stability. Overall, continued efforts to monitor and contain financial stability risks would also be key to avoid systemic risks in the future.

What are your plans on maintaining the level of liquidity in Bahrain’s banking sector? The CBB issued last year new regulations on liquidity risk management requirements for banks, the implementation of which shall enforce more stability in the liquidity of banks.

What is your approach on fintech and regulation? How do you view this relationship? Since introducing the Regulatory Sandbox and the establishment of the Fintech and Innovation Unit within the CBB, we have issued and revised several of our regulations to create room for innovation within Bahrain’s financial sector. For example, the number of participants in the sandbox increased from seven in May 2018 to 35 as of August 2019. This increase helps innovative solutions get to the market quickly and also allows us as regulators to learn about appropriate regulations to be introduced. In November 2018, the CBB revised regulations on crowdfunding. It reduced the minimum

H.E. Rasheed Mohammed Al Maraj accepts the Banker Middle East Industry Awards 2019 Lifetime Achievement Award in Manama, Bahrain.

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REGIONAL ROUNDUP

A fireworks display takes place above the headquarters of Kingdom Holding Company.

Structural reforms to spur growth across GCC The significant groundwork which is being laid down in markets across the GCC region is expected to drive future growth

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of reforms across the region to modernise legislation and enhance the business environment. Similarly, it is notable that the region will be hosting two major global events in 2020—the Expo 2020 Dubai and the G20 summit in Saudi Arabia. Expo 2020 Dubai is expected to have a significant economic impact on the region, Dubai in particular, and it's forecasted that it is likely to result in it becoming the second most visited city in the world in 2020, according to PwC. The G20 summit, although a much smaller scale event with little direct economic impact, it will play a similarly major role in showcasing some of Saudi Arabia’s social and economic reforms that were implemented recently to drive foreign investment. Real growth rates in 2019 across the region have been broadly in line with 2018 performance, showing about a two per cent growth in the GCC and slightly higher in the rest of MENA, said PwC.

PHOTO CREDIT: Faisal Al Nasser/Bloomberg

THE KINGDOM

CC governments are restructuring and opening up their economic activities, rethinking the role of foreign investors as well as SMEs as they look to ease fiscal burdens and do away with dependence on oil. There is a broad trend of reforms across the region to modernise the legislation and enhance the business environment. According to the World Bank’s Doing Business Report 2019, the six-member bloc Gulf region sharply improved in the World Bank’s ease of doing business rankings this year and the most improved countries over the previous year were the UAE, Saudi Arabia as well as Bahrain and Kuwait. NBK Group said that there is a growing interest in the Gulf by emerging market equity and bond investors, made possible by capital market reforms—inflows of portfolio investment are expected to increase the scope of financing for both the public and private sectors. The significant groundwork which is being laid down in markets and legislation across the region is expected to drive future growth. The International Monetary Fund (IMF) said that it has been monitoring the key changes that have been underway in the landscape for foreign investment and public-private partnerships (PPP) and there is a broad trend

Saudi Arabia’s structural reforms are beginning to have a positive impact on the economy and non-oil growth is picking up. The Kingdom’s economic diversification plan is being supported by government spending on large infrastructure projects planned under the country’s Vision 2030—Crown Prince Mohammed bin Salman’s ambitious economic transformation plan—which should have positive spillover effects on the private sector. The Public Investment Fund, with around $320 billion AUM on behalf of the government, is at the centre of Saudi Crown Prince’s economic transformation drive. The Saudi sovereign wealth fund is financing several mega-developments including the $500 billion futurist economic free zone, NEOM City, and the Red Sea Development Company's mega tourism project. In September 2019, Bloomberg reported that Saudi Arabia awarded Tamimi Group and Saudi Arabian Trading & Construction Company contracts to build worker housing for NEOM, as plans for the $500 billion project move forward despite scepticism from investors. The ambitious 26,500 square kilometre NEOM city will link Saudi Arabia, Egypt and Jordan and it is imagined as a futuristic hub for both industry and citizens. EY said that to attract foreign talent and investment, the futuristic city will have a free zone with its own customs system, special taxation as well as labour legislation and an independent judicial system subject to independent regulations—which will be drafted hand-in-hand with local and foreign business entities. Saudi Arabia is also in talks with regional and global investors for its first mega entertainment and sports city that is being developed as the Kingdom spearhead plans to wean its economy from reliance on oil. Qiddiya, backed by PIF, will cover 334 km outside of Riyadh and have a Six Flags Entertainment Corporation theme park, private racetrack and an off-road zone.

“THERE IS A GROWING INTEREST IN THE GULF BY EMERGING MARKET EQUITY AND BOND INVESTORS, MADE POSSIBLE BY CAPITAL MARKET REFORMS—INFLOWS OF PORTFOLIO INVESTMENT ARE EXPECTED TO INCREASE THE SCOPE OF FINANCING FOR BOTH THE PUBLIC AND PRIVATE SECTORS.” — NBK Group

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REGIONAL ROUNDUP

Similarly, PIF launched the Kingdom's first commercial helicopter operator with an initial capital of SAR 565 million ($151 million). The Helicopter Company, which was launched to cater to rising demand in luxury tourism and urban aerial transport, will offer private air transport and tourist trips within Saudi’s major cities, as well as other parts of the country. The Kingdom, which has been relatively closed to holidaymakers for decades, launched a visa regime in September 2019 for nationals from countries in Europe, North America and much of Asia. Additionally, Saudi Arabia and the UAE are considering launching a joint tourist visa which is expected to be introduced in 2020, the move will allow both countries to use one visa for tourists.

THE EMIRATES The World Bank said that growth in the UAE is projected to pick up to three per cent in 2020 and 3.2 per cent in 2021, spurred by Dubai’s hosting of the World Expo in 2020 as well as Dubai and Abu Dhabi’s implementation of the economic stimulus plans announced in 2018.

“GROWTH IN THE UAE IS PROJECTED TO PICK UP TO THREE PER CENT IN 2020 AND 3.2 PER CENT IN 2021, SPURRED BY DUBAI HOSTING THE WORLD EXPO IN 2020 AS WELL AS DUBAI AND ABU DHABI’S IMPLEMENTATION OF THE ECONOMIC STIMULUS PLANS ANNOUNCED IN 2018.” — The World Bank

Expo 2020 Dubai, for which the Dubai government allocated $7 billion for infrastructure construction, is expected to draw large numbers of international visitors from 132 participant countries which should boost both private consumption and services exports next year. According to EY’s The economic impact of Expo 2020 Dubai report, “Expo 2020 Dubai and its legacy are expected to contribute AED 122.6 billion of gross value added to the UAE’s economy from 2013–31 as well as support up to 905,200 full-time equivalent (FTE) job-years, which is equal to approximately 49,700 FTE jobs per annum. In the legacy period from May 2021 to December 2031, the Dubai Expo site is expected to be redeveloped to District 2020, which is expected to include tenant companies and an expanded Dubai Exhibition Centre (DEC). District 2020 has been planned to support the UAE’s future vision by supporting sustainable economic development, moving toward an innovation-driven economy and creating a business environment to help support key growth industries such as logistics and transport, travel and tourism, construction and real estate and education. The UAE’s bankruptcy and financial restructuring law which was introduced in 2016 also seeks to support the nation’s legislative structure, protects its investors as well as strengthens the nation’s position in various global competitiveness indices in a bid to attract more foreign investors. The IMF stated that the UAE’s bankruptcy law contributes to raising the level of credit and financial security in the country

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by enhancing investor confidence as well as stimulating the nation’s economy by allowing people in financial difficulty to reorganise their financial affairs and repay their debts. Similarly, the Emirates’ long-term visa system, which was launched in November 2018, is meant to facilitate business, create an attractive and encouraging investment environment for the growth of business for investors, entrepreneurs and professional talents. The long-term visa will be awarded to investors, entrepreneurs as well as specialised talents and researchers in the fields of science, knowledge and outstanding students. According to the Federal Authority for Identity and Citizenship, to apply for a 10-year residency visa, the amount invested shall be wholly owned by the investor and not loaned and should be proven by supporting documents. The longterm visa could also be extended to include business partners, provided that each partner contributes AED 10 million, the spouse and the children, as well as one executive director and one advisor. The decision also includes the terms to grant a long-term visa to two categories of entrepreneurs; having a previous project with a minimum of AED 500,000, or having the approval of an accredited business incubator in the country. Entrepreneurs will be granted a five-year visa with a possibility for upgrading to an investor’s visa provided they meet the requirements. Just like Saudi Arabia’s PIF, Abu Dhabi-based Mubadala Investment Company invested a total of AED 70.1 billion of additional and recycled capital across its existing investment sectors including technology, aerospace as well as commodities and financial services in line with the UAE’s efforts to diversify its economy. The state investor together with Microsoft and SoftBank Group launched Hub71, a AED 520 million initiative which seeks to support high tech start-ups. In October 2019, Mubadala also launched AED 918 million ($250 million) MENA-focused tech investment funds to support start-ups from the GCC as well as the entire Middle East region while empowering tech talent in the UAE and across the wider region. The new MENA tech funds will invest in companies and venture funds that help boost local tech incubator Hub71— which was launched earlier this year as part of a broader effort by the government to diversify the economy.

MARKETS The Institute of International Finance said that it expects investor appetite for Saudi and Kuwaiti equities to increase after the full inclusion of the Tadawul and Kuwait Boursa on the MSCI and FTSE Russell emerging markets index. Foreign equity inflows to the region are also projected to surpass those of India and China. The MSCI completed the inclusion of the Saudi Arabia index in its closely watched and widely duplicated emergingmarkets index in August 2019, a move that is expected to draw billions of dollars of investor inflows especially with the government’s recent call for family-owned companies list on the Tadawul. The New York-based index compiler, whose emergingmarket group of indexes has about $1.8 trillion of assets tied to it, will also upgrade MSCI Kuwait Index to Emerging Markets status from its current frontier classification subject to omnibus account structures as well as same National Investor Number cross trades being made available for international institutional investors before the end of November 2019.

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Saudi Arabia, which has been relatively closed to holidaymakers for decades, launched a visa regime in September 2019 for nationals from countries in Europe, North America and much of Asia.

“THE UAE’S BANKRUPTCY LAW CONTRIBUTES TO RAISING THE LEVEL OF CREDIT AND FINANCIAL SECURITY IN THE COUNTRY BY ENHANCING INVESTOR CONFIDENCE AS WELL AS STIMULATING THE NATION’S ECONOMY BY ALLOWING PEOPLE IN FINANCIAL DIFFICULTY TO REORGANISE THEIR FINANCIAL AFFAIRS AND REPAY THEIR DEBTS.” — The IMF

FUTURE OF BANKING INDUSTRY Financial technology is the in-thing across the Arabian Gulf financial centres. Flamboyant symposiums, seminars as well as workshops, hackathons and accelerators, even festivals are appearing at an extraordinary pace. Bahrain Fintech Bay, the GCC’s largest fintech incubator, was formed in association with more than 30 corporate partners, including banks, insurers as well as payment processors, telecoms and technology companies. Manama is taking the lead in the introduction of the open banking system and the region is poised to be a hotbed for revolutionary banking regulations. The National Bank of Bahrain (NBB) is among GCC banks leading the trend by adopting technologies that enable the

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PHOTO CREDIT: Christopher Pike/Bloomberg

REGIONAL ROUNDUP

lender to deliver new open banking services to its customers. A collaboration with Tarabut Gateway, a new specialist fintech and open banking infrastructure provider, will enable the national bank’s clients to connect their account to any other bank operating in Bahrain for an amalgamated view of their finances from within NBB’s online and mobile banking apps. Similarly, Dubai’s Emirates NBD partnered with Dubai International Financial Centre FinTech Hive, to launch a new programme where they are certifying fintechs that collaborate, co-create and innovate using the bank’s API Sandbox. According to Moody’s, the UAE-based lender’s collaboration with fintech start-ups is credit positive because it will help the lender develop new digital products and services to meet evolving customer expectations, supporting the bank’s profitability. In Saudi Arabia, the Saudi Arabian Monetary Authority granted licences to 14 fintech companies in the field of crowdlending and payment services in June 2019. The companies include Geidea, Bayan Payments Company together with HalalaH, Saudi Digital Payments Company as well as Saudi Post, Brightware, and Tap Payments. Regional governments are restructuring their legal frameworks in a bid to increase foreign direct investments and do away with reliance on oil. In 2018, Bahrain started implementing structural reforms which are meant to eliminate fiscal deficit by 2022 through its Fiscal Balance Programme. Similarly, the newly introduced insolvency law in Saudi Arabia, Bahrain as well as the UAE were lauded by investors who are expecting more opportunities ahead.

CAPITAL MARKETS

How to approach first-time Sukuk issuance Mohammed Khnifer, Senior Associate, Debt Capital Markets at Islamic Corporation for the Development of the Private Sector (ICD) writes for Banker Middle East about the basic considerations that new Sukuk issuers should be aware of in approaching their first Islamic debt issuance

REGULATION On the regulation side, issuers need to be mindful of local and international regulations that regulate debt issuance. Sukuk offerings may take longer to structure and document than conventional offerings, owing to the need to establish an SPV (onshore/offshore), identification of appropriate assets, regulatory/government approvals, as well as additional structuring and approvals from Islamic scholars in the form of a fatwa. Mohammed Maait, Egypt’s finance minister, who has laid the groundwork for Egypt’s future Sukuk issuance. PHOTO CREDIT: Sima Diab/Bloomberg

rospective new sovereign and corporate issuers in emerging & frontier markets often tumble into unchartered territory with debut Sukuk issuance, especially if the jurisdiction of the issuer has never issued an Islamic debt instrument before. There is no easy crash course that can summarise what these prospective issuers can expect as each jurisdiction has its own unique challenges. Here is a summary of the most common challenges and what prospective new issuers should expect with debut issuance.

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TAXATION The relevant tax authority should consider providing the necessary tax waivers, such as VAT and sales tax, to the Sukuk sale agreement and purchase undertaking if applicable under the issuer’s jurisdiction. Other tax considerations, such as transfer tax/stamp duty and withholding tax, need to be considered prior the issuance.

WHAT TO EXPECT ON THE THE LEGAL FRONT If the issuance is an international one, then issuers need to consider the following counsels: • International Counsel: Advise sovereigns in relation to documentation and regulatory compliance under English laws. • Issuer Counsel: Counsel in offshore/onshore jurisdiction. • Delegate Counsel: Advise delegate in relation to its obligations acting on behalf of certificate holders.

GLOBAL SUKUK ISSUANCE GREW STRONGLY IN H1 2019 Sukuk issuance in $ billion Sovereigns & Supranationals

Corporates

FIs

<1Yr Sukuk

Estimated Issuance for H2019 2

160 140

120 100 80 60 40 20 -

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Others

H2019 1

Source: Thomson Reuters Eikon, Bloomberg, IFIS and Moody's Investors Service

GOVERNMENTS AND SHORT TERM PAPER FROVE AN INCREASE IN ISSUANCE DURING H1 2019 Sukuk issuance in H1 2019 ($ billion) Sovereigns

Corporates

FIs

< 1 Yr Sukuk

60.0 50.0

$ Billion

40.0 30.0 20.0 10.0 -

Offering circular (OC)/prospectus is compiled by the underwriters and legal counsel on behalf of the Issuer. The OC is prepared for distribution. It includes issuer’s description. The OC summarizes the offering and details of the terms and conditions is prepared by the book runner's legal counsel. On the other hand, there is the trust deed which governs the relationship between the issuer and the trustee. The trustee acts on behalf of the noteholders in the relationship between issuers andOthers noteholders. This is typical of transactions 13% where country of issue is separate from country of listing. UAE Furthermore, 4% the subscription agreement is signed between parties involved in the agreement i.e. SPV,Malaysia which as acts as an Turkey issuer and 9% the lead managers. The issuer 41% agrees to issue and sell the notes to the underwriters. The underwriters jointly and separately agree to subscribe to the same. Indonesia 18%

H2018

H2019

GCC GCC

H2018

H2019

Asia SoutheastSoutheast Asia

H2018 Turkey

H2019

Turkey

Source: Thomson Reuters Eikon

Saudi Arabia “THERE IS NO EASY 15% CRASH COURSE THAT CAN SUMMARISE WHAT THESE PROSPECTIVE ISSUERS CAN EXPECT AS EACH JURISDICTION HAS ITS OWN UNIQUE CHALLENGES.”

— Mohammed Khnifer

LISTING REQUIREMENTS The governing law varies depending whether the listing is in the domestic market (follows local law) or the international one (follows the English law). Certain jurisdictions (like Ireland) require listing agent to facilitate Sukuk listing on the Stock Exchange. Listing agents prepare all of the material for the submission to the stock exchange, such as application documentation, prospectus etc.

DOCUMENTATION We cannot cover everything on the documentation side of the Sukuk, but we can highlight at least three of them. First, the prospectus. Such investor documentation is per international standards and usually conform to the laws of an internally/externally accepted jurisdiction.

Mohammed Khnifer

Mohammed Khnifer can be reached by email at mkhnifer@isdb.org and on twitter @mkhnifer.

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INSURANCE

Mitigating the risks of innovation Tracie Grella, the Global Cyber Practice Leader at AIG, highlights the importance of cyber insurance as well as the guidelines on how companies can mitigate cyber risks

As companies are increasing their digital footprintâ&#x20AC;&#x201D;which is great for efficiency, convenience and streamlining of businessâ&#x20AC;&#x201D;the same vehicles also serve as gateways to cyber-attacks.

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Tell us more about cyber insurance. How does it work and how important is it?

Cyber insurance policy is designed to help an organisation mitigate risk exposure by offsetting costs involved with recovery after breaches and it has been around for 20 years but in different markets as well as times. There are four main coverages in cyber insurance: • Security privacy and liability cover which insures against disclosure of data either through a cyber event or a privacy event. This coverage responds when confidential data is disclosed. • Cyber insurance insures business interruption related losses—if a cyber event disrupts a business network, the loss of income and extra expenses as a result of network interruption will be addressed by the policy. • Cyber insurance insures against cyber extortion, which pays the extortion payment where allowed by law. The decision to pay is made by the insured. Cyber extortion often results in business interruption as a result of the systems being down or data not being accessible, and the policy will respond to that as well. • Additionally, cyber insurance insures crisis management expenses and data restoration. Cyber events involve many tasks which needs to be executed promptly, forensic experts need to investigate what happened as well as stop or mitigate the extent of the attack, get the intruders out of the network and make sure all the data is clean and restored. Similarly, a company needs to deal with communication hence public relations—working with clients, stakeholders as well as customers and partners to communicate the breach so all the exchanges, notifications and updates will be covered by the policy. Cyber insurance is broad with respect to security failures and privacy losses—that is violations of privacy and regulations that may be triggered by a cyber attack. Cyber insurance policies cover regulatory violations which include the defence and appeal, as well as fines and penalties.

Similarly, cyber insurance insures against system failures and dependent business interruption. If systems are taken offline due to a programming or system upgrade resulting in loss of business income—the policy will address such unforeseen occurrences.

How does cyber insurance cover companies against data breaches? The cyber insurance policy usually covers non-physical losses where a company is attacked and it results in the loss of corporate or personal confidential information. So, issues of companies losing confidential information that you see in the news will be addressed under the security and privacy section of cyber insurance. For data breaches, the event management coverage section is normally triggered first followed by the security and privacy liability coverage section.

What are the typical cyber risks for banks? And what are the less common ones that banks tend to overlook? Banks have been dealing with the regulatory environment for a long time, so they are leading when it comes to prioritising cyber controls. Among industries, banks are more sophisticated in protecting against cyber attacks and have invested more money as well as talent to protect their networks. However, banks are not immune to cyber events. Lenders are attacked on a daily basis with a number of incidents they are able to block but some cyber events are successful. By being a data-intensive industry and being on the lookout against disclosure of confidential information, banks are concerned about the loss of data. A large-scale loss for banks may result in business interruption, resulting in loss of revenue as well as potentially damaging the bank’s reputation and confidence from customers. As companies are increasing their digital footprint—which is great for efficiency, convenience and streamlining of businesses— the same vehicles also serve as gateways to cyber attacks. Whether launched by run-of-the-mill hackers, criminals, insiders or even nation-states, cyber attacks are likely to occur and can cause moderate to severe losses for organisations large and small. However, banks are prioritising security as they are embarking on digital transformation and planning about security should be a key component of that initiative. There are situations where companies in other industries are developing services and products without prioritising security. It is a good practise that when companies are developing new technologies, they also develop new security protections—this is a critical component of digital transformation within the banking sector.

What kind of trends do you see in the cyber insurance space in the EMEA region? The cyber insurance policy covers non-physical disclosure were a company releases confidential data, as well as incidents, were businesses go offline but there is no physical damage to the network. Financial institutions remain exposed to impactful cyber events, however, companies that rely on operational technology and industrial control systems have additional significant exposure to physical cyber events, for instance, where a valve can be adjusted resulting in a gas pipeline explosion. Companies need to look beyond traditional kinds of cyber policies and consider the cyber risks the entire organisation is exposed to as well as how cyber events can be resolved in these kinds of physical losses. Insurance programs can be customized depending on your current business security posture and overall insurance program structure.

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INSURANCE

they need to set targets. Cybersecurity management is limited by the company’s resources as well as the available capital to invest in improving the cyber risk posture. Organisations need to decided where to a invest in order to get the best returns on reducing their risks. Most financial instituation are implementing basic hygiene and the minimum standard includes two-step authentication, training employees as well as creating cybersecurity awareness within the organisation from top-down and avoiding using unsupported software. Some of these precautionary measures might seem ordinary but they prevent around 98 per cent of data breaches. It is important that the cybersecurity controls a company invests in are implemented across the entire organisation. A network does not have borders—it is important that companies invest across their entire network system because once the adversary attack part of the network they can move throughout the network system which may paralyse the organisation resulting in loss of income.

Do you find companies and individuals seeking insurance after they have been exposed to a cyber event?

Tracie Grella

“CYBER INSURANCE CAN BE A GREAT WAY TO MITIGATE THE DAMAGE CAUSED BY A BREACH, BUT IT SHOULD COMPLEMENT CYBERSECURITY TECHNOLOGY AS PART OF AN OVERALL CYBER RISK MANAGEMENT PLAN.” — Tracie Grella, the Global Head of Cyber Risk Insurance

Additionally, banks have been concerned about their exposure to potentially having cyber event triggred loss resulting in a physical exposure. It can cause a fire or explosion at a data center—causing physical loss and potentially taking the company offline thereby losing revenue. Cyber insurance insures a broad range of cyber risk losses that may unexpectedly arise from cyber events and some policies can offer coverage for physical damage to hardware or coverage for business income loss. The Middle East is the supplier of around 70 per cent of the world’s oil and gas, and given this region’s importance to the world, cyber events are a big threat which needs to be well addressed and managed for both nonphysical and physical losses.

How can companies manage data breaches and Distributed Denial of Service (DDoS)? There are basic hygiene guidelines that are best practises on how companies can manage cyber risks. Developing a cybersecurity programme is a journey for organisations and

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Cyber insurance can be a great way to mitigate the damage caused by a breach, but it should complement cybersecurity technology as part of an overall cyber risk management plan. For a long time, there are several cybersecurity vendors trying to collectively sell their services, but companies have been reluctant to properly invest before a cyber event. Some companies will only seek to implement the cyber controls after they have been breached which is more expensive because an organisation will be forced to implement protection immediately. The same applies to insurance, if companies are not investing in controls its value and why it is a good business decision for an organisation, they are often reluctant to buy insurance. Cyber risks cannot be fully managed away, an organisation should do its best in implementing controls; but the threat is constantly changing and evolving. It is not possible to manage to zero risk. An organisation should reduce risk by implement strong controls that mitigate their threats, identify their remaining risk, determine how much risk they are willing to accept (their retention) and insure the remaining.

As Global Cyber Practice Leader at AIG, what is currently on top of your agenda? Our top agenda is working with our clients to evaluate their overall insurance programme not just their cyber controls but their overall insurance portfolio, their crime property, casualty and other programmes they may purchase. AIG seeks to evaluate how our clients’ insurance policies are responding to attempted breaches and cyber events and work with our clients to address this risk in the most holistic way. Our clients should go through an assessment of their posture in developing scenarios of what could happen to them if they encounter a cyber events. Will it result in physical damage to their infrastructure, products, and services? Will it result in bodily harm or injury to employees and how will their policies respond? This assessment is shared with our insureds to help them better understand their threat, control effectiveness and business impact. The assessment is provided in a boardroom ready document that can be shared with boards and C-suite executives.

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PRIVATE BANKING

The futureâ&#x20AC;&#x2122;s bright for private banking in the region With the region undergoing an unprecedented transformation, new opportunities will abound for the local wealth management sector, Rudy Guillemyn, Head of Elite & Private Banking, First Abu Dhabi Bank (FAB) writes for Banker Middle East

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quick search for ‘private banking’ on any news aggregator will typically yield a set of results dominated by the likes of Switzerland, Singapore and Hong Kong, who show little sign of relinquishing their perches atop Mount Offshore. Keep mining through the data, however, and it becomes clear that change is afoot, with the Gulf region rapidly rising through the ranks. According to the Boston Consulting Group’s 2018 Wealth Report, the UAE is the joint-fifth largest centre for global offshore wealth, with the sector overseeing some USD 0.5 trillion of assets and growing at an average rate of four per cent between 2012 and 2017. To put this into context, the UAE ranks higher than Luxembourg, the UK mainland and Monaco, with Bahrain close behind in eighth place. Such results have led leading analysts such as EY to conclude that “the GCC region is a highly prospective market for private banks and other providers of wealth management solutions”. This should hardly be surprising given the GCC’s meteoric economic rise since its inception. GDP growth has advanced in a more or less linear fashion for all member states over the past three decades and regional wealth is expected to rise at an annual rate of eight per cent over the next three years. In the UAE alone, the number of wealthy households doubled between 2005 and 2015, prompting a number of international banks to rededicate their private banking efforts and diversify away from traditional commercial operations. Equally as significant, the region’s financial institutions have been active in hiring world-class expertise and developing local wealth management propositions of their own. First Abu Dhabi Bank (FAB), for example, has established a global presence in strategic locations such as Geneva, London and Singapore, allowing it to offer its broad range of global investment and wealth solutions. Private banking therefore rests on fertile ground in the region, with a seemingly massive potential. At the same time, a number of positive reforms, from enhanced regulatory frameworks to increased transparency, have helped to build investor confidence, but there are still a number of challenges that need to be overcome if the region’s full potential is to be fulfilled. Perhaps the greatest challenge lies in the particular profile of clients in the region. For instance, high-income expatriates often spend limited periods in the region, curtailing the potential pool of clients for wealth management firms. When residents do seek out investment advice, this is often from familiar parts of the world such as the UK or Switzerland.

Rudy Guillemyn

“THE WORK BEING DONE ACROSS THE REGION TO TRANSFORM AND MODERNISE LOCAL ECONOMIES IS ALSO HELPING TO USHER IN NEW OPPORTUNITIES FOR PRIVATE BANKING. FINANCIAL HUBS LIKE ABU DHABI, DUBAI AND RIYADH ARE INCREASINGLY COMPETING ON AN EQUAL FOOTING WITH THE TRADITIONAL PRIVATE BANKING CENTRES OF THE WORLD.” — Rudy Guillemyn

This might be a major challenge if socio-economic trends were fixed phenomena. Fortunately, the region is undergoing a period of unprecedented change, with member states presently implementing ambitious multi-year development plans to place their economies on a sustainable footing for the future. The Abu Dhabi Economic Vision 2030, for example, calls for huge investments in infrastructure, energy and the gradual transition to a smart, digital economy. With 90 per cent of the region’s businesses family-owned, individual investors will be at the forefront of the region’s transformation, creating a wealth of opportunity for private banking institutions. Significantly, these opportunities will not be limited to regular advisory facilities and investment tools: according to the STEP Trust Quarterly Review, 75 per cent of GCC family businesses—some two thirds of all companies in the region—are likely to pass from founding generations to millennial successors in the near future. Demand for family governance services is therefore likely to skyrocket as these transitions take effect. Of course, the mere presence of an opportunity does not guarantee that it will be seized and the region’s HNWIs of tomorrow could continue to favour traditional offshore centres over local private banking institutions. This is unlikely to be the case, however, since local banks have been steadily gearing up for the changes ahead and adapting their wealth management offerings to millennial clients. FAB, for example, is broadening its wealth platform and investing in digital platforms, a prescient move given that wealth management globally is already incorporating the likes of roboadvisory services into their proposition. FAB and other GCC banks also operate vast international networks and partnerships, leading to considerable transfers of knowledge from traditional financial capitals to Abu Dhabi, Riyadh and other regional centres. Private banking and wealth management businesses in the GCC therefore appear well placed to compete on their own terms over the coming years, with the outlook particularly good for the Islamic asset management sector. In the GCC, the majority of Sharia products are managed and distributed through Islamic banks or subsidiaries, who boast a heritage and expertise that would be difficult to match elsewhere. The work being done across the region to transform and modernise local economies is also helping to usher in new opportunities for private banking. Financial hubs like Abu Dhabi, Dubai and Riyadh are increasingly competing on an equal footing with the traditional private banking centres of the world. And since local institutions are proactively preparing for the future while seizing the myriad opportunities available today, the summit of Mount Offshore could soon be within reach for the region’s banks.

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TRADE FINANCE

Closing the trade finance gap Eng. Hani Salem Sonbol, CEO, International Islamic Trade Finance Corporation, writes for Banker Middle East about the developing world’s potential and how to unlock global value chains

countries flourish, neighbouring countries and entire regions (Islamic or otherwise) stand to benefit from a virtuous cycle of sustainable growth and long-term prosperity. Trade finance is, however, only part of the solution. Autonomous financial institutions like the International Islamic Trade Finance Corporation (ITFC) for instance, have the responsibility as catalysts to mobilise private and public resources, so that enterprises (in particular SMEs) in developing countries can gain access to a wider choice of financing options. They should also provide businesses with the necessary trade-related capacity building tools to help them successfully compete in the global market and boost exports.

ENRICHING GLOBAL VALUE CHAINS—A KEY COMPONENT IN BUILDING SUSTAINABLE ECONOMIES Eng. Hani Salem Sonbol

ompanies and individuals the world over do best when integrated into global value chains. It provides companies with opportunities for growth and operational efficiencies; and offers individuals, entrepreneurs and employees wider career prospects. In the developing world, more needs to be done to advance trade so that more and more businesses can unlock their potential by participating in the global value chain—a crucial step towards inclusive growth, enhancing trade and boosting shared prosperity. In the developing world in particular, these partnerships can go a long way in successfully implementing targeted trade finance and export mobilisation strategies that have direct impact on the livelihoods of people. The underlying goal should be the creation of jobs in fast-growing economic sectors with high untapped export potential. Value chains are an integral part of regional integration as well as linking countries and regions to the global economy. As value chains in OIC (Organisation of Islamic Cooperation)

BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

In general, trade-related international support tends to focus on the integration of Least Developed Countries (LDCs) into the global economy by advancing economic and employment growth as well as financial flow. By UN definition, LDCs are low-income countries challenged by many structural impediments to sustainable development, such as political instability, vulnerability to natural disasters and epidemics, and a high reliance on natural resources. In 2018, out of the 47 countries included in the LDC category, 23 were OIC Member Countries. Many of these countries are highly dependent on the agricultural sector as major contributor to GDP and source of employment. Although there has been increased foreign direct investment flow to LDCs in recent years, it has been unsteady at best. This has led to the inevitable creation of large informal economies within many of LDCs, and needless to say they remain locked out of the global economy. Trade finance institutions are therefore required to step up efforts towards closing the trade finance gap and providing the necessary solutions to support domestic, inclusive and sustainable development in LDCs. In recent years, ITFC has shifted its focus towards achieving this goal. Today, one third of all ITFC financing, amounting to $1.7 billion in 2018, is directed towards 14 member LDCs from the OIC. In 2018, ITFC provided $750 million of financing to

LEAVE NO ONE BEHIND Given the extent of the development gap, the issue of poverty and inclusive growth cannot be tackled alone. International partnerships and support both from public and private sector sources are needed to provide market access, fair trade and innovative solutions especially for developing countries. This is why strategic partnerships are integral to ITFC’s development approach. In 2018 alone, through working with partner organisations and tapping into private sector funding

“TRADE FINANCE INSTITUTIONS ARE THEREFORE REQUIRED TO STEP UP EFFORTS TOWARDS CLOSING THE TRADE FINANCE GAP AND PROVIDING THE NECESSARY SOLUTIONS TO SUPPORT DOMESTIC, INCLUSIVE AND SUSTAINABLE DEVELOPMENT IN LDCS.” — Eng. Hani Salem Sonbol

to support trade finance activities in member LDCs, ITFC mobilised an additional $1.39 billion in external resources. It is the collective responsibility of international trade finance institutions to create an environment for inclusive intra-regional growth and pave the way for the world’s poorest countries to join the global economy in a sustainable manner. There is an ever-growing need to boost cooperation in trade development and trade capacity enhancement, in addition to developing a framework for bilateral and regional cooperation and coordination. In the world of trade finance, an approach of ‘leaving no one behind’ in terms of financial, economic and social inclusion is necessary. It is what will ultimately drive the creation of robust, export-driven economies upon which regional and global value chains can be built. This is how we can unlock exciting, sustainable and autonomous trade ecosystems, support inclusive growth, advance trade and improve lives.

ITFC is working in Gambia on eradicating the aflatoxin fungus from Gambia’s peanut crops.

PHOTO CREDIT: Agarianna76/Shutterstock

strategically important value chains, in key sectors such as cotton, groundnuts and coffee, which is intended to bring stability and better livelihoods to over 600,000 farmers in member countries. In additional to financing, emphasis is put on supporting and implementing trade-related technical assistance and capacity building programmes to enhance the quality of goods and commodities for export into the global economy. In the agriculture sector, key areas of intervention must therefore include critical areas of the value chain, from farm input to processing, pre-export, and export. Through a strategic partnership with the Enhanced Integrated Framework (EIF), global development programme and an affiliate of the World Trade Organisation (WTO), ITFC has been able to jointly implement a key programme, including the Gambia Aflatoxin Mitigation programme, which is aimed at eradicating aflatoxin fungus and enhancing the quality of the groundnut produced in The Gambia for local consumption and for export into key European and other international markets.

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FUND MANAGEMENT

Thematic investing is transforming fund selection Major players all seem to be shifting into thematic investment. Here’s why the trend is reshaping the investment world, according to Cedric Le Berre, Fund Selector and Portfolio Manager, Union Bancaire Privée

BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

ollowing macroeconomic trends is nothing new for the investment world. After all, understanding where the world is moving is one of the basic ways to identify where growth will come, be it in location or industry. Investment is not just about seeing where things are now, but where things will be. But in a time when finding value, and high returns, is more difficult than ever before for investors, more and more institutions are turning more towards thematic investing. What is thematic investing? It’s simple—recognising major trends, and figuring out what potential investments stand to benefit from those trends. This strategic thinking is becoming a major driver for the world’s biggest investment institutions . “There has been a shift from traditional investing into thematic. it’s also very big pension funds across the world. I believe this trend will grow in importance and it will reflect how the asset management is positioning,” Cedric Le Berre, Fund Selector and Portfolio Manager, Union Bancaire Privée. “We see all the big players coming to the market with thematic solutions, and I believe we’re just at the beginning of this big trend that will reshape the industry.” “Fund picking has been very challenging in the last 10 years, especially with the core asset class, which is US equities, and also challenging on the fixed income side, and I think the solution comes from thematic investing. If you think about the skill sets that you need to analyse companies that are in those disruptive innovation industries, if you think about the skillsets one needs to analyse companies like Alibaba which don’t fit in any definitions that benchmark are providing, you need to venture out of traditional investment and go into thematic,” he continues.

“CLIMATE CHANGE ALSO HAS TO DO WITH HOW PEOPLE ARE READY TO ACCEPT SOME OF THEIR GOVERNMENTS DECISIONS. WHEN WE THINK ABOUT HOW MILLENNIALS ARE CONSUMING, WE NEED ALSO TO ECHO THAT WAY OF CONSUMING AND WAY OF DECIDING INTO THE PORTFOLIOS THAT WE SELECT." — Cedric Le Berre

Agricultural innovation, set to increase with climate change, is ripe for investment.

UBP has transformed its whole investment strategy towards equities towards thematic investing. “What we have been working on doing is using a thematic lens in a way of addressing global equities. We just recently launched a strategy on that, using the best 14 or 15 thematic investment solutions, ranging from climate change, to demographics, consumption patterns, and disruptive innovation, to provide our clients with a global equity solution, but avoiding all the pitfalls of the old-fashioned way of investing which is relative return against benchmark, because we believe benchmarks are always backwards looking but not forward looking,” says Le Berre. One of the themes that UBP has identified is climate change. “In climate change, for example, we look for multi-energy efficiency but also all the alternative energies that are now much more present. If you think about China, it’s planning to source its energy needs from not only the traditional nuclear

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FUND MANAGEMENT

Cedric Le Berre

“WE SEE ALL THE BIG PLAYERS COMING TO THE MARKET WITH THEMATIC SOLUTIONS, AND I BELIEVE WE’RE JUST AT THE BEGINNING OF THIS BIG TREND THAT WILL RESHAPE THE INDUSTRY.” — Cedric Le Berre, Fund Selector and Portfolio Manager, Union Bancaire Privée

but also solar and wind and that creates a lot of opportunities. It’s a tricky market and tricky industry because often you get subsidies to launch those businesses and at some point when those businesses are afloat, the government will pull out the subsidies so you have to be aware of that in order to drive your allocation,” says Le Berre. “Water treatment is also very important. With a big turn in urbanisation, you need to make sure that you can give access to clean water to as many people that are coming into those cities. When you think about climate change, you also think about resource efficiency in a broader sense. Typically we are investing in managers that are investing in industrials that are changing the way they manufacture. When you think about how much money you spend on energy and water, when you have old fashioned resourses, and you can transition into companies that can provide you with facilities that are much more efficient, then it make sense for them to transition.” Millennial behaviors driven by climate change are also an important consideration. “Climate change also has to do with how people are ready to accept some of their governments decisions. When we think about how millennials are consuming, we need also to echo that way of consuming and way of deciding into the portfolios that we select,” says Le Berre. “Further, agriculture is important when dealing with the theme of climate change. Here, we look for companies that

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are also providing farming with new technologies in order for them to be more efficient. Thinking about growing companies and software companies that provide agriculture with the possibility to look at their fields from a helicopter view, allowing them to better source their crops, using less or more crops depending on how the soils are irrigated, where the sun is coming and using fertiliser no longer in a plain way but focusing on areas that need more or less. At the end of the day, they pay money for those services, but they will save a lot in terms of efficiency.” Emerging markets in particular are driven by themes of consumption and urbanisation. “In emerging markets, we’ve very much been looking at everything to do with consumption. That’s one of the key themes, because we think the story is intact. It’s not a new story, but there are more and more companies that are deriving earnings out of it, rather than having the US or European companies making money out of the consumption growth in Asia,” says Le Berre. “The second theme is urbanisation that we’ve seen in EM, which is again not new, but if you think about how Singapore is a city sitting in EM but is also a developed city refurbishing its water system but also transferring some of its dockyards outside of the central vicinity and creating new residential areas, there are plenty of opportunities to identify companies that will benefit from that.” Fintech development and adoption in emerging markets is also outpacing the developed world. “The last element has to do with digitalisation and fintech. We see that in EM there is an early and quick adoption of all of those ways of using financial services, which I think is the key late-mover advantage of emerging markets compared to the US and Europe, where people are much more reluctant to use their smartphone to book insurance, conclude a loan, or shift allocation in their portfolio for their pension fund,” says Le Berre. Overall, the global economy in 2019 is better than most people predicted. “I think it’s better than expected. When we think about how we ended 2018, there was a lot of stress, a lot of pessimism building in, and we started on that ground in 2019 and the market has been surprisingly positive and supportive. People realise that the fear and a lot of the exuberance of the fall in the market in Q4 of last year was undue and there is a much better growth around the world. Not only in the US—it’s also a recollection of the emerging markets being seen as the spice you put in your portfolio rather than a growth engine for the world, and people are starting to realise that emerging markets are a driving force for all of us. It’s much better than expected when we entered the year. I think the volatility that we had in August was also interesting because it also shows that things can go very quickly in the negative zone, and that one of the outcomes that’s very much 2019 rather than every other year is that the cursor can move very quickly,” says Le Berre. “Another surprise was the value-tilted rally we had in September. This was one of the first—I remember in the last three years we always had, at some point in the year, a value driven rally, but this year it never happened so far and we had to wait until the end of August to see a shift in the market. Is it going to last? Is value back? We’ve all been tempted to answer that question in the past few years with a yes and have gotten our fingers burnt, so we refrain from rushing to the value rally, and that’s where we stand today.”

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ISLAMIC FINANCE

Tracing the industryâ&#x20AC;&#x2122;s positive trajectory Dr. Bello Lawal Danbatta, Secretary General, IFSB speaks to Banker Middle East about the current landscape for the Islamic financial services industry

T Dr. Bello Lawal Danbatta

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he Islamic finance industry has just recorded a 6.9 per cent growth rate to reach $2.19 trillion. To what would you attribute that level of growth at this point in Islamic finance's maturity?

In absolute monetary terms the Islamic financial services industry (IFSI) recorded a continuous improvement for a third straight year with its total worth estimated at about $2.19 trillion as of 2Q18, up from $2.05 trillion in 2Q17. In as much as I would not want to give a speculative figure, without a doubt the worth of the IFSI would have increased significantly by the time the next IFSB Stability Report is issued. We have to understand that there are three key segments in the IFSI: Islamic banking, Islamic Capital Market (ICM) and Takaful. Of these three, only Islamic banking recorded a marginal year-on-year growth rate of 0.9 per cent. The other two sectors, especially the ICM, recorded significant growth of 26.9 per cent and now accounts for about 27 per cent of the total worth of the IFSI. The Takaful segment, albeit accounting for a marginal 1.3 per cent of the total worth of the global IFSI, nonetheless recorded impressive 4.3 per cent year-on-year growth rate in 2017. That said, what I consider a softened momentum in growth rate of the IFSI with a relative decline of about 1.6 per cent from 8.5 per cent as at 2Q17 to 6.9 per cent as at 2Q18

of oil and other export commodities, as well as a notable improvement in the investment climate in most jurisdictions with a significant Islamic finance presence. In addition, the IFSB IFSI Stability Report 2019 also noted improved asset quality due to credit growth, and continued improvement in the resilience of the global Islamic banking sector recorded in 2018. I also expect a continuous and strong positive performance in the Islamic capital market sector due to the increasing number of sovereign and multilateral Sukuk issuances in key Islamic finance markets to support budgetary and development projects.

PHOTO CREDIT: lionvision/istock

While market share continued to grow in 19 countries, it declined in 11 others. Why is Islamic finance growing in some markets while declining in others?

could be attributed to a number of factors. I view some as global while others may be peculiar to the IFSI. For instance, there seems to be moderation in global economic growth, tightening international liquidity conditions as well as the continuing geopolitical and economic challenges arising from implementation of protectionist policies amongst the worldâ&#x20AC;&#x2122;s major economies and trading partners. Other reasons which may be peculiar include economic sanctions, regional economic and political impasse, and prolonged depreciation of the local currency in US dollar terms in some jurisdictions with a strong presence of Islamic finance, especially in the period of 2017 to Q318 etc.

How long can that rate of growth be expected? In my view, based on the various analyses contained in the IFSB IFSI Stability Report 2019, the global IFSI is well placed to maintain and commendably improve on its positive growth trajectory by experiencing asset increases across all three of its main component markets in the years ahead.

Why do you believe that the Islamic financial services industry is poised to maintain its positive growth trajectory? My expectation of a positive growth trajectory is hinged on a number of factors including: the rebound in prices

The market share in most jurisdictions that recorded continued growth could be linked to rebound in prices of the main export commodities especially oil, favourable economic climate, increased market penetration, and use of Sukuk issuances for eco-friendly capital expenditures. I want to also believe that increased use of technology to enhance operational efficiency, promote financial inclusion and to reduce operational overheads have also been instrumental to the positive outlook of the IFSI in some jurisdictions. I would rather view the decline recorded in some jurisdictions in relation to peculiar events during the immediate previous year. Most of these jurisdictions have significant presence of Islamic finance and are mainly those faced with either international or regional economic sanctions, regional or national geo-political impasse, and depreciation of local currencies of in terms of USD resulting in lower reported performance.

What should the leaders of Islamic institutions in those respective markets be focusing on? I would like to commend the achievements recorded in the IFSI in the various IFSB jurisdictions. As the IFSI continues to burgeon, and great opportunities are created, so also would new challenges emerge. Therefore, those at the helm of the affairs of Islamic institutions should focus on the new challenges posed by evolving market structures due mainly to advancements in financial technology and changing demographics, increasing activities of the non-bank financial institutions, as well as increasing cyber risks among other operational issues.

How much strength do you see in the Takaful space? Like I mentioned earlier, the share of global Takaful industry in the global IFSI worth remains marginal at 1.3 per cent. However, with over 306 Takaful institutions, including ReTakaful and Takaful windows, which now offer Takaful products in at least 45 countries globally, I consider the Takaful space will only get bigger by the day. In my view, the sector holds great promise to record a rapid growth especially when a trend analysis of its performance is considered. For instance, global Takaful contributions grew by 4.3 per cent (y-o-y and in nominal terms) in 2017 and with a six-year (2012â&#x20AC;&#x201C;17) compound average growth rate of almost 6.9 per cent. What some of the statistics I reel out on Takaful point at is that generally, the overall outlook for the sector is positive. The markets remain profitable due to earnings from other sources, such as commission income from ReTakaful/reinsurers and investment income.

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Similar to what has been the trend in the past few years, I also expect the compulsory lines of business such as medical and motor to continue to drive the growth of the general business line. My view is based on the greater deployment of technology and other institution-specific factors such as innovative products that are technology-driven, as well as cost-effective distribution channels for personal lines (i.e. online, mobile or digital platforms).

What do you feel needs to be improved in Takaful? In my opinion a lot needs to be done to improve to enhance the potential of global Takaful industry. From a regulatory perspective, the IFSB as a foremost global standard setting body for the IFSI has issued six standards and two working papers on Takaful. The IFSB is also presently working on two standards in relation to Takaful: Core Principles for Islamic Finance Regulation (Takaful Segment), and Disclosure to Promote Transparency and Market Discipline for Takaful and ReTakaful Undertaking. Furthermore, preparing for the implementation of new International Financial Reporting Standards for insurance contract (IFRS 17), stress testing, and measures to strengthen the professionalism of insurance and Takaful intermediaries is a step in the right direction.

"THE MARKET SHARE IN MOST JURISDICTIONS THAT RECORDED CONTINUED GROWTH COULD BE LINKED TO REBOUND IN PRICES OF THE MAIN EXPORT COMMODITIES ESPECIALLY OIL, FAVOURABLE ECONOMIC CLIMATE, INCREASED MARKET PENETRATION, AND USE OF SUKUK ISSUANCES FOR ECO-FRIENDLY CAPITAL EXPENDITURES." — Dr. Bello Lawal Danbatta, Secretary General, IFSB

From an operational perspective, in my opinion there is a need to reinforce the complex risks underwriting capacity of ReTakaful/reinsurance. This is without prejudice to the capacity of some Takaful operators with significant underwriting strength to develop tailor-made products and lesser dependence on facultative ReTakaful / reinsurance markets.

How do you feel that Islamic financial instruments can address the current global issues and blend with the needs of socially responsible and ethical investment? For the sake of reiterating the obvious, I unequivocally state that the pertinence of Islamic finance towards achieving the 17 Sustainable Development Goals (SDGs) cannot be over-emphasised. This is especially so when viewed within the context that the edifice of Islamic finance is built on the foundation of the higher objectives of the Shari’ah to remove hardship, promote justice, and protect public interest.

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A few examples that come to mind are, for instance, green Sukuk issuance as well as the Global Alliance for Vaccines and Immunizations (GAVI) Sukuk to fund immunisation programmes in the poor countries. The indispensability of Islamic finance instruments in this regard can be achieved by broadening access to the inherent value proposition that Islamic finance offers especially for improving financial inclusion and enhancing socio-economic development within the tenets of the higher objectives of Shari’ah as I mentioned earlier. From a prudential regulatory standard-setting point of view, I also consider developing requisite regulatory framework and offering innovative Islamic finance products and services as an imperative. This should, in my opinion, be in a manner that leverages on both Islamic social finance platforms such as Zakat and Waqf, as well as technological advancement to broaden outreach, without infringing on the value-based intermediation essentials of Islamic finance.

What are your Sukuk landscape?

thoughts

the

current

I would say that generally, the prospects for Sukuk in the near-term seem very bright. As the dominant sub-sector of the ICM segment, Sukuk would continue to remain so. This is due largely to increase prospects of sovereign and multilateral issuances in key Islamic finance markets as well as new markets such as United Kingdom and Kazakhstan respectively to support respective budgetary expenditure. Two examples of ongoing initiatives in key jurisdictions that come to my mind would include the launch of a primary dealers’ programme for sovereign Sukuk in Saudi Arabia in July 2018, as well as the commencement of Sukuk trading on Borsa Istanbul via the Committed Transactions Market (CTM) of Sukuk. I expect moderation in sovereign issuances, especially from the GCC on account of a positive rebound in the price of oil, but this would be compensated for by an expected continuous remarkable increase in corporate Sukuk issuance in most jurisdictions.

PHOTO CREDIT:ablokhinn/istock

The World Bank, the headquarters of which is in Washington DC, endorsed the IFSB standard for Islamic banking regulation in May 2018.

What have been IFSB's key accomplishments, activities and initiatives in 2018 and 2019 since you joined? Since taking helm of IFSB on 29 January 2018, with strong commitment and guidance by the IFSB Council and the support of all IFSB members, several enhancements in the IFSB’s Strategic direction and governance has been made in line with its mandate to promote the stability and resilience of the Islamic Financial Services Industry through the issuance implementation of global prudential standards and initiatives that foster knowledge sharing and cooperation. Last year, we came up with a new strategic focus paper that mapped out our resources, members expectation, strategies and the desired impact of the IFSB for the global Islamic Financial services industry. So, managing the IFSB and all its accomplishments are collective efforts of the IFSB members, the IFSB Council, the Executive and Technical committees of the IFSB, myself as the Secretary General and staff of the IFSB Secretariat. I will be glad to share with you some of our accomplishments. The IFSB has issued and launched three new standards namely the Key Elements in the Supervisory Review Process of Takaful/Retakaful Undertakings which focuses on the Islamic Insurance segment, Core Principles for Islamic Finance Regulation, which concentrate on Islamic Capital Market Segment and the Revised Standard on Disclosure to Promote Transparency and Market Discipline for Institutions Offering Islamic Financial Services focusing on the Banking Segment. The standard issuance is very critical in order for IFSB to promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Shari’ah principles, and recommend these for adoption. Last year I signed MoUs with AIDI and AAOIFI for two separate joint standard development projects. We deployed

the strategy to work more closely with other standard setting bodies for the purpose of synergy and elimination of duplications, because that is one of the best ways of remaining relevant and proactively delivering the desired impact. We have tried to devote the limited IFSB resources towards supporting and adding value to our members. Hence, I have given serious attention in building the capacity of IFSB members as way giving value for their membership. This is done through workshops, trainings, seminars, webinar and our e-learning platform. The IFSB has conducted 11 workshops in 9 members countries in 2018 alone and 8 has been completed as at 30 August 2019 in 8 member countries including Ivory Coast, Kazakhstan, Kenya, Lebanon, Nigeria, Pakistan, Tunisia, Malaysia and United Arab Emirates, as well as 2 Workshops for Regulatory and Supervisory Authorities (RSAs) in Kuala Lumpur, Malaysia. We had our inaugural Capacity Building for Market Players (CBM) workshop which is tailored for IFSB’s observer members in Kuala Lumpur in order to increase the implementation of IFSB standards among member jurisdictions. This year we also introduce the e-workshop for wider global participation. In increasing the value in the IFSB membership and visibility, the IFSB had jointly organised the CBK-IFSB Conference with Central Bank of Kuwait (CBK) and collaborated with the International Islamic Liquidity Management Corporation (IILM) and the International Islamic Financial Market (IIFM) in organising a High-Level Seminar on Islamic Capital Markets (ICM) on fostering the economic development and strengthening financial sector resilience—the role of Islamic Capital Market instruments in Abu Dhabi, United Arab Emirates which is hosted by Abu Dhabi Global Market (ADGM). The IFSB has also jointly organised IFSB-Bank Indonesia Seminar and Workshop titled ‘Broadening Economic Frontiers and Reducing Income-Gaps through Inclusive Finance: The Islamic Finance Solution’ in Surabaya, Indonesia. The IFSB has also managed to published a number of publications including the IFSB Summit 2017 Proceedings, the IFSI Stability Report 2018 and 2019, and IFSB working papers. Moving forward, as outlined in the IFSB Strategic Performance Plan 2019-2021, the IFSB has published three research papers on Consumer Protection in Takaful, Risk Sharing in Islamic Banking and Investigating Inter-sectoral Linkages in Islamic Financial Services Industry. Two exposure drafts on Guidance Note on Shariah Compliance; Lender of the Last Resort and Core Principles for Effective Islamic Insurance Systems has also been published by the IFSB. It is important to also highlight that the Executive Board of IMF and World Bank has in May 2018 endorsed the IFSB standard namely the IFSB-17 Core Principles for Islamic Banking Regulation: Banking Segment for their Financial Sector Assessment Program (FSAP) in jurisdictions with significant Islamic Banking market share.

What have you learned in your time being the Secretary General of the IFSB that you didn't know before? The question seems general and I would also like to answer it in the same manner. Life itself is a learning process and as long as we live, we shall continue to learn, unlearn, and relearn. The IFSB has offered great personal, professional, social, cultural, and even religious learning opportunities that I shall for ever remain thankful to Allah SWT for.

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A bullish view on US real estate Edward Fleming, Executive Vice President for Land in the Eastern United States for Walton International, walks Banker Middle East through the state of the United States real estate market, and the opportunities that millennial homebuyers are creating

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ow did your journey bring you to Walton International?

I joined Walton in November of 2014. Currently I’m the Executive Vice President for land in the Eastern United States. My responsibilities run from Washington DC all the way down to the tip of Florida, and any of the assets that we own or might potentially acquire, and any of the partnerships we have with builders and landowners are my and my team’s responsibility. The Walton Group of Companies currently administers about 35,000 acres in the East Region alone, which is about 40 per cent of the total land assets that Walton co-owns in the United States with our investors. I didn’t take the traditional path to move up into the development, asset management and homebuilding business. Most guys started out in some fashion in homebuilding and

PHOTO CREDIT: adamkaz

development. I was in the U. S. Army for 25 years, and some folks may say, that doesn’t patch over to a career in the private sector, but most of my time in the military was spent managing complex construction projects, leading large organisations, participating in multi-national exercises, and administering multi-million dollar budgets. Aside from the Civil & Environmental Engineering and construction background that I have, clearly, as you move up in the military, you spend a lot more time building relationships, starting partnerships, and then, as a leader, bringing folks together to bring your vision to fruition. The art of leadership is encouraging folks to see your vision and get to the end through lots of different means. All the skills I learned in 25 years in the army come to help me here in our asset management business.

What were some of the projects you tackled in that role? One of the assignments I had was down in New Orleans after Hurricane Katrina. I was responsible for all the reconstruction of all the levees, the flood walls, the pump stations, and anything that was damaged, destroyed, or needed to be rebuilt as a result of Hurricane Katrina. That was a $14.6 billion programme, and I was fortunate to be down there for three years in a leadership role as the senior army officer responsible for that work. Although I had a great team of dedicated professionals, having billions of dollars of construction projects under my leadership was something that was a humbling, rewarding, and learning experience.

Could you break down some of the projects you are working on with Walton? There’s a couple of development projects that have really been important not only to me but to the Walton Group of Companies as a whole. One of them is called Westphalia in the greater Washington DC area. It’s a very complex, 479-acre mixed-use project with mixed ownership and lots of equity and debt partners. It has both residential and retail, and it’s an amazing project that’s allowed me to understand not only the land development business but also the acquisition and disposition of an asset. Clearly every project and every asset that Walton manages has its own lessons to be learned and its own challenges that come along with it, and it could be anything from coordinating with the local elected and appointed officials regarding zoning, to coordinating with the local community, who may or may not want a particular development project in their neighborhood. In addition, negotiations with consultants, contractors, and of course the ultimate disposition of the asset to a homebuilder/buyer. Just most recently, we negotiated a sale of a 1000-acre master-planned project with a large public homebuilder down in Florida, just outside of Tampa, and it has become the example of the way that we will sell a lot of our land assets in the future. With a template for an agreement now in place with this buyer, we have adjusted that for other states and counties around the country, and we expect to see considerable land dispositions in the future not only with this particular buyer but with other local, regional and national top-tier homebuilders.

What are your views on the real estate market in general in the United States at the moment? Where do you see things heading? Edward Fleming

The market is very strong. Of course, it’s hard to generalise across the country, but overall it is very strong. There are a couple reasons why we feel comfortable saying that. Clearly, low mortgage interest rates, currently and for the foreseeable future,

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are something that’s an indicator of a strong market. But perhaps more importantly, we see a big chunk of millennials coming into the market. They are between the ages of 23 and 38, and they were slow to get into the homebuying market and form households after the housing led recession, but are now the largest cohort in the U.S. population at around 80 million. Slowly they are starting to build households, and we are bullish on the fact that they are coming into the market now; in 2018 alone, millennials accounted for 37 per cent of all homebuyers. Also, there was a lot of unmet demand from 2008 to 2017, where we were only meeting around 65 per cent of the homes that were needed around the country. If you put those things together, we feel very strongly that there is a lot of room for homes to be built around the country.

How much focus do you put on a potential recession? We acknowledge it, and we understand it. We know that something will happen to the economy in the near future, but an expansion never dies of old age. There has to be some sort of external action that would cause some sort of downturn. We don’t expect it to be very long or very deep, and we don’t expect it to be caused by the housing market like it was in 2008. I will also say that we have a strategic advantage. It’s built in our business model that all the assets we own have no debt on them—they’re all equity. When we purchase land, we purchase

“CLEARLY EVERY PROJECT AND EVERY ASSET THAT WE HAVE HAS ITS OWN LESSONS TO BE LEARNED AND ITS OWN CHALLENGES THAT COME ALONG WITH IT, AND IT COULD BE ANYTHING FROM COORDINATING WITH THE LOCAL ELECTED OFFICIALS TO COORDINATING WITH THE LOCAL COMMUNITY.” — Edward Fleming, Executive Vice Presiden, Land in the Eastern United States, Walton International Group

Calgary, Alberta, Canada, where the Walton Group was founded in 1979

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it on an all cash basis on a co-ownership basis with investors. As a result, we’re in a pretty good position to be able to withstand any downturn that may come a long, combined with the fact that we’re a private company so we’re not subject to market or shareholder pressure. We have patient capital and we’re not making decisions based on quarterly calls and stock price, and this gives us a strategic advantage as a land asset manager.

How much has the real estate market changed since the housing crisis in the late 2000s? Builders these days are shifting to what we call a land-light strategy. Back in 2008-2010 after the recession, approximately 50 per cent of the homebuilders in the United States went out of business, which doesn’t get a lot of attention and a lot of people don’t probably grasp. One of the big reasons why was they had so much land on their balance sheet, it may have had some debt on it, and unfortunately, they probably lost it to a bank through foreclosure. As a result, they have gotten very conservative to the point where they don’t want to have a lot of land on their balance sheets. This is a great opportunity for Walton, who is in the land, asset management and real estate business, because we love having land. For those who don’t want to carry land on their books, we can accommodate them. Because there were so many homebuilders that went out of business, they are very conservative now in the way that they buy land. Since they don’t want it on their balance sheets, as I mentioned, we are able to feed that market. We have created an opportunity to sell homebuilders land to meet their just-intime inventory requirements, in a similar way that they would buy lumber or other supplies that they would need to build their homes. If we can sell them 200 acres at a time, instead of them buying 1000 acres from us all at once, they can manage their homebuilding in phases and better utilise their capital for infrastructure to kick start development. Then, the land is a commodity that is delivered just in time and, because of our equity position, we don’t have an interest payment that we have to make. We can provide that resource to the homebuilder in a pretty good fashion that meets both our needs.

In reference to Walton’s plans for the next few years, are they set in stone or are they beholden to which way the wind blows in the real estate market in the Eastern region? There are some things that won’t change. We won’t lever our land. There are some development projects that, once we get into construction, we will take out loans for development, but those are very few. Our traditional model is to buy our land with no debt. It is a core principle of Walton’s pre-development model to buy the land with equity, and I don’t see that changing. However, we have to understand who our buyers are, and we have to provide our buyers a way to buy land from us, as they have changed over the years. In the early 2000s, landowners and developers would buy big chunks of land, and after the recession, they wouldn’t buy raw land, they wanted serviced lots. They were expecting someone else to bring the servicing in, the streets and the landscaping. There was a period of time when builders only wanted horizontal, finished, serviced land, or serviced lots. Now we’re at a point where it’s a land-constrained environment. A lot of builders want to have their destiny in their own hands regarding horizontal development, but they only want it just in time. Our strategic position as an asset manager of over 86,000 acres in the United States allows us to accommodate this need.

Bill Doherty, CEO, Walton Global Investments Ltd

PHOTO CREDIT: EB Adventure Photography/Shutterstock

Where do you see opportunities? We see opportunities in a couple of different places. One is looking at the geography in different parts of the country. If you look at the assets that we have, we use the phrase the ‘Southern smile’, going from Southern California, through Arizona, across into Texas, and then over into Tampa, Orlando, Jacksonville in Florida and then all the way to DC. We also have land assets in Denver, Colorado and some in Oklahoma City. We don’t anticipate any changes there. If you look at domestic migration in the United States, folks are moving out of the Northern climates and high-cost states. States that have higher taxes, whether you’re talking Connecticut, New York, New Jersey or Illinois, people are moving to places with affordable housing, strong employment, lower taxes and a better climate which in most instances are Florida and Texas. When you see those migration patterns over time, it makes us comfortable that those places are going to have good opportunities. Most of those locations are also more prodevelopment and have a more simplified entitlement process. Second, we’re looking to leverage the way that homebuilders are buying land. Traditionally, we would go out to research and acquire land on our own, and not necessarily have a specific exit partner in mind. We knew the strategy, but we didn’t have a particular buyer in mind. Now we’re going to homebuilders and asking them if they like a particular piece of land but don’t want it on their balance sheet, we can buy it, and enter into an agreement now that they are interested in purchasing it sometime in the next two to three years to suit their just in time inventory requirements. That in turn, may provide a bulk sale or income opportunity in the future for our co-investors. We’re looking at those two models to be able to accommodate what builders are looking for and how they are going to acquire land in the future. We’re in a very good equity position on our land, we have very patient investors, and we appreciate the almost 96,000 investors we have across the world, split half and half between Middle East & Asia, and North America. We’re very appreciative of our investors, and we are looking to continue to provide innovative real estate opportunities and raise capital in those regions going forward.

Bill Doherty, CEO, Walton Global Investments Ltd, speaks to Banker Middle East about why the firm achieved Shari’ah-compliance on its investment products, and the latest projects to launch What were the conversations that led to achieving Shari’ah compliance? We’d been discussing it for quite a while, so doing business out of our Singapore office for Malaysia and Indonesia, we began discussing it seven to eight years ago, and put it into action between three and four years ago, gaining approval about three years ago. That was for our pre-development land product, which is the cornerstone of the Walton Group of companies. We are going to be introducing another product to the marketplace in Q1 2020 which we are going to work immediately in an effort to achieve Shari’ah compliance as well, which will be a cash-flowing product, an income-type product, which will be tied to a Fortune 500 homebuilding company in the US. Could you tell me more about that project? We launched our first fund of this product in the United States in October, which is called the BOLD Fund, the Builder-Optioned Land Development Fund. With this, we work with national publicly-traded builders in the United States where they have land assets they are looking to acquire, and instead of them acquiring those assets, we purchase the assets ourselves. We have an agreement in place where they will take down those assets phase by phase or by lot over a specified period of time. The first fund is tied to a Fortune 500 company who is the number one home builder in terms of volume. They will be our primary partner for this fund and for funds going forward.

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The impact of ‘Davos in the Desert’ Steen Jakobsen, Chief Economist & CIO, Saxo Bank, speaks to Banker Middle East about the Future Investment Initiative, held at the end of October in Riyadh, Saudi Arabia Saudi Arabia is in the midst of a big privatisation process which means finding foreign investors and access to global markets. This is classic consultancy, investment banking and political process.

Do you see Saudi hosting the annual global summit will help the kingdom in separating itself from being an oil-based economy? Absolutely, the outside world know Saudi Arabia is an oil nation, but this forum gives Saudi Arabia ample opportunity to engage and tell their story of their future vision for not only Saudi Arabia but also the region where Saudi Arabia remains the most potent player.

Steen Jakobsen

ow will the “Davos in the Desert” event impact Saudi’s economy? And in which fields/sectors will it impact the most?

Saudi Arabia is running an ambitious socioeconomic plan to attract investors and social change. This is in order to reduce the dependence on oil over time. This includes a big privatisation programme and looser regulatory framework. To promote this and get investors to see for themselves on the ground is of course a major part of Davos in the desert. The main fields of interaction are very much reflected in the impressive guest lists which classically includes CEOs from mainly banking, asset management and the political world.

“THE OUTSIDE WORLD KNOW SAUDI ARABIA IS AN OIL NATION, BUT THIS FORUM GIVES SAUDI ARABIA AMPLE OPPORTUNITY TO ENGAGE AND TELL THEIR STORY OF THEIR FUTURE VISION FOR NOT ONLY SAUDI ARABIA BUT ALSO THE REGION WHERE SAUDI ARABIA REMAINS THE MOST POTENT PLAYER.” — Steen Jakobsen, Chief Economist & CIO, Saxo Bank

BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

The annual summit seeks to project the insular kingdom as a dynamic investment destination and draws 6,000 people and international firms to Riyadh. Do you believe this will stimulate meaningful foreign investment and impact growth across the GCC? There is no doubt that “personal relationships” are almost as important as commercial links, but cementing the Future Investment Initiative and attracting top CEOs and politicians globally is a major signal of Saudi Arabia’s ambition and ability to attract both the global companies but also its investment. The recent inclusion of Saudi Arabia into the MSCI Emerging Market index has already generated 18 billion USD of inbound investment with at least 3 billion USD more expected this year. The MSCI inclusion, the global bond issuance of bonds from GCC countries has put the Middle East and specifically GCC on the map for investors, as the access to markets, the regulatory framework and increased openness is paramount for investors. That this whole strategy is validated by an impressive oil reserve, a tangible asset, of course makes the proposition more interesting and appealing and will benefit all of the GCC.

Wil this summit have any impact on the oil price? Impact is limited but of course with high level political support from other emerging nations like India and Brazil in the audience plus significant high level Trump administration officials, there is a good chance that the present level of oil and energy overall will be discussed at several “sidebar meetings”, but the agenda here is to showcase Saudi Arabia as an investment hub, inbound and outbound and recover the international relationship post a bad 2018 for Saudi Arabia foreign policy. This year’s forum clearly shows Saudi Arabia and its guests have moved on.

ISSUE 07

WORKING IN HARMONY IN A DIGITAL FUTURE Aongus Hegarty, President, Dell Technologies EMEA

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s r e k n a s b r o e t r a u v t fu inno & April 2020, Dubai, UAE

An exclusive gathering of the region’s top bankers and tech leaders to discuss the most pressing challenges of the new digital ﬁnancial landscape and identify the myriad opportunities presented by the new business frontier.

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TECHNOLOGY

WORKING IN HARMONY IN A DIGITAL FUTURE Aongus Hegarty, President, Dell Technologies EMEA, clears up misconceptions about how technology will transform the financial world, elucidating how fintech and financial institutions will continue collaborate

Aongus Hegarty

hat trends do you see amongst financial institutions in the Middle East and how do you compare them to other parts of the world?

The Middle East has a strong financial sector. There is a solid push by governments in the region to adopt digital initiatives and solutions to help accelerate their capabilities in providing world-leading financial services to customers. One of the biggest trends we are witnessing in the region is the rise in demand for digital and mobile banking.

People are becoming more dependent in using their smart devices to conduct a variety of tasks, including transfers, payments, and a range of other transactions. More than ever, banks need to optimise their platform to be more mobile-first. The second trend we are noticing in the Middle East is that financial institutions are increasingly using advanced analytics to improve their risk assessment and prevent fraud. They are beginning to adopt the concept of â&#x20AC;&#x2DC;Open Bankingâ&#x20AC;&#x2122;â&#x20AC;&#x201D;a connected ecosystem of financial services that allows banks to quickly and securely enhance their digital offerings.

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TECHNOLOGY

Banks are also beginning to invest in staff training to provide more value-added services. They are adopting technological solutions for the routine and repetitive tasks as well as for data analysis which provides insights that can be used to improve the customer experience. The last trend is the rationalisation of branch networks. The very purpose of a bank branch is changing and the impact of new, digital banking channels and the cost of operating a branch is a hotly discussed topic. Financial institutions are constantly challenged to define the role of the branch, as alternate solutions allow for more creative ways to affordably offer customers the services they require, when and where they need it.

organisation supporting the functionality in the back-end. This is a departure from other parts of the world, where startups in digital innovation can compete with established banks for the same customer pool. In a dynamic market environment, a shift in customer behavior can have a significant impact on banks. Competitive threats today are no longer from similarly-sized organisations, but from smaller, more nimble players.

How do present trends amongst regional lenders differ from that of markets such as the US and Europe?

The right technology and data infrastructure is key when it comes to digital transformation. To provide the service and digital experience that customers expect, banks will need to simplify as well as aggressively adopt innovative solutions to ensure smooth and seamless operations.

The regulatory environment in the Middle East is geared towards the banking sector, and new innovations, such as e-wallets and mobile payments, need to have a banking

BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

Banks here are implementing their respective digital transformation agendas. Having a broader point of view, what should they tackle first in their transformation strategy?

financial institutions that we are talking to are leveraging digital and emerging technologies to create new business models. They are exploring new ways to get closer to their customers and strengthen their relationships. Some are exploring new partnerships, and others are creating their own fintech suites, all with a view to maintaining their relevance to the individual and corporate customer alike.

What are the main misconceptions about the digital banking future? While there are many misconceptions about the digital banking future, I would say that the main one is that the growth of fintech signals the end of traditional banks. In a sector as mindful of regulation and risk as the banking sector, it is not always easy to move consumers, organisations and economies away from established and proven models. However, traditional financial institutions that do not quickly capitalise on the benefits and facilities provided by FinTech solutions stand to lose customers, impacting their bottom-line and therefore their attractiveness to the wider market.

“THE RIGHT TECHNOLOGY AND DATA INFRASTRUCTURE IS KEY WHEN IT COMES TO DIGITAL TRANSFORMATION. TO PROVIDE THE SERVICE AND DIGITAL EXPERIENCE THAT CUSTOMERS EXPECT, BANKS WILL NEED TO SIMPLIFY AS WELL AS AGGRESSIVELY ADOPT INNOVATIVE SOLUTIONS TO ENSURE SMOOTH AND SEAMLESS OPERATIONS.” — Aongus Hegarty, President, Dell Technologies EMEA

The inability or unwillingness to adapt and adopt emerging technologies is the real challenge. Technology will continue to change every business and the banking and financial industries are no different. The way to lead, survive and thrive is to embrace and adopt change.

How do you envision banking in the future? Having the right IT partner along the digital transformation journey is key to banking products and services becoming more frictionless and ensuring customers benefit from the value created by digital transformation solutions.

What are your conversations with Middle Eastern banks like? What are their main concerns? Today, there are a significant number of big brands that are making moves into the finance industry, including Apple, Google, Amazon, Facebook, and many more. As a result, banks are being forced to rethink their business models to be able to compete with the significant consumer bases and innovative offerings of new competitors. Banks understand that if they are unable to evolve, they are at risk of losing customer relationships to those that have the ability to offer banking-as-a-service solutions. In the Middle East though, banks are still viewed as the cornerstone of the financial services industry, and the

Dell Technologies aims to assist businesses in the Middle East on their digital transformation journey. Digital transformation will rapidly change the banking sector. Once the right IT infrastructure is in place, banks will become more productive, efficient, and agile than ever before. They will be able to provide more value-added services for their customers, and an improved experience overall. For example, a customer will be able to ask a bank to analyse their spending patterns and give them customised recommendations on investing and savings. Furthermore, banks will be able to offer unbiased suggestions to customers to switch from a subscription they are currently using to an alternative that can help save money. Mobile banking could also incorporate new technologies such as voice recognition, augmented reality and more. Customers will be able to develop a strategic plan to purchase the car they want, as the app itself will provide a variety of options that include finance options, insurance, and more, all of which have been designed taking into account the customer’s unique income and spending patterns.

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TECHNOLOGY

INSIDE THE MIDDLE EAST'S FIRST REGULATED CRYPTO EXCHANGE Yehia Badawy, Co-Founder of Rain, the world's first Shari'ah-compliant cryptocurrency exchange, speaks to Banker Middle East

hat’s the sentiment for cryptocurrency at the moment? When you started this journey, the conversation around cryptocurrency was very different than it is today, with many highs and lows in between. How do you think the ups and downs have helped cryptocurrency mature to the point that it’s at today? I think we are at a turning point. In its first wave, pre-2017, there were a few boom and bust cycles within this space, and it was largely due to few people understanding how this works, and then others who are just trying to make a quick profit without understanding the fundamentals. This was accentuated in 2017 when the bitcoin price, and, consequently, all the other cryptocurrencies, appreciated rapidly in price. This drew in an uninformed crowd that was really just in there to make a quick buck. Some of these didn’t even understand what they were doing by buying this thing.

BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

Following that, there was a sharp decline in price. Bitcoin went down from almost $20,000 all the way down to around $4000. During that time, a lot of people lost money, and confidence. There were a lot of bad actors in the space. Certain companies and entities were using the words bitcoin, etherum, and any other to mask whatever scheme they had centered around crypto, but it was in the end some sort of scam. Unfortunately, attaching those scams to cryptocurrencies themselves caused a lot of reputational damage to this technology. We what we refer to in the industry colloquially as the ‘crypto-winter’. During that time, spanning late 2017 until early 2019, a lot of projects within the community were coming to fruition. People hit the restart button. I like to draw parallels to the start-up bubble in the late 1990s and early 2000s in Silicon Valley. People saw a lot of exciting companies, they were throwing money at them, they

didn’t really understand what these companies were doing. If you look at the venture capital space now, and how people do investments, there are agreed upon norms and traditions, things to be done and specifically legal frameworks and how to operate that have made that landscape much more mature. I would say the same thing is happening in the cryptocurrency space. Now that people saw the sharp rise and decline in price, they understand this is not something that you get into without informing yourself about it. That’s what we’re finding—people are becoming more careful, and they are interested in reading more, and understanding this technology. That’s great for us— we’re always pro-education and we sponsor meet-up groups and sessions where we go on the ground in different city to educate people and make sure that whoever is thinking about it has the right resources to go about it. To be honest, we’re breaking a lot of records. Every year, we’re seeing more volume, and more interest. Whether on the retail side or the institutional side, things are looking very good. It’s partially driven by the increase and stability in price, but also greater interest and greater education. One thing that’s really helped us is being regulated by the Central Bank. This gives people the confidence that they’re dealing with a company that is under a certain amount of supervision and that they’re safe in dealing with us.

Do you see any key differences in the investors in the Gulf from what you do in other markets, in terms of savviness, or approach? I would say there are more similarities than there are differences. What we see in investors in this region is really on par with those that exist globally. I have a banking background. I used to work at a bank in Kuwait, and I was on the institutional desk dealing with institutional clients in Europe and the US that were interested in capital markets in the region. With that background, and then dealing with regional investors in my current role, I see a lot of similarities, and the same principles being applied. The only difference is the need for more relationship building, and more face to face meetings and conversations. That’s something we love to do. This aspect of business, which is part of our heritage in how we do business in the region, has spilled over into this space as well in the people that we’ve met.

How did Rain develop from the initial concept? The four co-founders of the company met online in 2016. Our goal was to create a regulated cryptocurrency exchange in the region. Our region was the only one without a regulated exchange. You had exchanges that were regulated in North America like Coinbase or Latin America, or even in Korea and Japan. In Europe you had Bitstamp. We were the only market left that didn’t have a regulated and licensed exchange. We believe that cryptocurrencies are a game-changing innovation, but they do need the right platform to operate on. Part of that is building an ecosystem where people understand what are risks and rewards of dealing with this new innovation, and also how companies should organise themselves. To do that, we have to speak to regulators in the region, and get to the point where we’re agreeing this is something that should be regulated, and this is something that’s overall good for the economy. To do that, we went to several central banks in the region, and they listened to us, but they weren’t really interested in this. It was too early for some of them. We happened to get a meeting with the Central Bank of Bahrain in early 2017, and during that meeting we discussed what bitcoin is and why it’s important that the Central Bank of Bahrain should consider regulating cryptocurrencies, and then we expressed interest in developing the conversation further with the Central Bank of Bahrain. The conversation went really well—it ran on for more than it was planned and there were more people in attendance due to their interest. Ever since then we’ve been in close collaboration with the Central Bank of Bahrain. During the same year, they told us about the regulatory sandbox programme which commenced in November 2017. We were the first cryptocurrency company to enter the sandbox and the second company overall. We stayed in the sandbox from officially operating in December of 2017 all the way up to our graduation from the sandbox in February of 2019. During this time, we were serving a limited set of users as per the rules and regulations of the Central Bank for the regulatory sandbox. We were also developing our product further—developing our website and mobile apps for Android and iOS. We were able to assist a limited set of users in conducting transactions and offering them support.

BITCOIN PRICE FROM 2009 TO 2010, THE LEADING CRYPTOCURRENCY

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TECHNOLOGY

How does it affect the offering exactly? It is just technical or are there substantive differences? Our certificate deals with both client-facing and operational facets of our business. The certificate is for providing the services. While the Shari’ah Review Bureau screened the assets on the platform, they also did an audit on the service itself on the system of buying, selling, and storing cryptocurrencies, and they found that the measures that we implemented are in line with Shari’ah guidelines.

What kind of support did you get from the Bahrain Fintech Bay? How integral was it to your success? None of the founders are from Bahrain. Two of us are from the US, one is from Saudi Arabia and I am originally Egyptian. Bahrain was new to us, and when we first met with the Central Bank, we quickly found an ecosystem of entities that’s really helping us grow, thrive, and succeed. The Bahrain Fintech Bay was a key partner—they were instrumental in getting us the right introductions to people and helping us in conversations with the Central Bank. Regulators are focused on getting things done right, but it sometimes takes time for things to move forward. What Bahrain Fintech Bay did was facilitate conversations, make sure our voices were heard, make introductions on the policy side but also get us plugged in into the community, and we’re grateful for that. Yehia Badawy, Co-Founder of Rain

In February 2019, the Central Bank of Bahrain launched the crypto-asset regulation module, and they were the first Central Bank in the GCC to do that. The final form of the regulation was in line with global standards and what we expected to see, and we were very happy with that. Then we immediately began the application process to acquire the license, which we did throughout this year, and then in August of 2019 we received the license from the Central Bank of Bahrain. We were live and serving users since 2017, but now post-sandbox we have no limit on the users we can serve and the transaction sizes. We have seen some healthy growth since acquiring the license.

Why was Shari’ah-compliance important for the exchange? For us, we understand the context of the region. I come from a banking background and I understand that Shari’ah compliance and Islamic finance are a cornerstone of the economy in the region. One thing that’s importance for us to do is to bring an international and global technology into the region with an institutional standard, but also to understand the context we’re operating within. During our conversations with institutional clients and family offices, they’re especially interested in understanding whether becoming Shari’ah compliant was a part of our plan. While this was always a part of our plan, we didn’t know, until we’d had those conversations, that it would be a requirement as early as it was. We went about canvasing the landscape and finding the best partner to work with and we settled on Shari’ah Bureau who had already worked on this specific technology with another company in the region. We were very lucky to have that done quickly and become the first Shari’ah-compliant cryptocurrency platform worldwide. We had inquiries of people asking how this impacts them, but overall we just got positive comments from our client base.

BANKER MIDDLE EAST | DECEMBER 2019 | ISSUE 225

How much are you tapped into the broader Halal economy? Are you tapped into the rest of the Islamic world? We would hope that we are, because we are about building infrastructure. It’s similar to ISPs in the early days of the internet. What we’re doing is setting up the foundation for people to be able to buy and sell cryptocurrencies in a way that’s regulated and more economical. Part of that is building the right infrastructure for the industry itself, and the Halal economy can only build upon that with more Shari’ahcompliant products and initial coin offerings.

What are your next steps? The future is very exciting. The ecosystem here in Bahrain is wonderful, and we’re glad to be based here in Manama. We are hoping to expand our physical presence throughout the region. We are already serving clients in the GCC and broader Middle East region, but we want to make sure we’re achieving regulatory redundancy, and we’re already in conversations with different regulators in the GCC to replicate this relationship we have with the Central Bank of Bahrain, and with these other regulators. That’s the best thing to do— you have to meet with the regulators. They have to get to know you and trust you and understand that we both want the same thing, and we’re just looking at it from different angles. We’re also planning to launch an exchange service by the end of this year. We’re now operating on a brokerage model, where clients buy from us and sell to us, but later in the year we’ll enable an exchange service so that clients can buy from each other and sell to each other, basically creating a marketplace. We believe that an exchange product and service is something that had to come later on because we were aware of the liquidity that existed in the market at the time that we launched. It seemed like having a brokerage and then seeding this liquidity and then coming up with the exchange would be the better order of things. That’s something we’re excited to do. We’re growing our institutional offering to be more targeted. We’ve seen a lot of interest in the pat year from institutional clients, and we’re excited to develop those conversations.

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