#226 January 2020

JANUARY 2020 | ISSUE 226 MIDDLE EAST

JANUARY 2020 | ISSUE 226 A CPI Financial Publication

Adnan Ahmed Yousif, President & Chief Executive, Al Baraka Banking Group ANALYSIS 06 Saudi Arabia 2020 budget

IN DEPTH 28 Three themes shaping GCC banking sector

PRIVATE BANKING 32 Should private banks worry about their cyber rating?

TECHNOLOGY 45 Building capabilities to

connect tomorrow’s customer

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LEVERAGING A ROBUST GLOBAL NETWORK Adnan Ahmed Yousif, President & Chief Executive, Al Baraka Banking Group

LEVERAGING A ROBUST GLOBAL NETWORK

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EDITOR'S NOTE

W William Mullally Editor, CPI Financial

elcome to Banker Middle East’s latest issue. I hope you had a productive close to your year.

As is tradition, after our awards dinners and major summits have closed, the last major event of every year, for more than two decades, has been the World Islamic Banking Conference held in Manama, Bahrain and organized by Middle East Global Advisors. I was proud to attend again this year, and would like to thank the wonderful staff of the Bahrain Economic Development Board for all of their assistance over that week.

The 26th edition held successfully at the beginning of December under the theme of ‘mega-trends in Islamic banking’, and the most interesting part for me, as someone who has closely covered this industry for many years, was how different speakers interpreted that theme throughout the event.

Some chose to talk about external macroeconomic factors, such as the next potential financial crisis or an oft-speculated global recession and how we are to weather the storm, or the continuous year-on-year growth of the Islamic finance industry and how that growth will be maintained.

While these questions are all important, it seems that often we have these conversations as if the banking industry will remain static. Yes we talk about technology and how it will change banks, but we still probably keep our conversations a bit too lightly, not taking into account the likely reality. As much as we talk about transformation, I don’t think that we’ve fully taken in how much that transformation will affect the industry, and how different the industry will look in the coming years.

Dr. Adnan Chilwan, Group CEO, Dubai Islamic Bank, offered some thoughts that focused on exactly this issue at the event itself.

“I feel that traditions should not be treated as shackles.

They should not restrict you from moving forward. Rather, they should serve as a platform for the next transformation. Banking stands at a crossroads today. The leaders of financial institutions in this highly dynamic and progressive world have to make the key decision now, to remain relevant to the demands of the customers or disappear. We are competing not just with entities within the sector but ambitious institutions from outside the traditional boundaries. So, it’s time to continuously be a part of the customers’ life, simple as that. Banking 2.0 (or lifestyle banking) is the only way forward,” said Dr. Chilwan.

It is this line that I most focused on: Remain relevant to the demands of the customers or disappear. The invocation of the possibility of disappearance is not a mere instance of melodrama, it is reality. The biggest focus that banks need to have, Islamic or conventional, is on their place in the future.

The biggest megatrend will be internal to the industry. Banks that are not able to see how the winds are changing and how different the world will look, nor able to find a place for their institution in that new paradigm, will likely be looking more like Kodak than they expect.

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CONTENTS JANUARY 2020 | ISSUE 226

ANALYSIS 6

Saudi Arabia 2020 budget

NEWS 10

News Highlights

THE MARKETS

18

14

Better operating conditions

COVER INTERVIEW 16

Leveraging a robust global network

COUNTRY FOCUS: THE UAE 22 The merits of fiscal discipline

IN DEPTH

28 Three themes shaping GCC banking sector

INVESTMENTS

30 Are bank mergers in the GCC as profitable as they seem?

PRIVATE BANKING

32 Should private banks worry about their cyber ratings?

RETAIL BANKING

34 Digitalising retail banking in the Middle East

ISLAMIC BANKING

COVER INTERVIEW LEVERAGING A ROBUST GLOBAL NETWORK

36 The next generation of customers

ISLAMIC FINANCE

40 The global Islamic financial market-trends, prospects and challenges

Adnan Ahmed Yousif, President & Chief Executive, Al Baraka Banking Group

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BANKER MIDDLE EAST | JANUARY 2020 | ISSUE 226

32

36

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TECHNOLOGY

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A Banker Middle East Supplement

45 Building capabilities to

connect tomorrow’s customers 48 How will the future look

for finance professionals?

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43 BUILDING CAPABILITIES TO CONNECT TOMORROW’S CUSTOMER on

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PHOTO CREDIT:Tasneem Alsultan/Bloomberg

ANALYSIS

Saudi Arabia 2020 budget Saudi Arabia, the Arab world's largest economy, is expected to witness growth in future on the back of the government’s continued efforts to increase spending efficiency and enhancing public-private partnerships

T

he Saudi government set an optimistic target for the country’s economic growth when the Cabinet approved the SAR 1.02 trillion ($272.00 billion) budget for 2020, which is skewed towards economic diversification, creating more jobs and and increasing non-oil revenues.

In its Kingdom of Saudi Arabia Budget report, KPMG KSA said that while the budget expenditure is steering towards a downward trajectory until 2022, they believe that the decline in the expenditure will not affect the future growth of the country’s economy.

Saudi Arabia, the Arab world's largest economy, is expected to witness growth in the future on the back of the government’s continued efforts to increase spending efficiency and enhancing public-private partnerships.

The Ministry of Finance (MoF) said that expenditure in 2020 is estimated to be a slight fall in spending, reversing Riyadh's three years of expenditure increases intended to spur non-oil economy growth.

Despite the oil market volatility, which had some impact on the expenditure, the government has made notable progress on

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BANKER MIDDLE EAST | JANUARY 2020 | ISSUE 226

the Vision Realisation Programmes (VRPs), said KPMG KSA. The allocation of over SAR 1 trillion budget expenditure for 2020 demonstrates the government’s commitment towards driving economic growth. The Public Investment Fund (PIF) and the National Development Fund (NDF), Saudi Arabia’s investment vehicles are expected to take a lead role in investments locally.

In line with the Kingdom’s expenditure, once proceeds from Saudi Aramco’s SAR 96-110 billion IPO flow to the PIF as well as its 70 per cent stake sell in SABIC for SAR 259 billion is completed, the two transactions will also contribute raising the level of capital spending within the domestic economy by the Saudi sovereign wealth fund significantly.

THE BALANCING ACT Saudi Arabia published the annual pre-budget statement in October 2019 which contained the revised revenue and expenditure projections for 2019-22 under the Fiscal Balance programme (FBP). The Kingdom is targeting lower spending over the three-year forecast horizon for the first time since the FBP was launched in 2016.

Moody’s stated that together with more realistic revenue assumptions, the planned expenditure cuts increase the likelihood that the government will achieve its balanced budget objective by 2023.

Furthermore, Saudi Arabia said that the current mediumterm expenditure estimates reflect the fiscal policies adopted by the government that balance fiscal sustainability and economic growth while allocating spending towards sectors with higher economic and social return.

The government intends to reduce expenditure by increasing public spending efficiency, reprioritisation and extending the execution of some of the capital spending programmes.

However, analysts said that achieving this goal might prove a daunting task for the Kingdom. Saudi Arabia’s medium-term expenditure estimates also strive to achieve a balance in the sources of growth by strengthening the role of the private sector.

Moody’s said that under the revised FBP, the government aims to reduce spending by SAR 124 billion (4.2 per cent of 2018 GDP) between 2018 and 2022, a significant change from previous FBP versions, which targeted rising expenditure over the same four-year period.

Saudi Arabia allocated SAR 56 billion, 5.5 per cent of the total budget, towards infrastructure development compared to 9.5 per cent in 2019. The infrastructure development sector, part of several big projects being run by the government, is expected to bring in significant investment from the private sector.

KPMG KSA stated that mega projects such as NEOM, the Red Sea project and Qiddiya are expected to have a positive impact on the country’s economy in the medium and long term and these projects are expected to create more jobs as well as increase the private sector engagement.

The ambitious 26,500 square kilometre NEOM city will link Saudi Arabia, Egypt and Jordan. NEOM is set to 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 to attract foreign talent and investment.

“INTERNATIONAL MARKETS WILL REMAIN THE PRINCIPAL FINANCING SOURCE TO ENSURE THE SUSTAINABILITY OF SAUDI ARABIA’S ACCESS TO THE DEBT MARKETS.” — Saudi Arabia Ministry of Finance

2020 EXPENDITURE BY SECTOR, SAR 1.02 TRILLION Education

18.9%

17.8%

General items

Security and regional administration

13.8%

10.0%

Infrastructure and transportation

WIDENING DEFICIT Saudi Arabia forecasted 2020 revenues at SAR 833 billion, widening the budget deficit to SAR 187 billion or 6.4 per cent of GDP compared with a projected deficit of SAR 131 billion or 4.7 per cent of GDP in 2019.

Military

Municipal services

5.5%

5.3%

Health and social development

16.4% Economic resources

9.6% Public administration

2.7%

Source: KPMG KSA

SAUDI ARABIA 2020 BUDGET Saudi Arabia 2020 budget

Expenditure SAR

1,020bil ion

Revenue

Budget 2020 balancing fiscal sustainability and economic growth

SAR

833bil ion Deficit

Total public debt

SAR

754bil ion

SAR

187bil ion

(6.4% of GDP)

(26% of GDP)

Source: KPMG KSA

Source: 2020 Annual budgets, MoF

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ANALYSIS

BUDGETtoDEFICIT/SURPLUS TO GDP Budget De icit/Surplus GDP SAR Billion 400

15.00%

300

10.00%

200

5.00%

100 (100)

2010

2011

2012

2013

2014

2015

2016

2017

2018

0.00%

2019 Estimated

(200)

-5.00% -10.00%

(300)

-15.00%

(400) (500)

Deficit\Surplus

-20.00%

As percent to GDP

Source: Ministry of Finance

SELECTED ECONOMIC INDICATORS

Selected Economic Indicators*

Growth Rate of Economic Indicators (%)

2019

2020

2021

2022

Real GDP Growth

0.9%

2.3%

2.2%

2.3%

Nominal GDP (SAR in billions)

2,792

2,858

2,996

3,140

Nominal GDP Growth

-5.4%

2.4%

4.8%

4.8%

Inflation

-1.0%

2.0%

2.0%

1.8%

* Preliminary Estimates

Source: 2020 Annual budgets, MoF

The Ministry of Finance expects the fiscal deficit for 2020 to widen, primarily due to oil market instability, however, the Kingdom is continuing its effort towards reducing the budget deficit to achieve the target of fiscal balance by 2023.

The International Monetary Fund said that the oil markets have been volatile—Brent oil price peaked at $85 a barrel in October 2018 and fell to $55 a barrel in December 2018, it rebounded to close to $75 a barrel in April 2019 and is currently trading around $60–65 a barrel. The fund’s data shows that the world’s biggest oil exporter needs prices at about $85 a barrel to balance its budget this year and forecasted $78 in 2020.

DIVERSIFIED FINANCING STRATEGIES According to Saudi News Agency, to cover for the 2020 budget deficit, the Kingdom authorised the Minister of Finance to withdraw from the state's general reserve account as well as issue debt instruments and all kinds of Sukuk, inside and outside of Saudi Arabia.

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The government has increased debt issuance in previous years to achieve fiscal sustainability and stability as well as to balance financing sources between debt and government reserves. Additionally, to improve the local debt market, the government has taken numerous steps including listing government debt instruments on Tadawul and appointing primary traders.

Fahad Al-Saif, the Head of the Finance Ministry’s Debt Management Office, said, “Most of the debt will be local and around 45 per cent will be raised overseas through Sukuk and conventional bonds.”

In its pre-budget statement, the ministry of finance said that international markets will remain the principal financing source to ensure the sustainability of Saudi Arabia’s access to the debt markets. Furtheremore, the Kingdom also launched the first Saudi euro-denominated issuance, helping create a new yield curve for potential public and private issuers as well as diversifying the investor base.

Saudi Arabia expects its public debt to reach SAR 754 billion, 26 per cent of the estimated GDP in 2020, and 11.2 per cent higher compared to the previous year (SAR 678 billion). The debt-to-GDP ratio remains below the government’s National Transformation programme 2020 target, wherein a ceiling of 30 per cent was put on public debt as a percentage of GDP, said KPMG KSA.

REAL GDP GROWTH IN 2020 The MoF expects real GDP growth in 2020, 2021 and 2022 to be 2.3 per cent, 2.2 per cent and 2.3 per cent respectively.

According to KPMG KSA, real GDP growth in Q1 2019 was 1.7 per cent and both the oil sector and the non-oil sector witnessed a growth of one per cent and 2.1 per cent, respectively. While the real GDP and the non-oil sector GDP witnessed a growth of 0.5 per cent and 2.9 per cent in 2Q19, the real oil GDP declined by three per cent due to the downward fall of the oil market.

The IMF projected real oil GDP growth in 2020 to rise as crude oil production increases and the Jizan refinery becomes fully operational, while non-oil growth slows with fiscal consolidation. In the medium term, non-oil growth is projected to strengthen to around three per cent as reforms yield dividends and real GDP growth to settle around 2.5 per cent.

ECONOMIC DIVERSIFICATION The Kingdom’s Vision Realisation programmes (VRPs) that underpin Vision 2030 are moving from design to implementation. The World Bank said that reforms are beginning to have a positive impact on the economy and non-oil growth is picking up.

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 Crown Prince Mohammed bin Salman’s ambitious economic transformation plan which is expected to have a positive spill over effects on the private sector.

PIF, with around $320 billion AUM on behalf of the government, is financing several mega-developments including the $500 billion NEOM City, Qiddiya and the Red Sea Development Company's mega tourism project.

Saudi Arabia will receive an uplift in the non-oil private sector as a result of hosting the G20 summit in 2020. However, the Kingdom remains exposed to global economic developments such as the US-China trade war, no-deal Brexit as well as regional geopolitical tensions.

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NEWS HIGHLIGHTS

MSCI to upgrade Boursa Kuwait to emerging market status in 2020 MSCI will reclassify the MSCI Kuwait Indexes to Emerging Markets status as part of the May 2020 semi-annual index review in one step as the Kuwaiti equity market now meets all the necessary requirements.

The upgrade of Kuwaiti equities to MSCI Emerging-Market status is expected to trigger $2.8 billion of inflows from passive funds.

Sebastien Lieblich, the Global Head of Index Solutions and Chairman of the MSCI Equity Index Committee, said, “We welcome the latest market accessibility enhancements introduced by the Kuwaiti authorities that now allow international institutional investor to benefit from omnibus account structures and same NIN cross-trade capabilities.”

In October 2019, the Kuwait Capital Market Authority (CMA) said that it issued resolutions, amending some provisions of the executive bylaws and rules related to the implementation of omnibus accounts and same National Investor Number (NIN) cross trades.

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UAE’s FAB expands Saudi footprint, opens branch in Jeddah UAE’s First Abu Dhabi Bank (FAB) has expanded its operations in Saudi Arabia with the opening of a new branch in Jeddah, as the bank plans to support promising opportunities in the Kingdom at the same time strengthening its regional presence.

The new branch in Jeddah joins Riyadh and Al Khobar to give FAB an on-ground presence in three regions in Saudi Arabia, as well as the lender’s international network, which spans five continents, enabling the lender to use its global relationships, expertise and financial strength to support local, regional and international businesses seeking to do business at home and abroad.

The Abu Dhabi-based bank was granted a licence by the Saudi Arabian Monetary Authority to open a commercial banking business in the country in March 2019 and the licence allows the lender to operate three branches.

Dubai Islamic Bank shareholders approve Noor Bank acquisition UAE’s Dubai Islamic Bank’s (DIB) shareholders have approved the acquisition of unlisted Dubai-based Noor Bank subject to regulatory approvals.

Dr. Adnan Chilwan, Dubai Islamic Bank’s Group CEO, said, “We anticipate that integrating the two operations will generate significant synergies, leading to improved efficiencies and greater contribution to profitability with a positive impact on shareholder returns.”

The shareholders gave approval for the acquisition through an increase of DIB's capital from 6.6 billion shares to 7.2 billion shares, with a share swap ratio of one new share in DIB for every 5.49 Noor Bank shares, translating into an issuance of about 651 million new DIB shares.

The acquisition cements DIB’s position as one of the world’s largest Islamic finance institutions and is expected to enhance Dubai’s position as the capital of Islamic economy by creating the region’s most progressive Shari’ah-compliant banking group.

Potential IMF, World Bank help for Lebanon is credit positive

FATF urges Turkey to improve measures against money laundering

Lebanon steps up fiscal engineering to buy time in debt crisis

Moody’s said that caretaker Prime Minister Saad Hariri’s formal request for technical assistance from the International Monetary Fund (IMF) and the World Bank to develop an economic reform plan to address Lebanon’s fiscal, economic and financial crises is credit positive and reduces the risk of extreme macroeconomic instability.

Caretaker Prime Minister Saad al-Hariri discussed last week the possibility of technical assistance from the IMF and World Bank in drawing up a plan to rescue the economy from a worsening crisis.

In a report, Moody’s stated that without technical and financial support from the IMF, World Bank and international donors, a scenario of extreme macroeconomic instability—in which a debt restructuring occurs with an abrupt destabilisation of the currency peg resulting in very large losses for private investors—is increasingly likely.

Lebanese banks' recent implementation of official and unofficial restrictions on foreign-exchange transfers abroad and dollar withdrawals has slowed the drawdown of foreign-exchange reserves and supported the government’s foreigncurrency debt service payments.

Paris-based Financial Action Task Force (FATF) has urged Turkish authorities to address shortcomings in tackling money laundering (ML) and terrorism financing (TF) or risk being added to a gray list of countries with inadequate financial controls.

The global money laundering watchdog said that Turkey should make fundamental improvements in measures for freezing assets linked to terrorism, terrorist organisations and financiers.

In a report, Anti-money laundering and counter-terrorist financing measures: Turkey, FATF stated that Turkey has a low rate of conviction for terrorism financing, pointing to data that the watchdog obtained from authorities showing more than 6,000 people were prosecuted in 2017 but only 115 convicted.

FATF said that Turkish law enforcement agencies’ identification of ML activity for investigation through their analysis of STRs and other reports submitted to the Financial Crimes Investigation Board (MASAK) is not commensurate with the risk profile in Turkey.

Out of 11 areas evaluated, Turkey was deemed to require major or fundamental improvements in nine and the report’s findings mean Ankara will be put under observation for a year and risk being added to the ‘gray list’ if it does not make improvements.

Lebanon’s worst economic crisis in decades is forcing authorities to wade deeper into the kind of fiscal engineering that the International Monetary Fund (IMF) said risks undermining Banque du Liban (BdL) credibility, reported Bloomberg.

The central bank bought LBP 3 trillion ($2 billion) of Treasury bills from the government at one per cent well below market rates. BdL is expected to buy half as much again at the same rate by the end of the year to reduce the government’s rising debt costs.

The deal helps offset higher interest rates incurred by the finance ministry, which last month sold $3 billion in Eurobonds to the central bank at as much as 12 per cent.

The move is the latest sign of how the government, effectively shut out of bond markets amid a crippling political crisis, is increasingly relying on the central bank to prevent a financial meltdown. The country has been without a functioning government since Prime Minister Saad Hariri resigned in late October in the face of mass protests against corruption and inequality.

Saudi Arabia’s NCB, Riyad Bank end merger talks National Commercial Bank (NCB), the Kingdom’s biggest lender, has ended talks to merge with Riyad Bank.

In separate bourse filings, NCB and Riyad Bank said, “The boards of both banks have decided to end preliminary merger talks and not to continue with the merger study.”

The merger was expected to create a combined bank holding $183 billion in assets and to further extend NCB’s lead over its closest rivals, such as Al Rajhi Bank, by boosting its assets by almost a third to SAR 685 billion.

NCB stated that it is committed to become the region’s leading financial services group by implementing its sustainable growth strategy, while Riyad Bank said it will continue to develop its products, services and technologies that serve the interests of its customers, shareholders and employees.

Kuwait appoints Gulf’s first female finance minister Kuwait has appointed Mariam Al-Aqeel as the new finance minister, the first woman in the Arabian Gulf region to hold the post, reported Bloomberg.

As finance minister, Al-Aqeel automatically heads the country’s sovereign wealth fund, Kuwait Investment Authority.

Kuwait, home to about six per cent of the world’s oil reserves, is the fourthbiggest producer in the Organisation of Petroleum Exporting Countries (OPEC).

The new cabinet is expected to serve for less than a year since Kuwait is scheduled to hold parliamentary elections in 2020.

Moody’s declares ‘deposit default’ for three top Lebanese banks Moody’s said that emergency measures by Banque du Liban (BdL) to address foreigncurrency shortages forced three of the country’s top lenders into a ‘deposit default’.

The central bank’s instructions add to unofficial restrictions that Lebanon's Association of Banks announced on 17 November 2019 for transfers abroad and dollar withdrawals from deposit accounts and implemented by banks.

Moody’s said that the incremental measures by both the BdL and the banks will likely diminish depositor confidence and stifle future foreign-currency inflows for some time, a credit negative for banks.

Bank Audi, Blom Bank and Byblos Bank also had their baseline credit assessments (BCAs) downgraded to the second-lowest level in a move that Moody’s said it was not a credit rating action but an opinion on issuers’ standalone intrinsic strength in the absence of any extraordinary support from outside.

The rating agency stated that the downgrade is driven by the payment of part of the interest for foreign currency deposits in local currency by banks in Lebanon following instructions by the country’s central bank, which constitutes a deposit default.

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NEWS HIGHLIGHTS

Saudi Arabia may tap debt markets in January 2020 to cover deficit Saudi Arabia may tap international debt markets as early as next month as it seeks funding to help bridge its widening budget deficit, reported Bloomberg.

Saudi Arabia expects its budget deficit next year to be around SAR 187 billion, with plans to finance that by borrowing and drawing down the Kingdom’s reserves.

Fahad Al-Saif, the Head of the Finance Ministry’s Debt Management Office, said, “Most of the debt will be local and around 45 per cent will be raised overseas through Sukuk and conventional bonds.”

“The country will also refinance roughly SAR 44 billion riyals ($11.7 billion) of existing local debt,” said Al-Saif.

Additionally, the total debt requirement next year will be as much as SAR 120 billion, the new debt will be up to SAR76 billion and of that new debt, SAR 30 to 35 billion will be international.

Saudi Arabia’s 2020 budget marks a shift away from the fiscal stimulus that helped power non-oil economic growth this year to the fastest since 2015. The world’s largest oil exporter is embarking on three years of spending cuts as it looks to private businesses to take the lead.

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ADDH, Wizz Air partner to launch Wizz Air Abu Dhabi Saudi Aramco set to pay banks around $64 million for record IPO Saudi Aramco is poised to pay a combined $64 million to the banks that arranged the world’s largest initial public offering (IPO), a disappointment for the Wall Street firms that pitched aggressively for a spot on the deal, reported Bloomberg.

The state-owned oil giant plans to pay the top local banks on the deal SAR 39 million ($10.4 million) apiece while foreign banks on the deal are set to each receive SAR 13 million.

The figures represent the base fee being paid by Saudi Aramco, which will decide the amount of discretionary incentive fees at a later date. If Saudi Aramco opts to dole out additional money, most of it would likely go to the domestic banks that brought in the bulk of the IPO orders.

The Gulf oil producer raised $25.6 billion in its share sale, which became a local affair after foreign fund managers shunned its premium valuation. The base fee, representing 0.25 per cent of the funds raised, pales in comparison to other large deals.

Abu Dhabi Developmental Holding Company (ADDH) has signed an agreement in principle with Budapestbased Wizz Air Holdings to launch an airline in Abu Dhabi, Wizz Air’s first airline established outside of Europe.

In a bourse filing, Wizz Air said that the intended low-cost airline will be formed through a joint venture called Wizz Air Abu Dhabi and operations are expected to launch in the second half of 2020.

The airline will focus on establishing routes to markets in which Wizz Air has existing, high growth operations namely Central, Eastern and Western Europe as well as the Indian subcontinent, Middle East and Africa, over the long run.

London-listed Wizz Air stated that the new airline would have an initial capital requirement of about $50 million and would use Airbus A320neo, A321neo and A321XLR planes Wizz already has on order.

Wizz Air Abu Dhabi will face competition from Air Arabia Abu Dhabi which is due to begin operations from the second quarter of 2020.

Saudi Arabia announces SAR 1.02 trillion 2020 budget

Egypt's cabinet approves citizenship by investment law

Saudi Arabia, the Arab world's largest economy, has announced a SAR 1.02 trillion ($272.00 billion) budget for 2020, a slight fall in spending that reversed the Kingdom’s three years of expenditure increases intended to spur non-oil economy growth.

According to local newswire, Saudi Press Agency, revenues in 2020 are forecasted at SAR 833 billion, widening the budget deficit to SAR 187 billion or 6.4 per cent of (GDP) compared with a projected deficit of SAR 131 billion or 4.7 per cent of GDP in 2019.

To cover for the budget deficit, the Kingdom authorised the Minister of Finance to withdraw from the state's general reserve account as well as issue debt instruments and all kinds of Sukuk, inside and outside of Saudi Arabia.

Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud, said, “The 2020 budget comes in light of a global economic climate that prevails challenges, risks and protectionist policies, which requires flexibility in managing the public finances and enhancing the ability of the economy to address these challenges and risks.”

The Saudi finance minister also said that the proceeds from Saudi Aramco’s share offering would be invested locally helping to create more revenue channels for the government.

The Cabinet of Egypt has approved the country’s citizenship by investment law allowing the offering of citizenship to foreigners who would have acquired property or invest in the country to acquire, making good on a promise that was floated in 2018 as the government seeks to diversify its sources of revenue, reported Bloomberg.

Under the law, foreigners could become citizens either by purchasing state-owned property worth at least $500,000, investing at least $400,000 with an ownership stake of no less than 40 per cent of the project capital or depositing cash ranging from $250,000 to $1 million into a local account.

Those ponying up $750,000 could withdraw the funds in local currency after five years, without interest, while parking $1 million allows for a withdrawal after three years, also interest-free.

However, a $250,000 deposit is nonrefundable and goes directly into state coffers. The cabinet stated that there are conditions tied to the real-estate option, which relate to a 1975 law governing citizenship.

Saudi Aramco debut trading to make Tadawul world’s ninth-biggest bourse Saudi Aramco will instantly spring the Tadawul, Saudi Arabia’s stock market into the ranks of the world’s largest when the state-owned oil producer’s shares begin trading on 11 December 2019 after its initial public offering (IPO), reported Bloomberg.

The energy giant raised $25.6 billion in the biggest-ever IPO, selling shares at SAR 32 each and valuing the company at $1.7 trillion, overtaking Microsoft and Apple as the most valuable listed company. Saudi officials pulled out all the stops to ensure that the stock trades higher.

The start of trading in Riyadh marks the end of a near four-year plan that has been intertwined with Crown Prince Mohammed bin Salman’s rise to global prominence and his Vision 2030 plan to reform the Kingdom's economy. First announced in January 2016, the IPO set records but fell short of the $100 billion international offering with a valuation of $2 trillion that the prince once proposed.

Saudi Aramco is so big that it will easily dwarf the rest of the companies in the Saudi market, which have a combined value of about $500 billion. Adding in the oil producer, the Saudi Arabia Stock Exchange will become the world’s ninthbiggest stock market, overtaking India and closing in on Germany and Canada.

Sovereign Ratings as of 1 January 2020 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

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

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13

MARKETS

Better operating conditions The regional banking sector has been severely tested but thanks to their respective governments’ support, the banks successfully withered the storm

F

inancial markets across the globe have taken a battering in the past couple of years, with the Arabian Gulf region experiencing its fair share of difficulties. The regional banking sector has been severely tested but thanks to their respective governments’ support, the banks successfully weathered the storm.

According to Moody’s, the outlook for GCC banks remains stable, underpinned by solid economic growth and by the lenders’ strong capital buffers and substantial liquidity.

GCC lenders are coming up with ways to resist geopolitical tensions, faltering real estate industry and volatile oil prices through partnerships with fintechs as well as mergers and acquisitions (M&A) to improve competitiveness and boost capital.

The GCC banking sector is also benefitting from the regional equity market which has seen an increase of initial public offerings by major companies like Saudi Aramco as well as an active debt market, witnessing iconic transactions as governments and corporates seek to diversify their sources of finance.

“Government spending programmes will push average non-hydrocarbon GDP growth to 2.6 per cent in 2020, providing favourable operating conditions for the region’s banks,” said Moody’s.

The GCC region will be in focus in 2020 because of several major global events such as Expo 2020 Dubai, which opens on 20 October 2020 and runs for nearly six months and the G20 Summit in Riyadh in November 2020.

PwC stated that in different ways, the Expo 2020 Dubai and G20 Summit will showcase the region’s economic development as well as potential and could contribute to ongoing efforts to attract investments and diversify economies.

OPERATING ENVIRONMENT

In a research note, Fitch Ratings stated that GCC banks will successfully navigate a less-than-favourable macroeconomic environment in 2020 supported by their solid financial profiles. Banks took the opportunity of the transition to

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Banks in the GCC continue to display strong capitalisation by global standards.

PHOTO CREDIT: adrian825/iStock

International Financial Reporting Standards (IFRS) 9 in 2018 to recognise the effect of the softer economic cycle on their asset quality indicators in a relatively conservative manner.

“The amount of problematic assets, which we define as IFRS 9 Stage 2 and 3 loans, will likely remain stable, but we do not exclude transition between the two categories,” said S&P. Loan performance will weaken modestly but will remain solid. However new problem loans are expected to form primarily in the slowing construction and real-estate sector.

Moody’s expects non-performing loans (NPLs) to stand at a moderate 3.5 per cent of total loans by the end of 2020, from an estimated 3.3 per cent in 2019.

Surprisingly, the muted economic activity of the past four years did not result in a significant increase in nonperforming loans in the region. According to S&P Global, as of 30 June 2019, NPLs to total loans for the rated GCC banks reached 2.8 per cent, compared with 2.4 per cent at year-end 2015.

A combination of write-offs, restructuring of exposures to adapt to the new economic reality, and tighter underwriting standards explain this stability.

S&P Global stated that the other source of latent risk is Gulf banks’ international operations. Several GCC banks such as Bahrain’s Al Baraka Bank, Kuwait’s Kuwait Financial House and UAE’s Emirates NBD have invested internationally over the past few years, with Turkey among the most popular destinations.

Given Turkey’s lacklustre economic performance, exposed GCC banks will see some effect on their asset quality indicators, however, this risk remains confined to only a few players, some of which have the financial muscle to absorb it, said Fitch Ratings.

However, growth in banking assets is highly correlated with that of regional GDP, which moves largely in tandem with oil prices although governments are diversifying their economies to do away with reliance on hydrocarbons. Moody’s expects real GDP growth to average two per cent across the region in 2020.

The relatively stable oil price has helped lift the outlook of GCC banks in 2019, compared to their counterparts in other

emerging markets such as Turkey and Lebanon, who have been struggling amid slowing economic growth with some even facing rating downgrades.

Oil remains the dominant driver of growth in the GCC states which, given low-trending prices and ongoing output caps, will limit the upside for recovery in the year ahead, said ICAEW. The Organisation of Petroleum Exporting Countries and their allies (OPEC+) agreed to adjust its output target and redistribute production cuts between its members under pressure from Saudi Arabia, which has long carried an outsized share of the burden.

Moody’s forecasted an average oil price of $62 for 2020, around the midpoint of the rating agency’s $50-$70 mediumterm projection range, balanced by sluggish global demand and subsequent supply cuts led by OPEC and Russia.

Since 2014, the GCC countries have been hit by a sustained period of low crude prices, which has caused governments to re-calibrate budgets and dip into state deposits. Banks have also faced pressure from higher compliance costs because of new accounting standards, technological changes and the introduction of value-added tax.

MERGERS AND ACQUISITIONS According to S&P Global Ratings, consolidation is an avenue that some Gulf banks have decided to take, although the first wave of mergers was driven by banks with common shareholders, the second wave could be due to lower financial performance.

The overcrowded banking sector in the GCC has seen a wave of mergers and acquisitions announcements in the last year, as falling oil prices hit government budgets, slowing economic growth. The sector has many banks serving small populations, driving intense competition and aggressive pricing policies.

Moody’s said that Oman, where two potential mergers have been announced, has 20 licenced banks serving a population of 4.6 million people while Saudi Arabia has only 27 banks serving a population of close to 33 million people.

The Abu Dhabi government completed the merger of Abu Dhabi Commercial Bank, United National Bank and Al Hilal Bank in June 2019 following the successful tie-up of its two major banks to become First Abu Dhabi Bank in 2017.

Recently, Dubai Islamic Bank’s (DIB) shareholders approved the acquisition of Noor Bank through an increase of DIB’s capital from 6.6 billion shares to 7.2 billion shares, with a share swap ratio of one new share in DIB for every 5.49 Noor Bank shares, translating into an issuance of about 651 million new DIB shares.

Dubai’s Emirates NBD also completed the acquisition of Russia-based Sberbank’s 99.85 per cent stake in Turkey’s Denizbank for $2.8 billion (TRL 15.48 billion) in August 2019, strengthening UAE’s financial powerhouse’s regional presence.

Additionally, the shareholders of Invest Bank also approved an investment proposal allowing the Government of Sharjah to own 50.07 per cent of the lender following AED 1.12 billion strategic investment last year.

Banks in the GCC continue to display strong capitalisation by global standards and over the past year we have affirmed most of our ratings taking a couple of positive actions because of upcoming mergers or our view of higher systemic importance, said S&P Global.

Across the region, the Central Bank of Kuwait ‘conditionally’ approved the proposed merger between Kuwait Financial House (KFH) and Bahrain’s Ahli United Bank (AUB). CBK granted KFH permission to acquire 100 per cent of the capital shares of AUB and the approval shall be conditional upon fulfilling certain requirements by the central bank.

Moody’s said that the outlook for GCC banks remains stable, except Oman, underpinned by solid economic growth as well as the banks’ strong capital buffers and substantial liquidity.

Additionally, Saudi British Bank (SABB) and Alawwal agreed to merge their businesses in June 2019, after receiving regulatory and shareholder approvals, creating the thirdlargest bank by assets in the Kingdom.

In Bahrain, the National Bank of Bahrain, which owns a 29 per cent stake in Bahrain Islamic Bank, made an offer to acquire the entire Islamic lender in November 2019 following months of discussions as well as financial and legal due diligence for a potential offer for the Shari’ah-compliant lender’s issued shares.

Furthermore, the Sultanate’s Alizz Islamic Bank and Oman Arab Bank (OAB) signed an MoU to explore the possibilities of a potential merger after obtaining the in-principal approval from the regulatory bodies in 2018. The two lenders also appointed legal and financial advisors to conduct due diligence, paving way for the proposed merger.

Although GCC countries are diversifying their economies to reduce dependence on oil and gas exports, hydrocarbon revenues contribute greatly to their fiscal revenues and annual budget. The sharp drop in oil prices in Q4 2018 highlights the vulnerability of GCC sovereigns’ credit profiles to future oil price declines which will inevitably impact the capital base of banks. Should prices stay near $60, Oman’s budget deficits would be materially wider and debt likely higher.

“GCC BANKS WILL SUCCESSFULLY NAVIGATE A LESS-THAN-FAVOURABLE MACROECONOMIC ENVIRONMENT IN 2020 SUPPORTED BY THEIR SOLID FINANCIAL PROFILES.” — Fitch Ratings

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15

COVER INTERVIEW

Adnan Ahmed Yousif

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Leveraging a robust global network In an exclusive interview with Banker Middle East, Adnan Ahmed Yousif, President & Chief Executive of Al Baraka Banking Group reviews the group’s 2019 results and how the Shari’ah-compliant bank plans to further bolster and enhance extensive global network

H

ow has 2019 been for Al Baraka Bank?

What would you say were the major milestones achieved by the bank last year?

Overall, Al Baraka Bank maintained its healthy financial performance despite the lower-income, which was due to the geopolitical concerns in some of the countries where the banking group operates. Towards the end of the year, we showed improvement in our revenues, as total operating income of the Group during the third quarter increased by four per cent to reach $235 million, net operating income by one per cent to reach $98 million.

However, Al Baraka's adherence to its conservative approach to set aside hedging provisions for all its units resulted in a 14 per cent decrease in net income attributable to shareholders during the third quarter, to reach $28 million compared to the second quarter of the year.

Similarly, another remarkable milestone is digital transformation. Al Baraka Banking Group has always focused on digitalisation as a top priority and has to its credit, several achievements with the most recent award received by the Group as the Most Innovative Islamic Bank of the Year at the FinX 2018.

The bank also launched the Al Baraka Global API website, a step towards innovation in open banking. The muchacknowledged digital-only Islamic bank in Germany ‘Insha’ is now on stream and is providing services to the German market, flooded with locals and expatriates who are eager to partake in the digital-only Islamic banking services.

Al Baraka Banking Group also inaugurated a new fintech company which focuses on e-payments ‘alneo’ in Turkey through its Turkish subsidiary.

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17

COVER INTERVIEW

Additionally, the bank will also continue to focus on expanding our Shari'ah-compliant investment as well as banking products’ base through our banking units and creating greater synergy between them in the areas of compliance— AML / CFT, FATCA, CRS, and other international legislations— to strengthen the Group's position.

In addition, our human resources will be one of our key focus areas. We will continue to provide modern training programmes through Al Baraka Academy both in person and through online modules to all employees of the banking group and its banking units.

One of ABG's main strengths is its extensive global network. How do you plan to further bolster and enhance this unique capability?

Adnan Ahmed Yousif

“AS A BANKING GROUP WITH A NETWORK OF SUBSIDIARIES, BRANCHES AND REPRESENTATIVE OFFICES SPREADING OVER 17 COUNTRIES ACROSS THREE CONTINENTS, MULTIPLE CHALLENGES AND RISKS ARE FACTORED IN OUR BUSINESS MODEL AND WE ARE USED TO COPING WITH THEM OVER THE LAST 17 YEARS.” — Adnan Ahmed Yousif, President & Chief Executive of Al Baraka Banking Group

What were the main challenges you faced in 2019 and how do you see this panning out in 2020?

As a banking group with a network of subsidiaries, branches and representative offices spreading over 17 countries across three continents, multiple challenges and risks are factored in our business model and we are used to coping with them over the last 17 years.

As part of this, some of our units such as Turkey, Sudan as well as Algeria and Syria saw unstable economic conditions during 2019, but other units such as Egypt, Jordan, Tunisia and South Africa witnessed healthy improvements, which created a balance in maintaining our sustained revenues and operations flow.

What are your priorities for the bank in 2020?

In 2020, the Al Baraka Banking Group will continue to focus on the implementation of the digital transformation strategy, both at the group level and in our banking units. Moreover, we intend to launch a number of initiatives that will highlight the leading role of Al Baraka Banking Group in embodying this transformation.

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The expansion of our global network goes both at the branch network level and with exploring new markets.

During the first nine months of 2019, Al Baraka’s units opened six new branches, taking the total number of branches to 703. The total staff of the group's branches reached 12,695, which reflects the clear role of our units in creating rewarding jobs for citizens in their communities. This strategy is key for us to continue growing our businesses and profits, at the same time serve wider communities in countries where we operate, taking into account the effect of digital banking.

In terms of regional and international geographical expansion, in December 2017 we opened our Moroccan banking unit, BTI Bank. The unit has started offering various Islamic banking products and services based on approvals being received from relevant authorities.

The bank now has four branches which were opened in 2018 and plans to open 37 new branches by 2022 in various Moroccan cities, supported by ATM banking and online channels.

Furthermore, the Al Baraka is also planning to enter new markets in the coming period through the presence in the Indonesian and Chinese markets, expansion in East Asia, as well as studying the expansion in the continent of Africa through the presence in several countries such as Kenya, Tanzania andUganda.

ABG partnered with ADIB last year to cross-sell on customer payments and collections. How has this partnership benefitted ABG thus far? Are there similar arrangements with other banks in the pipeline this year?

It is a fruitful partnership and enables both Al Baraka Banking Group and Abu Dhabi Islamic Bank (ADIB) to establish

4% $235 1% $98

total operating income reaching million &

net operating income to reach million

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COVER INTERVIEW

a joint channel to provide their customers with access to wider markets and collaborate on cross-selling in the area of payments and collections.

Al Baraka is a leading provider of Shari'ah-compliant products globally and this agreement with ADIB sets the platform for customer referrals between the two banks, capitalising on our large geographic presence and wide client base. This approach is in line with Al Baraka Banking's thrust towards greater customer-centricity. Given the success of this partnership, we looking forward to similar arrangements with other banks as well during 2020.

Following an agreement signed with UNEP last year, ABG had pledged to allocate approximately $197 million to finance environmental projects over the course of 2019 - 2020. What projects have ABG financed since? What more is in the pipeline and do you plan to expand this allocation further?

We have already developed our business plan to achieve this target through our units and some of them have already implemented initiatives in their countries. These units will provide financing of over $78 million towards renewable energy projects and over $ 119 million towards enhancing the energy efficiency of existing cooling & electric systems. We have confidence that these targets are achievable.

Through channelling finance for renewable energy and energy efficiency projects, we hope to be able to strengthen efforts towards achieving sustainable development in the countries where we operate while improving the lives of local communities. We expect that our collective effort with UNEP will help reduce carbon emissions in these countries. In addition, we hope that this financing pledge will encourage other banks to finance renewable and energy efficiency projects in a similar fashion

Looking at the rest of 2020, what major risks do you expect to encounter? How do you plan to manage them?

We believe that the challenges we faced in 2019 will continue in 2020, especially the geopolitical situation surrounding our units’ businesses. However, on the other hand, we expect that oil prices will remain firm during 2020 and the Arabian Gulf government spending programmes will push the average non-hydrocarbon GDP growth to 2.6 per cent, thus providing favourable operating conditions for the region's banks.

The ongoing implementation of the new accounting standards such as IFRS9 and Basel 3 will put more pressure on banks’ businesses too. Also, the lower interest rate will start to pressurise banks' net interest margins; but margins will remain strong compared with global peers, given the relatively cheap funding resources.

“THE EXPANSION OF OUR GLOBAL NETWORK IS KEY FOR US TO CONTINUE GROWING OUR BUSINESSES AND PROFITS, AT THE SAME TIME SERVE WIDER COMMUNITIES IN COUNTRIES WHERE WE OPERATE.” — Adnan Ahmed Yousif, President & Chief Executive of Al Baraka Banking Group

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“WE HAVE ALREADY DEVELOPED OUR BUSINESS PLAN TO FINANCE ENVIRONMENTAL PROJECTS THROUGH OUR UNITS AND SOME OF THEM HAVE ALREADY IMPLEMENTED INITIATIVES IN THEIR COUNTRIES.” — Adnan Ahmed Yousif

In 2020, the Al Baraka Banking Group will continue to focus on the implementation of the digital transformation strategy, both at the group level and in our banking units.

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21

COUNTRY FOCUS

The UAE has a slightly better public debt outlook compared to its Arabian Gulf allies.

The merits of fiscal discipline The UAE has many economic laws and regulations that deal with investor rights and guarantees property rights such as arbitration, insolvency and corporate laws

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a very large hydrocarbon endowment as well as strong growth rates and a return to consolidated UAE budget surpluses.

The UAE has a slightly better public debt outlook compared to its Arabian Gulf allies. The implementation of fiscal consolidation measures to nurture the growth of the non-oil private sector, including SMEs and developing transparent rules-based fiscal frameworks will support long-term sustainability, said the IMF. According to analysts since 2014, lower oil prices have prompted GCC governments to launch fiscal consolidation programmes spending cuts, energy price reforms and economic diversification measures.

FISCALLY FITTER

PHOTO CREDIT: Christopher Pike/Bloomberg

The UAE Cabinet approved a zero-deficit federal budget of AED 61.35 billion for 2020 and the budget is the largest allocation since the establishment of the country. The Ministry of Finance (MoF) stated that the budget is distributed amongst various sectors related to Emirati citizens and their services such as 31 per cent for social development, 14 per cent for infrastructure and economic resources as well as 6.5 per cent for social benefits and 32.6 per cent for government affairs.

In September 2019, the Financial and Economic Committee approved a two per cent increase for the 2020 federal budget on top of the AED 60.3 billion the government had allocated for 2019.

The budget was increased more than 300 times since the allocation of the first budget in 1971 and has been without deficit for the third consecutive year, reflecting the strength of the national economy and the country’s abundant financial resources that can fund economic development projects.

“GROWTH IN THE UAE IS EXPECTED TO REACH 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.”

— The World Bank

W

hile the UAE has been steadily diversifying its economy through the increase of foreign direct investment (FDI), oil remains the country’s primary source of revenues. Any volatility in the global markets and the oil industry could dampen investor confidence and affect the country’s economic performance.

Fortunately, the UAE is bucking the negative trends in global markets and economic analysts remain optimistic about the country’s growth in 2020. The International Monetary Fund (IMF) said that following a challenging period, the UAE economy is recovering, and non-oil growth could pick up to around three per cent next year—the fastest since 2016—on the back of Expo 2020 Dubai and fiscal stimulus.

The IMF projected overall GDP growth to register 2.5 per cent in 2020. Moody’s also affirmed its Aa2 issuer rating of the UAE, which is supported by the full backing of the government of Abu Dhabi and the federal government’s strong balance sheet.

Moody’s said that its credit view of the UAE reflects a very high economic strength with exceptionally high GDP per capita,

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

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).

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23

COUNTRY FOCUS

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.

STRUCTURAL REFORMS The introduction of a five per cent value-added tax (VAT) in 2018 was a historic milestone; and, while it might encourage consumers to fasten their wallets in the short-term, it is expected to substantially strengthen and diversify government revenues in the coming years.

According to Moody’s revenues from the UAE’s VAT exceeded government expectations in 2018, boosting state coffers and proving credit positive for the country. The rating agency stated that the robust level of compliance in the first year is a positive reinforcement of the UAE’s high institutional strength.

The UAE government has been supportive of economic diversification through the enactment of laws and regulations that seek to boost FDI as well as the participation of the SMEs, the sector which represents more than 94 per cent of the total number of companies operating in the country.

In 2018, the President of UAE, HH Sheikh Khalifa bin Zayed Al Nahyan issued an array of new investment laws, a move which is expected to boost and retain foreign investment for the country to lead Global FDI by 2071.

“The authorities have already taken a number of important steps, including adopting a foreign direct investment (FDI) law allowing 100 per cent foreign ownership in selected sectors and reducing or eliminating fees and penalties,” said PwC. The Cabinet approved 13 sectors eligible for up to 100 per cent foreign ownership such as manufacturing, agriculture and renewable energy in July 2019. The cabinet also approved 122 economic activities across 13 sectors eligible for total foreign ownership.

“FOLLOWING A CHALLENGING PERIOD, THE UAE ECONOMY IS RECOVERING, AND NON-OIL GROWTH COULD PICK UP TO AROUND THREE PER CENT NEXT YEAR—THE FASTEST SINCE 2016—ON THE BACK OF EXPO 2020 DUBAI AND FISCAL STIMULUS.” — The IMF

Other sectors and activities where up to 100 per cent foreign ownership will be permitted including space, transportation as well as hospitality and professional, scientific and technical activities. Similarly, local governments at the emirate level are to determine how much foreign investors can own in each activity allowing different foreign ownership limits to be applied among the seven emirates.

Moreover, the UAE’s long-term visa system, which was launched in November 2018, is aimed at facilitating business, and creating 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.

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2020 31% 14% 6.5% 32.6 % UAE

budget allocation

for social development,

for infrastructure and economic resources

for social benefits

for government affairs

The UAE has many economic laws and regulations that deal with investor rights and guarantees property rights such as arbitration, insolvency and corporate laws.

PwC said that the UAE’s bankruptcy law contributes to raising the level of credit and financial security in the country by enhancing investor confidence. The bankruptcy and insolvency laws are aimed at stimulating the country’s economy by allowing people in financial difficulty to reorganise their financial affairs and repay their debts.

The new insolvency law and regulations for companies operating in Dubai International Financial Centre, which was enacted by Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, came into effect in August 2019. The new insolvency law provides for a new administration process where there is evidence of mismanagement or misconduct.

Similarly, the law also enhances the rules governing windingup procedures; and incorporates the UNCITRAL Model Law on cross border insolvency proceedings with certain modifications for application in the centre.

BOLSTERING THE COFFERS Moody’s said that the outlook for the UAE’s banking system remains stable as banks’ credit profiles remain resilient in a stable but subdued economy. 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.

Scale and competitive edge are among other reasons behind mergers and acquisitions in the banking sector in the UAE. The need for mergers is pressing given the slowing global economic growth battering emerging markets in the wake of a prolonged US-China trade war, said Fitch Ratings.

Last year, the Abu Dhabi Government merged three banks creating a banking group with AED 423 billion in assets.

Similarly, Dubai Islamic Bank’s Board of Directors recently approved proposed terms of the proposed merger with privately-owned Noor Bank, a tie-up which is expected to create a Shari’ah-compliant lender with AED 277 billion ($75 billion) in assets.

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COUNTRY FOCUS

“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.” — EY

The UAE’s plans to allow foreigners to own 100 per cent of businesses across industries in July 2019 was welcomed by the country’s banking sector. As the government eases rules to attract foreign direct investment, the boards of First Abu Dhabi Bank, Emirates NBD and Abu Dhabi Islamic Bank plan to open up to more foreign shareholders. Previously, the UAE capped foreign ownership of businesses at 49 per cent, except in economic free zones.

INVESTING INTO THE FUTURE The UAE’s economic diversification strategy is also being spearheaded by Mubadala Investment Company and Abu Dhabi National Oil Company who are spending on large infrastructure projects—a move which is expected to have positive spill over effects on the private sector.

In 2019, Abu Dhabi’s Mubadala 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

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seeks to support high tech start-ups. Mubadala also unveiled AED 918 million ($250 million) MENA-focused tech investment funds in October 2019 to support start-ups in the Gulf region while empowering tech talent in the UAE and across the wider Middle East region.

The new MENA tech funds will invest in companies and venture funds that help boost UAE’s Hub71—a tech incubator which was launched earlier this year as part of a broader effort by the government to diversify the economy.

Similarly, the Abu Dhabi National Oil Company (ADNOC) is seeking to bring in outside investors to take minority interest in its gas pipeline network. According to the Institute of International Finance (IIF), the UAE is among Arabian Gulf oil producers that are deploying their energy riches as a magnet for fresh capital.

The state-owned energy giant—already raised funds by leasing out crude pipelines and listing shares in its service stations business—is lining up partners to boost gas output and expand refining and chemical operations.

ADNOC raised $4.9 billion from investors including KKR & Co., BlackRock as well as Singapore sovereign wealth fund, GIC, and the Abu Dhabi Retirement Pensions and Benefits Fund (ADRPBF) through selling an interest in its oil pipeline business.

The UAE is expected to stage a modest recovery in 2020 and keep up the momentum through 2021. Abu Dhabi's three-year stimulus package and Dubai's infrastructure spending linked to World Expo 2020 is set to support the non-hydrocarbon real GDP growth which is expected to reach 2.2 per cent in 2020. The real Estate sector hasn't been doing since 2016, however, the launch of the Supreme Committee for Real Estate Planning in Dubai is expected to balance supply and demand.

As the leading regional destination of FDI inflows, the UAE government aims to achieve even higher FDI inflows, setting a target of five per cent of GDP for 2021.

UAE in numbers

POPULATION

GDP PER CAPITA GROWTH

10.5

2.6% (2016) -0.5% (2017) 1.5% (2018) 2.0% (2019) 3% (2020-projected)

million

1m

11m

Source: IMF

GDP NOMINAL GDP

$414 billion (2020) Source: IMF

REAL GDP GROWTH

3% (2016) 0.8% (2017) 2.9% (2018) 3.7% (2019) 2.5% (2020-projected)

Source: Standard & Poor’s

FISCAL INDICATORS CURRENT ACCOUNT BALANCE

$13.2 billion (2016) $26.5 billion (2017) $30.5 billion (2018) $35.9 billion (2019) $30.3 billion (2020-projected) Source: IMF

Source: IMF

REAL NON-OIL GDP (as percentage of GDP)

3.2% (2016) 2.5% (2017) 2.9% (2018) 3.9% (2019) 4.2% (2020-projected) Source: IMF

OIL AVERAGE CRUDE OIL EXPORT PRICE

$44 billion (2016) $54.4 billion (2017) $71.9 billion (2018) $72.3 billion (2019) $69.4 billion (2020-projected)

GDP PER CAPITA (000s)

CRUDE OIL PRODUCTION (in millions of barrels per day)

71.2 (2016) 74.6 (2017) 81.7 (2018) 78.5 (2019) 37.4 (2020-projected

3.0 (2016) 2.9 (2017) 3.0 (2018) 3.1 (2019) 3.2 (2020-projected)

Source: Standard & Poor’s

Source: IMF

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IN DEPTH

Three themes shaping GCC financial services

By Jorge Camarate, Partner with Strategy& Middle East, Christina Hedra and Krzysztof Ignaciuk of Strategy& Middle East and Mahmoud Al-Salah of PwC Middle East

G

overnments in the GCC region know that a strong, resilient financial services sector is critical to economic development and reform.

In 2019 there has been steady progress on regulation, consolidation, and digitisation.

These three themes are connected, reinforce each other, and help the sector mature.

Regulation is the first theme. On the regulatory front, there have been significant changes that demand largescale investment in new technologies to ensure compliance.

Although these changes require considerable effort, they are helping GCC financial sectors to develop rapidly, adopt leading practises, and thereby pave the way for sustainable economic development.

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There were several high-profile mergers and acquisitions in the spotlight in 2019.

PHOTO CREDIT: Christopher Pike/Bloomberg

In particular, there has been increased regulatory scrutiny regarding anti-money laundering (AML) and know-yourcustomer (KYC) compliance. The Financial Action Task Force (FATF), an intergovernmental organisation, started a new round of mutual evaluations across the GCC in 2018. These reviews focus on the strength of AML regulations, how central banks operate, regulators’ effectiveness, and the extent of banks’ compliance with regulations. These are difficult reviews. Failure to pass can lead to being cut off from the global financial system.

In preparation for these reviews, regulators have increased scrutiny of banks, levying fines when necessary.

The Central Bank of the United Arab Emirates has imposed fines ranging from $13,600 to $1.36 million. This past summer the Qatari regulator fined First Abu Dhabi Bank $55 million for obstructing an investigation into suspected market manipulation.

Along with the FATF review, global correspondent banks, which must comply with a variety of global regulations and standards, are demanding that GCC banks also observe these regulations. If they do not, the global correspondent banks will not do business with them, thereby denying GCC banks access to critical elements of the global financial markets such as US dollar clearing facilities.

GCC regulators have responded with a change in mindset.

Previously the approach was often focused on improving ease of doing business for the many foreign individuals and companies attracted to the region. Now regulators understand that banks under their purview must know more about their customers and the source of funds.

“MANY GOVERNMENTS, SOVEREIGN WEALTH FUNDS AND REGULATORS REGARD CONSOLIDATION AS A STEP TOWARD A STRONGER, MORE RESILIENT FINANCIAL SECTOR.” — Jorge Camarate

The consolidation of financial institutions is the second theme. Most GCC financial sectors are fragmented, with Saudi Arabia the notable exception. The UAE, for example, has over 40 banks—too many for the population and a strain on regulators.

Another reason for consolidation is that the state owns, to some degree, many banks. Consequently, many governments, sovereign wealth funds and regulators regard consolidation as a step toward a stronger, more resilient financial sector.

There were several high-profile mergers and acquisitions in the spotlight in 2019. In the UAE there was Noor Bank and Dubai Islamic Bank, and Abu Dhabi Commercial Bank, United National Bank and Al Hilal; in Saudi Arabia, National Commercial Bank and Riyad Bank, and Saudi British Bank and Alawwal; in Bahrain and Kuwait, Kuwait Finance House and Ahli United Bank; and in Qatar, IBQ and Barwa Bank.

Digitisation is the third theme. New technology deployment is accelerating in banking globally, including in the GCC. Banks have partnered with fintechs and invested in new digital solutions for their home markets. Mashreq Bank has launched NeoBiz, the first fully digital bank offering in the UAE exclusively aimed at small- and medium-sized enterprises.

Banks have used digital to enter new markets, such as First Abu Dhabi Bank’s Saudi offering FAB KSA. Banks are also being pushed to digitisation because of increasing competition from non-traditional entrants. Neobanks, which are 100 per cent digital and reach customers on mobile apps and personal computer platforms, are spreading. Bahrain Bank ABC has launched ‘Fatema,’ which will interact with customers as if they are talking to an actual employee.

‘Fatema’ is powered by artificial intelligence (AI) and will talk to customers in a personalised manner. Xpence will soon launch the ‘Gulf region’s first neobank designed by entrepreneurs for entrepreneurs.’ Other entrants include telecommunications operators which are offering digital wallets, such as STC Pay in Saudi Arabia and Viva Cash in Bahrain.

These three themes of regulation, consolidation, and digitisation are related and mutually reinforcing. Until recently, the technology focus was customer-facing. However, improved back-office technologies mean better compliance.

For example, at present more than 90 per cent of transactions identified as ‘suspicious’ are wrongly reported.

Despite this high error rate, banks must investigate each of these, which costs time and money. By contrast, an AI-driven algorithm that learns could significantly lower error rates. Similarly, technologies could identify customers in real-time, facilitating KYC compliance.

Better back-office technologies can also facilitate merger and acquisitions by improving pre-deal due diligence. As regulations become more rigorous, the need to understand AML risks will be critical to consummating deals. In a twist that neatly demonstrates the connection between these three themes, faster consolidation could lead to more cost efficiency and improved regulatory compliance through the creation of. shared utilities to manage common AML and KYC activities across multiple banks.

These three themes of regulation, consolidation, and digitisation can strengthen the GCC financial sector and thereby promote economic development and reform.

Jorge Camarate

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INVESTMENTS

Are bank mergers in the GCC as profitable as they seem?

By Mayur Pau, Financial Services Leader, Transaction Advisory Services, EY MENA

I

n the past two years, we have seen a number of bank mergers take place in the GCC with further mergers either rumoured or announced in the market.

Bank mergers are not a new concept, but with the growing economies of the region, they are starting to make more sense for local institutions that want to become prominent global players.

With foreign operations now accounting for about 15 per cent of foreign banking assets in the GCC, international business is gaining significance as a key avenue of longterm growth. Bank mergers are on the rise as banks face the pressures of their home market and begin to consider promising opportunities in new markets—a key to the drive of international expansions.

Home market challenges range from slowing growth and profit pressures due to saturation and strong competition to the need for global diversification, global needs of ‘global corporates’, and the ability to tap the opportunities with trade and expats.

“BANK MERGERS INCREASE THE POTENTIAL ABILITY FOR THE NEW COMBINED BANK TO RAISE FUNDS AS A RESULT OF AN INCREASE IN PUBLIC CONFIDENCE AND A POTENTIAL IMPROVEMENT IN THE CREDIT RATING OF THE NEW ENTITY.” — Mayur Pau

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Many GCC banks note attractive long-term growth potential in emerging markets, the exits by European banks that are creating inorganic opportunities for GCC banks, and the weakening of currencies in select target markets.

While the cost synergies of a bank merger can be tempting, the strategies to execute such a consolidation vary significantly and there is no ‘one size fits all’ approach to expansions. Most small to mid-sized banks, whether conventional or Islamic banks have operations in five or lesser countries with a global footprint mostly limited to GCC countries and one to two MENA countries.

Select large banks, all conventional, have taken a more aggressive footprint to create a global proposition. Furthermore, a number of GCC banks observe a healthy capital position, requisite scale, and supportive shareholders also provide the necessary impetus for international expansions. However, not all international expansion strategies have yielded desired returns.

In the past few years, one of three GCC banks incurred losses in their international operations. Only two out of every five banks are witnessing improvement in returns compared to the previous year. For many banks, international operations have become a drag on overall profitability as their returns are below home market operations and internal hurdle rates.

Nevertheless, history has shown that GCC banks can create greater shareholder value through optimisation of their existing country portfolios and through selective investments in new, strategic markets. A portfolio review can reveal significant value creation opportunities that would boost a bank’s return profile.

Moreover, it can identify where capital and resources can be freed up for investment in more promising markets.

PHOTO CREDIT: CapturedByAmeli/iStock

There are seven different primary factors for under-performance of an international portfolio. The value wreckers are: • Lack of clarity on long-term strategy and aspirations • Sub-scale operations • Business risks that are not adequately factored • Continuing unviable product lines • Limited offerings with no differentiation • Limited management focus and/or investment from the headquarters • Inappropriate set-up with a sub-optimal licence Banks can significantly improve returns by addressing these sources of value leakage. If the two or more merging banks are able to successfully address the factors of an under-performing portfolio and mitigate risk, they will see the benefits of the newly established entity in both the local and global markets.

BENEFITS BANK MERGERS Rather than be a cause of financial risk, a bank merger— whether between locally licenced or internationally established banks—can benefit as a new entity in several ways. Advantages include the increased ability to compete, benefits to the local economy, the provision of a wider range of products and services, and the opportunity for synergies.

With the growth that comes from the merging of two or more banks, they will also have the capabilities to service larger ticket transactions and reach customers that were previously unavailable to them.

Similarly, a merged entity will be able to leverage existing customer relationships to cross-sell the expanded list of products and services. Through consolidation, the new entity can also help reduce the high fragmentation in the banking sector while maintaining a highly efficient financial services sector in the home market.

In addition, bank mergers increase the potential ability for the new combined bank to raise funds as a result of an increase in public confidence and a potential improvement in the credit rating of the new entity. The merged bank’s cost of funds may potentially decrease because of a wider range of correspondent banking relationships and a potential decrease in the risk profile of the entity.

Perhaps the biggest benefit is the cost synergies banks will experience as the result of a merger, which is typically driven by the consolidation of overlapping branches between banks, operation efficiencies through the combination of international offices based in common geographies and other core and non-core functions.

Combining correspondent banking relations also results in a wider network of correspondent banks and proportionally lower minimum relationship requirement. In addition to cost synergies, revenue synergies will also be driven by complementary products and services that can be offered to the combined customer base. Finally, there is also the opportunity to benefit from funding synergies.

“NEVERTHELESS, HISTORY HAS SHOWN THAT GCC BANKS CAN CREATE GREATER SHAREHOLDER VALUE THROUGH OPTIMISATION OF THEIR EXISTING COUNTRY PORTFOLIOS AND THROUGH SELECTIVE INVESTMENTS IN NEW, STRATEGIC MARKETS.” — Mayur Pau

Each division has its role to play in securing the success of the merger. For example, to ensure governance, a steering committee must be created to represent all parties early on in the process. This steering committee would resolve the key merger issues on a continuing basis, drive the overall integration process and synergy realisation, and have a defined integration plan that lists the resourcing structure for each of the main workstreams.

The opportunities for bank mergers are high, especially since financial institutions will continue to face the pressure of cost reductions and an increased focus on cost-to-income ratios for the next several years. To accommodate these challenges banks are looking at the potential optimisation of their international operations and determining the markets to grow and remain in vs the markets to wind down operations in or completely exit.

In addition, the banking industry as a whole is making way for the automation and digital agenda, as fintech becomes an area of play to meet the demands of customers. The potential of a merger to fill in any service or internal gaps while increasing cost synergies should make the notion of consolidation an appealing one to many in the banking industry.

MITIGATING THE RISK OF BANK MERGERS There are several key considerations that must be evaluated ahead of a bank merger. They include facets such as: • Strategy • Finance • Accounting • Regulatory • Governance • Operations • Communication

Mayur Pau

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PRIVATE BANKING

Should private banks worry about their cyber A rating?

Ian Cramb, Chief Operating Officer, Union Bancaire Privée (UBP) writes for Banker Middle East about how cybersecurity is affecting the private banking landscape

fter working hard to adapt to changes in private banking over the last 15 years—the disappearance of banking secrecy, the regulatory big bang, the introduction of Automatic Exchange of Information rules— it finally seemed that the industry could look ahead with confidence, focusing on development and digitalisation.

However, like Sisyphus, the industry can never rest, and its latest challenge is to combat cybercrime.

In fact, the challenge is not new at all, and is not confined to banking. However, it is growing all the time. In the last few years, cybersecurity has been the main concern of financial institutions’ Chief Operating Officers. According to an industry joke, there are only two categories of banks: those that have been attacked and those that haven’t yet realised they’ve been attacked.

Cybercrime, whether its aim is to misappropriate money or ruin reputations, poses considerable risks for all types of companies. But the threat is being taken particularly seriously by banks, whose business relies entirely on trust.

When Tesco Bank was attacked in 2016, 40,000 accounts were compromised and half had money stolen from them. This resulted in the UK’s Financial Conduct Authority fining the bank GBP 16.4 million for “failing to protect customers”. Since that first large-scale attack, the list of banks affected in Europe has grown to include Santander, Royal Bank of Scotland, Barclays, UniCredit, Bank of Valletta and Metro Bank.

JUSTIFIED PARANOIA The banking industry has entered an era of paranoia, with some justification. Web hackers have much more time and resources than their potential victims, however determined

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“IT IS NATURAL THAT A BANK SHOULD TAKE THE TIME TO RAISE CLIENTS’ AWARENESS OF CYBERPROTECTION MATTERS.”

In the same way as banks must now provide practical evidence of their commitment to responsible investment in order to stand out, they will in future have to show objectively that they are making constant efforts to protect their own data and those of their clients. For the best banks, their cyber ratings will become a marketing tool.

PHOTO CREDIT: PhonlamaiPhoto/iStock

VIRTUAL VAULT

those victims might be to protect their IT systems. On the dark web, cybercrime has become an industry in its own right, with price lists, service providers and sponsors. This can be seen in the way attacks have grown in both number and sophistication. According to Forbes, in just the first half of 2019, 3,800 security breaches were made public, in which the security of 4.1 billion records was compromised.

This is the downside of the ever-more connected world that we have created. The number of potential pitfalls is increasing as technological innovation makes everything more interconnected. In the banking industry, in particular, it should not be surprising that clients want the immediacy, simplicity and efficiency now being made possible by electronic services. Yet the e-banking apps giving them that connection have themselves become a weak link in the system. Well-designed e-banking tools provide solid protection. But hackers will take advantage of any small crack, such as a delay in installing an update, to infiltrate devices.

Banks are spending increasing amounts of money to combat this multifaceted threat. They are customers of a rapidly growing cyber-resilience industry. As well as established software makers, we have seen a proliferation of new service providers, such as cyber-rating agencies that assess a company’s cyber risk on the basis of public traffic data. The resulting ratings are updated daily, forcing companies to make ongoing efforts to maintain a good score.

At the moment, these cyber ratings are only accessible to institutional investors. But there is every chance that they will eventually be available to all, and will become a key criterion, like solvency indicators, that private clients take into account when selecting a bank.

Even then, to turn cybersecurity into a positive selling point, banks will have to raise awareness on an ongoing basis, both internally and externally. They must use their relationship managers’ close links with clients to make sure they are fully informed, particularly when setting up e-banking. After all, in a previous era, clients used to ask how secure a bank’s vault was. Today, therefore, it is natural that a bank should take the time to raise clients’ awareness of cyberprotection matters. Internally, as well as the need to ensure that their staff can be relied upon in order to minimise human risks, banks must raise awareness through information sessions, make regular assessments of how employees respond to “phishing” attacks (attempts to gain access to sensitive data through work e-mails), carry out penetration tests and simulate cyberattacks.

Today’s COOs are caught up in a number of technological revolutions, and most of them would admit that they need to remain humble in their efforts to combat cybercrime: no matter how effective the defences they build, it is impossible to eradicate all risk. But they also know that they cannot let down their guard when dealing with such a major challenge.

Ian Cramb

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33

RETAIL BANKING

Banks across the region are also steadily shutting down their physical branches.

PHOTO CREDIT: metamorworks/iStock

Digitalising retail banking in the Middle East

By Preeti Harrison Bhambri, Head of Business Development, MENA, WeInvest 34

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“THE MIDDLE EAST REGION IS HOME TO OVER 411 MILLION PEOPLE AND IS AMONG THE WORLD’S FASTEST-GROWING MARKETS, WITH REGIONAL PERSONAL WEALTH PROJECTED TO REACH A COMBINED $5.2 TRILLION BY 2023.”

— Preeti Harrison Bhambri

A

blaze of digital solutions is about to hit the retail banking space in the Middle East, a region projected to hold a staggering $5.2 trillion in wealth. Digitalisation is coming to the retail banking sector in the Middle East. Comprised of 17 countries (including the UAE, Iran and Turkey).

The region is home to over 411 million people and is among the world’s fastest-growing markets, with regional personal wealth projected to reach a combined $5.2 trillion by 2023. As wealth continues to grow and as retail consumers in the Middle East become more exposed to new and innovative ways of banking, the region’s clientele will increasingly demand more sophisticated tools to manage that wealth as well as an overall enhanced customer experience.

Interestingly, this demand is not just led by the younger generation but is also fueled by the rising expectations of savvy investors in the region. The impact of such a trend is already evident in Southeast Asia countries, specifically Thailand and Singapore, where up to 40 per cent of the trading is by retail investors.

Investors in these countries exhibit self-direction and initiatives to research and invest directly. The lower barrier-of-entry for digital wealth allows younger investors to invest in Singapore.

Beyond young investors, the option to be able to manage your portfolio digitally also reactivates dormant savvy investors.

Aside from the fintech players, this trend has also caught the attention of Singapore banks with all of the top players launching robo-advisory solutions within the past two years. Similarly, the Middle East’s overwhelmingly young populations—and their smartphones—are shaking up the banking industry.

With half of the region’s population under the age of 24, and millennials forming an increasing portion of high and ultra-high net worth individuals (UHNWIs), the landscape here is one of tech-native, savvy youths ravenous for instant access to financial services.

Most UHNWIs investors now have access to an investment experience that is sophisticated and digitally-led with other international financial providers based out of Europe, America and Asia.

Banks are therefore scampering to ramp up their tech prowess and continuously launch digital offerings to attract and retain these users. In recent years, banks have been investing heavily to enhance their digital infrastructure in a bid to provide their customers with digital solutions, which more than 90 per cent of the region’s wealthy now demand.

Banks across the region are also steadily shutting down their physical branches. Instead, they are building and launching digital banks to appeal to the tech-savvy youth. Through such virtual banks, banks can offer retail banking services that are more responsive, inclusive, accessible and flexible. Who knows if, in a few decades, physical bank branches could even be a thing of the past.

Robo-advisory is also becoming a popular tool among banks to engage and interface with their clients. There is a heightened interest in DIY Investment platforms by banks and their customers, thanks to the many Fintech initiatives across the board.

DIY digital platforms are automated to guide customers through a simple yet regulatory-compliant process to set up financial goals and recommend appropriate investment portfolios based on an individual’s profile and preferences.

These solutions are designed to work 24/7 especially to serve the mass underserved client segment not assisted by Relationship Managers. Banks have a huge upside in imbibing these new technologies and identify how best to integrate those into their systems and offerings.

What is clear is that digital wealth solutions deliver tremendous benefits to consumers. The primary benefit for customers, being that investments linked goals are and portfolios performance is monitored using automated algorithms to assist them in achieving financial targets.

Fintech start-ups--many of which offer robo-advisory or digital wealth solutions—are increasingly collaborating with banks to deploy digital solutions to consumers. Such alliances make sense: while banks enjoy trust from customers and a huge network of clients, fintech start-ups are agile and bring to the table innovative solutions unconstrained by legacy systems.

Partnerships between banks and fintech start-ups— including WeInvest—are growing in the Middle East. As the region’s tech-savvy population is briskly driving the adoption of digitalised tools, banks will need to adapt their services to them accordingly. This presents a massive opportunity for both banks and fintech start-ups alike, to carve out their competitive edge in the market.

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ISLAMIC BANKING

The next generation of customers Ibrahim Al Mheiri, CEO, Mashreq Al Islami speaks to Banker Middle East about the Islamic window’s priorities in 2019

Ibrahim Al Mheiri

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PHOTO CREDIT: Florante Magsakay/CPI Financial

W

hat has been the main focus of Mashreq Al Islami in 2019 and why?

When our Chairman Abdul-Aziz Al Ghurair decided to offer Islamic banking services sometime back, his vision was not just another ‘me-too’ Islamic player in the Islamic banking space of the UAE. The vision was to roll out cutting-edge Islamic banking products and services, enabled with advanced technology, without compromising on any Shari’ah-compliance principles. Historically, Islamic banks have been considered lacking in providing quality services and innovative technological solutions for day to day banking needs.

Mashreq Al Islami has carved a niche for offering smart technology-led Shari’ah-compliant solutions, and we developed our entire suite of Islamic products leveraging the tech platform of our parent, which is already a very established name in the retail banking space in the region.

When I joined Mashreq group last year, the leadership had decided to roll out a dedicated Emirati segment to cater to and provide wholesome banking solutions for Emirati individual customers. Our focus has been to roll out a robust banking product suite for UAE Nationals this year, aiming at making Mashreq Al Islami a banking partner of choice for all their lifestyle and banking needs.

We have endeavored around manufacturing and deploying financing, deposits and credit card solutions targeted to UAE Nationals, as being the resident population of the country, their banking needs differ from the expatriate population.

While this is an evolving journey, we have achieved quite a lot in 2019 to lay the grounds for successful growth in the years to come.

What have been the key initiatives you've put in place in 2019?

We have executed the following initiatives for Mashreq Al Islami in the year 2019, in line with our strategy, which has widened the product offering to the UAE nationals across all key banking needs:

• Relaunching of Nationals Loans for long tenure with competitive propositioning, abiding by the strict regulations issued by Central Bank to ensure responsible lending.

• Rolling out an expanded residential home financing proposition for UAE Nationals, allowing them to buy/ refinance their properties in non-freehold areas/granted land. These areas form the largest chunk of UAE Nationals’ home ownership, hence opening Mashreq Al Islami’s financing options to these lands for nationals has been a key initiative endorsed by our leadership.

• Launching and rolling out financing to properties against rentals for residential and commercial properties. As you know rental income via residential and commercial properties is a major pool of income in the UAE especially for the National population.

• Launching a high-end premium Islamic Solitaire Credit Card offering probably the best Gold privileges, 850+ airport lounges across the globe, complimentary valet parking at the Dubai International Airport, and all the top malls across Abu Dhabi and Dubai, up to 20 per cent discount on luxury fine dining, exclusive 30 per cent discounts on luxury yacht charter, unlimited complimentary visits to Fitness First, Marhaba meet & greet services, numerous lifestyle shopping benefits globally, exclusive premium offers from MasterCard, offering the best of travel inconvenience & travel medical insurance. This product from Mashreq Al Islami is one of the strongest Islamic banking card propositions available today in the market.

What digital initiatives in particular do you have planned for the future & how else have you tailored your offerings for the next generation?

The extensive interest in more bespoke and computerised/ consumer-led services has led Mashreq to reimagine our branch formats totally, which are truly the first of their kind in the UAE. The latest branch model at Mashreq is composed of digital innovation with the offerings of a traditional branch to allow customers all-in-one and quick interaction. This new concept offers a whole suite of functionalities including an integrated self-service area with kiosks, ATMs, cash and cheque deposit machines, slim lines, bulk cash deposit and recycler and interactive teller machines (ITM) and video conferencing services to allow customers to reach out to the bank beyond regular banking hours.

To support customers’ needs at the new branches, Mashreq has also introduced the concept of a Universal Banker—a highly trained officer who will be available to assist customers for transactions, through digital devices.

In the words of our Head of Retail Banking Group, “Mashreq has been making strategic investments that has revolutionized our operations and transformed us into a smart, connected and agile bank that is ready for the future.”

Customers will have far greater convenience and more touchpoints. In addition, dedicated advisors will be readily available to offer support and the human element that no technology can replace. From our perspective, the digitisation of the bank’s services will fundamentally transform the business while creating a room for our staff to focus on improving the customer experience through greater efficiency, quality, and speed, as the customer expects of today.

As consumers’ habits change, we observe a remarkable shift in the expectations and banking habits of our customers.

Our automated transactions today across all the branches are as high as 97 percent. Going forward, our distribution strategy

"TODAY’S CONSUMERS AND RISE OF MILLENNIAL WORKFORCE ARE LOOKING TO HAVE QUICK SOLUTIONS TO THEIR FINANCIAL NEEDS, AND ANY FINANCIAL INSTITUTION THAT TAKES THAT INITIATIVE WILL CAPTURE THE NEW MARKET AS WELL AS THE CUSTOMERS WHO ARE WILLING TO SWITCH THEIR BANKS." — Ibrahim Al Mheiri

will be growing the number of touch points across the UAE – by increasing the number of ATMs, ITMs, CCDMs, and cash dispensing machines and other digital touch points. As part of this strategy, we have already introduced two smart branches in Mercato and Festival City, and more such branches will be introduced in the near future.

What are the main challenges Mashreq Al Islami is facing?

The global Islamic finance industry has expanded and will continue to expand at a slower pace in 2020 due to geopolitical and economic challenges faced by core markets, according to S&P Global Ratings. Mashreq Al Islami is not immune to the regional environment. One of the main challenges is sustaining growth, as the Islamic finance industry has been growing at a double-digit growth rate for over the last decade.

Due to the geopolitical and oil prices risk, the market is expected to remain constrained in the near future.

The overall reduction in the consumer demand for financing, the potential liquidity drain in case any regional situation takes a turn, would essentially mean rising costs of doing business, and lesser attractive pricing propositions for the consumers.

How are you overcoming those challenges?

Potential accelerators could be Shari’ah product innovation, a more inclusive approach, a clear and demarcating focus on services, digital applications to reach out to the consumers, as well as fintech disruption.

We are fortunate to have one of the most dynamic scholars associated with Mashreq Al Islami who has supported us all the way, and since they sit on most of the globally recognised banks’ boards as well, Shari’ah innovation on existing products, new products’ features and services is one way to float through.

Islamic banks lag behind when it comes to instantly launching products by twisting the existing parameters to offer clients innovative lending and deposit solutions.

For conventional banks, since they are not bound by strict Shari’ah regulations, this is not a concern, and at the outset many product solutions seem incomprehensible from an Islamic way forward.

Ease and speed of transactions hold true for payment services and money transfers. We are planning to work with industry leaders to provide a seamless solution to our consumers on this.

Usage of blockchain technology is one avenue which is largely untapped and unexplored in this market, any leverage on this technology would give a great first movers advantage to the players. Our parent entity Mashreq Group has entered into a strategic alliance with DIFC-based norbloc, the leading Know Your Customer (KYC) and client onboarding fintech

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ISLAMIC BANKING

regionally headquartered in DIFC. Their strategic alliance to launch the region’s first production-ready blockchain KYC data sharing consortium to support businesses and corporates in Dubai. Mashreq Al Islami would be leveraging on this infrastructure going forward.

The advent of fintechs globally, in line with Dubai’s vision for a Smart City, and Mashreq Al Islami’s innovative streak make it all relevant to explore and offer digitally smarter solutions bring the consumers and financial institutions together. Our state-ofthe-art SnApp mobile banking solutions are providing us great lever to onboard higher number of customers.

How has Mashreq Al Islami performed in 2019?

Well, overall, the year went exceptionally well! We have spent considerable amount of time in developing the products and proposition around key banking needs of UAE National customers, alongside we have launched a state-of-the-art Premier Islamic Credit Card. We have created specific teams for products, sales, and providing services to these customers.

In terms of our commitments to the stakeholders, the business managed to hit most of its financial targets, be it the volume grown or the balance sheet growth. The financing products, deposit products, as well as the fee-based income products have maintained decent trajectory throughout the year.

We are setting up the Islamic franchise for Mashreq to take off to greater heights in the years to come, ensuring heavier participation from the UAE National customer base, for that, a core and solid platform is essential, which we are laying successfully.

“MASHREQ HAS BEEN MAKING STRATEGIC INVESTMENTS THAT HAS REVOLUTIONIZED OUR OPERATIONS AND TRANSFORMED US INTO A SMART, CONNECTED AND AGILE BANK THAT IS READY FOR THE FUTURE.” — Ibrahim Al Mheiri, CEO, Mashreq Al Islami

Do you think the Islamic finance industry is ready for the digital future as a whole?Well, it’s not a matter of whether the Islamic finance industry is ready for the digital future or not. The change is here and it is going to further digitise the future.

Global and regional banking players are seeing a rapid transformation in the way that business is done, which is led by emerging digital technologies. Some of the things which were not thinkable earlier are now totally possible. If the Islamic finance industry wants to be relevant; this initiative has to be implemented by them to help improve overall profitability, and efficiency in service.

Islamic banks will have to change the core technology structure and modernise it. Heavily digital Islamic banks are expected to dominate transformation in the next decade. With the use of artificial intelligence and big data, Islamic players would be able to compete and offer the end-to-end fulfilling experience to the consumers.

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At Mashreq, our leadership is playing a key role by being supportive of and encouraging fintech companies to augment their business models, which would aid eventually deploying new solutions and technologies in this geography. The bank is currently working with several fintechs that deliver customised solutions to existing problems. In turn, Mashreq is providing them the real-world banking cases, which helps and allows them to industrialise and gain scale.

What should the industry be focused on in 2020?

Improved governance that is applied on regulatory technology could provide us with more robust tools to attain compliance with regulations and Shari’ah requirements. It will also lessen the reputation risk related to a potential breach of Shari’ah requirements, and hence would allow more time at the hands of Shari’ah innovators to help take the industry forward.

Breaking the shackles of an Islamic finance industry that is just focused on providing Shari’ah-compliant solutions, which may be complicated and time dragging for the consumers is a priority, and there is need to move to focusing on delivering fast paced valued based services. Today’s consumers and rise of millennial workforce are looking to have quick solutions to their financial needs, and any financial institution that takes that initiative will capture the new market as well as the customers who are willing to switch their banks. The segment of the population that will remain content with merely the certified Shari’ah-compliant products will stagnate and gradually diminish.

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ISLAMIC FINANCE

The main concentration of Islamic fintech firms has been in Asia, Europe and the MENA region, with 46 per cent firms covering the Asian market and around 24 per cent operating in each of the other two regions.

PHOTO CREDIT: JOAT/Shutterstock

The global Islamic financial market— trends, prospects and challenges.

Dr Sheikh Selim, Programme Director – Economics, & Money Banking Finance University of Birmingham Dubai

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“ISLAMIC BANKS IN THE ARABIAN GULF REGION SHOWED FASTER GROWTH THAN THEIR CONVENTIONAL PEERS BETWEEN 20132017 WHICH IS ATTRIBUTED TO THE RAPID MODERNISATION, STRATEGIC INITIATIVES, ENHANCED QUALITY CONTROL AND THE STRONG FINANCIAL PERFORMANCES OF KUWAITI, QATARI AND EMIRATI ISLAMIC BANKS.” — Dr Sheikh Selim

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ith a total net worth of $2.19 trillion between 2018 and 2019, recent growth of around 6.9 per cent and notable developments in financial products in the past decade, the Islamic financial industry has attracted investors, researchers, governments and other stakeholders to participate, contribute as well as engage in the analysis of its prospects and challenges.

There have been a number of recent advancements in light of key challenges in the two major markets of the Islamic financial industry, that is the Islamic banking market and the Sukuk market, which also offer interesting new prospects and potential ways forward for the industry.

THE ISLAMIC BANKING MARKETS The IFSI Stability Report 2019 reconfirmed the continued predominance of Islamic banks’ share in the global Islamic finance industry, amounting to 71.7 per cent share in 2019, with $1571.3 billion total value of banking assets.

The main contributors of this share are banks in Saudi Arabia (20.2 per cent), Iran (32.1 per cent) as well as Malaysia (10.8 per cent) and the UAE (9.8 per cent). However, globally, this sector registered only 0.9 per cent growth in total assets during 2018-2019 compared to a 4.1 per cent growth in assets as well as a 7.5 per cent growth in liabilities during 2017-2018), which is less than what was forecast in the S&P Global Ratings Islamic Finance Outlook 2019 (IFO) report.

Slow economic growth in GCC economies, mainly due to volatile oil prices, has resulted in reduced opportunities for the banking sector which has, in turn, led to a sluggish lending growth across the region between 2013 and 2017.

Islamic banks in the Arabian Gulf region, however, showed faster growth than their conventional peers during the same period, which is attributed to rapid modernisation, strategic initiatives, enhanced quality control and the strong financial performances of Kuwaiti, Qatari and Emirati Islamic banks.

S&P Global expects further expansion in Islamic banks in the GCC region and an average financing growth of up to five per cent in the next two years, supported by strategic initiatives such as the Expo 2020 Dubai, the Saudi Vision 2030 as well as the Qatar World Cup 2020 and the Kuwait 2035 Vision.

Growth in Islamic financing through banks in this region is expected to contribute to an unweighted and steady average economic growth of 2.5 per cent in the next few years.

However, this is significantly lower than what the region delivered back in 2012.

The predicted risks of Islamic banking operations in the Gulf region, as identified and agreed by the S&P report, the World Bank as well as Islamic Financial Services Board (IFSB), are a higher cost of risk and lower profitability.

S&P expects standardisation of Shari’ah compliance to contribute to an improvement in the clarity of investment risk vis a vis risk management, which will eventually reduce the cost of risk for Islamic banks.

According to IFSB reports, growth in Shari’ah compliant financing by Islamic banks across the globe was only 3.3 per cent between 2017 and 2018, compared to the previous year where this growth was a mammoth 19 per cent. Clarifying risks for investors and creating extra scope for innovation in Islamic banking operations is, therefore, an essential step that the industry should consider.

Moreover, the introduction of fintechs across all stakeholders in the Islamic banking industry is also expected to reduce transaction costs and risks. This should include adopting and applying state of the art technology to ensure: • ease and speed of transactions (e.g. money transfers).

• improved traceability and security of transactions (e.g. blockchain to help reduce exposure to risks related to identity theft).

• enhanced accessibility of Islamic financial services (e.g. crowdfunding for affordable housing, mobile banking for remote areas).

• clearer and more robust compliance with regulations and Shari’ah requirements (e.g. regtech to minimise the reputation risk related to a potential breach of Shari’ah requirements).

While fintech solution sounds attractive to a young, educated and tech-savvy generation of bankers and banking stakeholders, the implementation is far from simple.

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The combination of adequate supervision and a strongly enforced regulatory framework of banking and finance remains the single most important prerequisite for the successful implementation and diffusion of fintech in the Islamic banking industry.

The recent growth of fintech firms across the world is an excellent value chain development, with a 70 per cent healthy share of these firms offering cutting edge solutions in the provision of financial services. The main concentration of Islamic fintech firms has been in Asia, Europe and the MENA region, with 46 per cent firms covering the Asian market and around 24 per cent operating in each of the other two regions.

THE SUKUK MARKET According to the IFSI Stability Report 2019, in contrast to the Islamic banking sector, the Islamic capital market demonstrated 25 per cent increase in growth despite only a 27 per cent share in total Islamic financial services. The majority of this share is comprised of the Sukuk market, with total Sukuk outstanding amounting to $530.4 billion between 2018 an d 2019, followed by a growth of 5.5 per cent over the amount in 2017.

Islamic financial assets are mainly concentrated in the GCC (42.3 per cent) and in Asia (28.2 per cent), with large proportions of sovereign Sukuk issued by two major contributors, Saudi Arabia (31.9 per cent) and Malaysia (32.8 per cent).

“THERE HAS BEEN SUSTAINED GROWTH IN SUKUK ISSUANCE FROM SOVEREIGN ISSUERS (45 PER CENT OF THE TOTAL ISSUANCE), WHILE GROWTH IN CORPORATE AND FINANCIAL INSTITUTIONS ISSUANCE (27.5 PER CENT AND 7.7 PER CENT OF THE TOTAL ISSUANCE, RESPECTIVELY) ALSO REMAINED STABLE.” — IIFM

Other countries which played a vital role in the recent growth of the Sukuk market are the UAE, Indonesia and Bahrain. According to the International Islamic Financial Market (IIFM) report, there has been sustained growth in Sukuk issuance from sovereign issuers (45 per cent of the total issuance), while growth in corporate and financial institutions issuance (27.5 per cent and 7.7 per cent of the total issuance, respectively) also remained stable.

Following two major drops in global issuance of Sukuk in 2014 and 2015, the global Sukuk market observed a sharp increase in international Sukuk issuance in 2016 and 2017, registering 29 per cent and 32 per cent, growth.

However, the growth in issuance suffered a huge slump to 5.5 per cent in 2018. An almost identical trend is visible in the issuance of domestic Sukuk. IIFM reports argue that the drop in 2018 is largely due to the loss of reputation associated with the Shari’ah non-compliance surrounding the infamous Dana Gas Sukuk legal battle.

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Global Islamic finance industry Saudi Arabia

20.2 % 32.1 % 10.8 % (9.8%)

,

Iran

Malaysia

UAE

A major development following the incident is a standardised mechanism for Shari’ah compliant foreign currency hedging, developed jointly by IIFM and ISDA. The standardisation of Shari’ah compliance enables the issuer to issue Sukuk in other jurisdictions without exposing the Sukuk holders to foreign exchange and rate of return mismatch risks. The new issuance includes environmentally friendly Green Sukuk, socially responsible Sukuk and Sukuk related to blockchains.

Moreover, investors in the Sukuk market are regaining hope due to the re-issuance of $500 million worth of short term Sukuk by International Islamic Liquidity Management Corporation. The recent release of the global industry standard for buying and selling Islamic trade-related risk to support the growth of Islamic trade finance business has also been a welcome change.

S&P suggested that the process of standardisation of Shari’ah compliance across the Islamic financial markets is still slow, and despite significant efforts made by standardsetting bodies, some market participants still consider the process to be an unrealistic one and instead argue in favour of harmonisation that would allow for some flexibility for implementation.

This debate is live, and addressing it requires a separate and perhaps more comprehensive discussion. Issues related to standardisation and adoption of fintech in the Sukuk market, therefore, remain a challenge.

For the Sukuk market, successful adoption and diffusion of fintech (e.g. regtech) is only possible after a reasonable level of standardisation has been accomplished, ensuring that the newly adopted technology can work in sync with strong recovery and resolution regimes, agreed and enforced networks of risk sharing and risk management, and access to a resource base (e.g. expertise and human capital) conducive to cost-effective management and development of innovation and technology, based on the core principles of Shari’ah compliance.

ISSUE 08

BUILDING CAPABILITIES TO CONNECT TOMORROW’S CUSTOMER Prashant Ganti, Head of Product Management at Zoho Corporation

SUPPORTED BY

ORGANISED BY

April 2020, Dubai, UAE

s r e k n a s b r o e t r a u v t fu inno & 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.

Contact for:

For Speaking Enquiries: Hitesh Bhakhri | hitesh.bhakhri@cpifinancial.net | +971 50 961 7242 SPEAKER ENQUIRIES: Hitesh Bhakhri | hitesh.bhakhri@cpifinancial.net | +971 50 961 7242 | +971 50 4408 788 4408 For Sponsorship Enquiries: Estampador | nap.estampador@cpifinancial.net SPONSORSHIP ENQUIRIES: NapNap Estampador | nap.estampador@cpifinancial.net | +971 50 788

TECHNOLOGY

BUILDING CAPABILITIES TO CONNECT TOMORROW’S CUSTOMER Prashant Ganti, the Head of Product Management—Global Tax, Accounting & Payroll Solutions at Zoho Corp, sheds light on the firm’s products as well as services and how they can benefit the GCC banking sector

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Prashant Ganti

ell us about your partnership with Mashreq

At Zoho, we had conceptualised ‘connected banking’ where banking and accounting systems unify to help businesses in three major ways: • Firstly, eliminate data entry by eliminating the need to re-enter banking transactions in the accounting system and automate reconciliation.

• Secondly, allowing customers to use their channel of choice to execute a transaction.

• Finally, use this information exchange between banks and leading financial systems, such as Zoho Books, to provide new services and transform the way some existing services are provided. For example, it would be far easier for the bank to extend credit to a company if it can contextualise the transactions and have better confidence in the financial reports of the company.

Mashreq Bank was working on ‘NeoBiz’, an innovative digital banking platform, which needed ‘connected banking’ and other valueadded services to improve their customer experience. Partnering up with a leading international technology company, such as Zoho, helped them enhance their offering.

Zoho took the opportunity to work with a leading regional financial institution of Mashreq Bank stature to bring its innovative connected banking’ technology to the UAE for the first time.

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TECHNOLOGY

“BANKS AND FINANCIAL INSTITUTIONS ACROSS THE MIDDLE EAST ARE ADOPTING TECHNOLOGY TO BECOME MORE CUSTOMERCENTRIC AND AT TIMES GO BEYOND THEIR TRADITIONAL SERVICES.” — Prashant Ganti

Months of hard work on both sides brought about improved the experience for clients who can now just use their Mashreq credentials and work with Zoho Books in order to automate reconciliation and other financial tasks with ease and speed necessary for UAE’s competitive business environment.

This partnership is merely a beginning to a myriad of exciting and transformative possibilities in the business banking sector for the UAE market.

Tell us about the history of Zoho. How has it evolved since its founding to become what it is today?

Zoho Corporation, the company behind Zoho, was founded in 1996. A technology firm with humble beginnings, Zoho Corp started with our WebNMS division that became a leading provider of OEM solutions like protocol adapters. It has now transmogrified into our internet of Things division.

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In 2003, we launched ManageEngine that produced IT Management software. With over 90 products, ManageEngine is a roaring success serving three million IT Admins across 180,000 companies. It is used by over 60 per cent of the Fortune 500 companies.

In 2005, we entered the SaaS (Software as a Service) space with Zoho by launching our first product, Zoho Writer, a cloud-based word processor. Over the next 15 years, we have increased our offerings to create the broadest product portfolio in the industry with more than 45 applications.

All the applications have been built on the same technology stack, which allows for deep integration and seamless flow of data. Our most revolutionary offering is Zoho One, comprising all our applications under one roof.

It is the operating system for business—a single platform to run a business entirely in the cloud.

Zoho offers products in every major category. Businesses can acquire and serve their customers using our sales and marketing products and can then empower their employees to create, store and distribute content using our productivity, communication and collaboration tools.

Furthermore, businesses can manage their finances and operations using our Finance and HR suite. Today, Zoho has over 50 million users spread across 180 countries, with offices in 13 locations, including Dubai, which is the headquarters of our Middle East and Africa operations.

The Middle East market is crucial for us. Our accounting application Zoho Books was the first to be accredited by FTA

“ZOHO TOOK THE OPPORTUNITY TO WORK WITH A LEADING REGIONAL FINANCIAL INSTITUTION OF MASHREQ BANK STATURE TO BRING ITS INNOVATIVE CONNECTED BANKING’ TECHNOLOGY TO THE UAE FOR THE FIRST TIME.” — Prashant Ganti, Head of Product Management—Global Tax, Accounting & Payroll Solutions, Zoho Corp

PHOTO CREDIT: ismagilov/iStock

How do these products enhance SME banking?

How do these products help banks better serve that community?

for VAT compliance. The MEA region is the fastest-growing region for Zoho, and we continue to invest heavily here.

Banks in the Middle East are now putting technology first. What are some of Zoho’s products and services that banks in the region can best utilise?

Banks and financial institutions across the Middle East are adopting technology to become more customer-centric and at times go beyond their traditional services. Zoho is uniquely positioned to help banks deliver exceptional services to their customers. The company offers Zoho BankBiz, a service that allows banks to quickly incorporate value-added services for their clients like invoicing, supplier payments from our accounting software into their mobile and web applications.

Zoho BankBiz was recently awarded the Most Innovative Open Banking at the 1st Global Fintech Innovation Award

by IBSIntelligence.

Zoho’s sales and marketing products can provide a 360-degree view of a customer, collating information from multiple departments across a bank like a loan and service origination helping banks to provide personalised service. The products can simplify the on-boarding process, allowing a bank to serve its customers through multiple channels in real-time.

These are some of the applications that can directly differentiate a bank outcome. Beyond these, Zoho provides solutions for communication and collaboration, HR and travel as well as expense management. All these features can help banks transform their internal processes.

SMEs can choose from the wide range of Zoho’s offerings the products available at cost-effective prices, and run all their operations in the cloud. This allows them to take advantage of the latest technological advancements to grow their business.

They can also scale easily on Zoho’s platform.

From the banks’ perspective, it will allow them to serve the SME community in better and unique ways. For example, integrating accounting and banking can create a lifetime of trust between a bank and an SME, easing the process of advancing working capital loans. This is important as SME lending is just 16 per cent of all bank loans in the Middle East.

Similarly, if a bank is utilising Zoho’s sales and marketing tools—with all the digital footprint subject to the customer’s consent—they can understand the needs, goals and preferences of SME clients and tweak their products and services accordingly.

What other ways can banks take advantage of technology that most have not yet?

Banks have a considerable room to improve before adopting artificial intellingeence (AI) and personalised customer experience at scale. Banks should also focus on adopting open banking practises and allow customers to take ownership of their data and deliver. Open banking is important for banks as well as other players in the ecosystem to provide exceptional customer experience.

What are the biggest challenges for Zoho? What keeps you up at night?

Zoho has a unique set of challenges. On the product front, being a privately-held global company with multiple products competing against players who splurge several million in sales and marketing, we need to continually think about creative ways for reaching our customers.

We invest heavily in R&D to ensure that our customers have the best experience. Serving millions of customers in practically every time zone with a wide range of products requires Zoho to continuously improve individual products while staying vigilant to ensure that these changes work seamlessly without breaking the existing functionality or the integration touchpoints.

On the other hand, Zoho’s culture is our biggest strength.

As we expand rapidly across geographies in terms of the number of customers—we are adding a million users a month—and employees, it is important to maintain the intricate cultural code that makes Zoho.

cpifinancial.net

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TECHNOLOGY

HOW WILL THE FUTURE LOOK FOR FINANCE PROFESSIONALS? Workers who neglect to upskill for the modern job market may find their talents become redundant when AI and ML can do all the things, they used to do faster—and cheaper, writes Katerina Manou, Regional Vice President, Regus

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A

rtificial intelligence (AI), machine learning (ML), the Internet of Things: the rapid pace of technological change we are witnessing today will have a profound effect on the way we live tomorrow.

From the time-saving convenience of driverless cars to fridges that automatically restock when the contents run low, there is no area of our existence that will remain untouched. It’s perhaps unsurprising, then, that the concept of work—how, when and where we do it—will also change dramatically.

Workers who neglect to upskill for the modern job market may find their talents become redundant when AI and ML can do all the things, they used to do faster—and cheaper. This is a seismic shift, and it will have a seismic impact on patterns of working too.

It’s thought that a scarcity of talent and the corresponding escalating price of retaining it, will mean that those with the sought-after qualifications will be increasingly hired on a project basis in a bid to control costs more effectively. This also has a knock-on effect on the investments a business is likely to make in terms of bricks and mortar, and on HR, procurement and recruitment arrangements.

According to PricewaterhouseCoopers (PwC), it’s likely to have implications for finance professionals too. Machine operators and assemblers, clerical workers as well as craft and related trades workers are likely to be hardest-hit—but the same in the same study PwC predicted that 30 per cent of finance and insurance jobs will also be at risk of automation by 2029.

The 2019 UAE Banking Perspectives report from KPMG noted that in an era where traditional banking methods are gradually being usurped by fintech and digital banking, the industry must remain alert and responsive to technological developments.

Some argue that AI and ML will prove beneficial for whitecollar jobs, allowing workers to avoid the drudgery of menial tasks and concentrate instead on the more creative things that only a human can do, yet others are less sure.

For CFOs to meet the challenges of a changing world, they must not only re-evaluate their own competencies but also equip their function with the right tools and surround themselves with the right team. They must make bold moves to build a finance function that has the right people, with the right skills, to complement and get the most out of new technologies.

Furthermore, there will be several stakeholders who will play an important role in the people strategy for the organisation as a whole. A finance head’s success will depend on combining the intelligence of smart technologies with the brains, emotional intelligence and interpersonal skills of talented people.

What is for certain is that no one really knows, and the best way to future-proof yourself is to prepare for every eventuality. One thing finance professionals and other whitecollar workers are likely to have on their side is time—or time to adjust, at any rate.

Richard Freeman, an economics professor at Harvard University, believes that integrating machine-learning technology needs a window of adjustment just like when a new IT system is bedded in to suit the particular needs of a business.

“If you’re bringing in the latest accounting software, the company has to change the way it’s doing reporting, controls, to do a lot of stuff,” said Freeman.

As the world of work switches to a on-demand model, so too will the ways people are hired. Whether people are permanent, non-permanent, working remotely or on an on-site basis, they will need to stay in touch with each other.

Katerina Manou, Regional Vice President, Regus

“FOR CFOS TO MEET THE CHALLENGES OF A CHANGING WORLD, THEY MUST NOT ONLY RE-EVALUATE THEIR OWN COMPETENCIES BUT ALSO EQUIP THEIR FUNCTION WITH THE RIGHT TOOLS AND SURROUND THEMSELVES WITH THE RIGHT TEAM.” — Katerina Manou

Ironically, the technology that is causing us to rethink our jobs also has the power to keep us connected wherever there is a Wi-Fi signal—and the right cloud-computing software means that tasks can be shared, discussed and worked on remotely without much hassle.

Flexspace like serviced offices can also help. A project-toproject business of the future is still likely, at some point, to find it needs to gather the troops—we’re social creatures after all.

And those who find themselves working from home a lot might benefit from the camaraderie found in a building of fellow portfolio workers, whatever arrangement their employer manages. (As seen from the worker’s perspective, who trends suggest is increasingly likely to work for more than one company, a ‘fixed’ yet flexible location makes sense when there are multiple clients of one’s own to service.)

Whichever way we look at the world of work, what’s clear is that while some things can be predicted, the extent to which things will change and the timescale for when those changes are likely to happen is anybody’s guess. But what we do know is this: the future is flexible.

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EVENTS

Enabling the digital economy Captains of industry and experts across the region’s financial services and fintech sectors gathered for SWIFT Regional Conference: Turkey & Middle East in Istanbul to get insight into the vital trends shaping the future of the payments industry across the region

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he financial services industry is buzzing with talk and activity on fintech strategy, experimentation, as well as investment, acquisition, and integration. No function, service or department seems immune to the wave.

Onur Ozan, the Head of Middle East, North Africa & Turkey at SWIFT, opened the conference by highlighting how the payments industry, a relatively unchanging business in the past, is now evolving rapidly.

The emergence of new technologies offers opportunities for innovation and efficiency, but also opens the door to new competitors such as fintechs, global retail giants as well as card networks and digital banks, said Ozan.

Captains of industry and experts across the region’s financial services and fintech sectors gathered for SWIFT Regional Conference: Turkey & Middle East in Istanbul to get insight into the vital trends shaping the future of the payments industry across the region.

Dr. Emrah Şener, Deputy Governor, Central Bank, Republic of Turkey

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The Middle East and Turkey has had a challenging couple of years when it comes to economic growth, however markets across the region are diversifying their economies to adapt with some banking on digital transformation.

EY said that the payments landscape is experiencing a wave of innovation, driven by technological advancement and consumer desire for on-demand banking and payment solutions.

“While we cannot predict what the new payments landscape will really look like, players in the financial services industry need to be ready to move to a more digital economy,” said Dr. Emrah Şener, the Deputy Governor of Central Bank of the Republic of Turkey.

Given that the payments market has been traditionally served by banks, the new, innovative non-banking payments providers are causing disruption and driving rapid changes to the payments landscape. Technology giants, fintechs, merchants and social media giants have all created their own digital payment offerings.

Gökhan Say, Founding Partner and General Manager, Innovera

Around 400 delegates from 30 countries attended SWIFT Regional Conference.

Digital transformation is swiftly shifting the field of play whereby financial institutions are now forced to focus on customer experience and it’s no longer about the products and services that the banking industry provides.

Alain Raes, SWIFT’s Chief Business Development Officer, said that this shift is most evident in China, where technology companies have displaced the majority of banking experiences through the use of new technologies.

The regional conference saw over 400 delegates from 30 countries delivering keynote presentations, lead panel discussions and deliberate on key case studies in an event that also served as a networking platform for fintech experts, senior banking executives as well as regulators and visionaries.

Raes argued that delivering instant payments, 24/7, is key to remaining relevant in this changing landscape and around the world, many domestic market infrastructures have begun delivering instant payments.

According to EY, driven by changes in digital technology, consumer demand, and competitive forces, the way people make payments is evolving faster than any area of financial services. Understanding these trends in payments is crucial for payment service providers to offer products and services that meet the complete financial needs of consumers.

In the report Doing Business Report 2019, the World Bank stressed that attracting foreign investment, introducing investor-friendly fiscal reforms and strengthening the markets’ business environment will lead to growth.

Similarly, increasing financial inclusion for those in the

“OPEN BANKING IS THE FACILITATOR FOR SELF-SERVICE BUSINESS DEVELOPMENT AND WITH THE AVAILABILITY OF APIS, INNOVATIVE FINTECHS CAN COME IN AND USE THEM IN THEIR OWN WAY, DEMOCRATISING DATA, AS WELL AS SERVICES.” — Deputy Governor of Central Bank of the Republic of Turkey

Middle East region will contribute to sustainable growth. “We need to increase financial inclusion, everyone sitting in the region, including SME and individuals, needs to contribute to the growth of the economy,” said Bernard Ferran, General Manager for the Middle East, Turkey & Africa at Euroclear.

EY said that while digital wallets have been around for a while, the adoption rate has varied a great deal. With the expansion of digital wallet offerings—which includes event ticketing, transit passes and loyalty cards—consumers will be motivated to rely on and to store their payment information within digital wallets as well as applications, pushing the physical payment card/vehicle further into the background.

Furthermore, next-generation digital payments vehicles will not only be embedded within smart devices but they will also have to offer increased securitisation, such as tokenisation and strong authentication.

Collaboration is indeed essential, and companies cannot fight the cyber threat alone.

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EVENTS

Technology will enable the move to a more digital economy, argued our next speaker, who gave an overview of the technologies transforming the payments industry in particular.

“THE EMERGENCE OF NEW TECHNOLOGIES OFFERS OPPORTUNITIES FOR INNOVATION AND EFFICIENCY, BUT ALSO OPENS THE DOOR TO NEW COMPETITORS SUCH AS FINTECHS, GLOBAL RETAIL GIANTS AS WELL AS CARD NETWORKS AND DIGITAL BANKS.” — Onur Ozan, Head of Middle East, North Africa & Turkey, SWIFT

According to KPMG’s The Future of Digital Banking report, over the next decade, we will see more changes in the banking industry than we have witnessed in the past 100 years. Banks are leading or participating in several accelerators, incubators and training programmes to get early access to technology and talent without taking any significant stake in the fintech companies.

However, for fintechs, such arrangements provide easy access to resources, data, funding, space and networking opportunities to test and showcase their prototypes. These types of collaborations are a valuable addition to the internal innovation programmes of the financial institutions that seek to increase and maintain their customer relevance.

PwC said that collaborations and co-developments are on the rise across the Middle East region—fintechs are no longer viewed as disrupters to incumbent financial institutions.

Celal Cündoğlu, the Executive Vice President Payment Platforms and Information Technology at the Interbank Card Centre, said that the use of Application Programming Interfaces (APIs) to make data available to third parties through banks’ own applications will be increasingly important in future.

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“Open banking is the facilitator for self-service business development and with the availability of APIs, innovative fintechs can come in and use them in their own way, democratising data, as well as services,” said Cündoğlu.

The SWIFT Regional Conference also highlighted that regulators see the benefits of—and expect banks to use— regulatory technology (regtech) to improve processes and an array of rapidly advancing technological innovations, from robotics to artificial intelligence (AI) and machine learning (ML) to offer banks new ways to transform.

Compliance is a growing challenge for institutions that costs both money and resources at a time when banks face a growing challenge to meet both national and international financial regulations, said Mohamed Afifi, the Group Chief Compliance Officer & Corporate Governance, Banque Misr.

Afifi said that banks in the Middle East and Turkey region have an even bigger challenge—de-risking. Many international banks have terminated their correspondent relationships in the region and exited business lines due to concerns over risk and rising costs. There is, therefore, huge pressure on banks in the region to prove they are compliant and a safe partner.

SWIFT is aware of de-risking and that is why it has developed specific solutions to support banks against being de-risked and to bring down the cost of compliance so that it becomes a lesser challenge, added Afifi. SWIFT’s KYC Registry, which has more than 5,100 financial institutions on its books enables banks to provide validated information, making it cheaper and easier for their correspondents to access the information they need.

“With fraud moving increasingly from data theft to payment fraud, financial institutions need to reassess the security of their payment environments,” said Raes.

The relationship between banks and digital payments service providers is no longer about competition; it’s now about collaboration through adopting digital services that allow customer needs to be met.

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Expertise to extend your reach across the globe Global trade is one of the economic lifelines of the United Arab Emirates.

As the country’s best business partner of choice over 30 years and the Best Trade Finance Bank in the region, National bank of Fujairah has

developed an award-winning trade services team that provides tailored solutions to suit each client’s individual requirements.

With locations covering key strategic trade links, we facilitate cross border flows between the UAE and the rest of the world. No matter where you see your business going, we will be there with you, enhancing your competitiveness and maximizing your growth.

TRADE FINANCE CORPORATE AND INSTITUTIONAL BANKING

Call 8008NBF(623) to start our partnership nbf.ae