#227 February 2020

FEBRUARY 2020 | ISSUE 227 MIDDLE EAST

FEBRUARY 2020 | ISSUE 227

A TESTAMENT TO EGYPT’S SUCCESS Tarek Fayed, Chairman and Chief Executive Officer, Banque du Caire Dubai Technology and Media Free Zone Authority

A TESTAMENT TO EGYPT’S SUCCESS

Tarek Fayed, Chairman and Chief Executive Officer, Banque du Caire A CPI Financial Publication

ANALYSIS 06 Political play

DEBT CAPITAL MARKETS 32 The “conventional wisdom” of pricing

WEALTH MANAGEMENT 38 Women and wealth

TECHNOLOGY 43 Breaking the mould

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EDITOR'S NOTE

T Nabilah Annuar Editor, Banker Middle East

he climate crisis took centre stage at the World Economic Forum in Davos this year with heated debates between US President Donald Trump, environmental activist Greta Thunberg, US Treasury Secretary Steven Mnuchin and Christine Lagarde, President of the European Central Bank. However, prior to these clashes was the IMF’s revision of its global economic growth forecast. From a 3.4 per cent growth rate predicted in October 2019, the IMF reduced its estimate to 3.3 per cent this year, and from 3.6 per cent to 3.4 per cent in 2021.

Discussions at Davos reveal that financial markets are hovering near record all-time highs, but systemic shifts and technological disruption continue to loom on the horizon. In terms of global trade, whilst the agreement between US and China bode well over the short term, Trump is still called on to continue to ease tensions. Additionally, governments are also called on to shift the focus from short-term stimulus to broad structural reforms to achieve inclusive and sustainable growth.

Paul Tudor Jones, American hedge fund manager, was quoted at Davos saying that the stock market today reminds him of the late stages of the 1999 bull market which saw a five-fold surge on Nasdaq before the dot-com bubble burst.

Similarly, Jamie Dimon, CEO of JP Morgan Chase pointed out that the only financial market bubble he expects to see is in sovereign debt.

According to the Institute of International Finance (IIF), within the first nine months of last year, global debt grew by $9 trillion to hitting $253 trillion, putting global debt-to-GDP ratio at 322 per cent. More than half of this debt was accumulated in developed markets, such as the US and Europe. Countries such as New Zealand, Switzerland and Norway are reported to have rising household debt levels, while the government debtto-GDP ratios in the US and Australia are at all-time highs.

On the contrary, the IIF said that debt levels are lower in emerging markets (at a total of $72 trillion) but they have risen faster in recent years. Spurred by low interest rates and loose financial conditions, the IIF estimates that total global debt will exceed $257 trillion in the first quarter of 2020.

Closer to home, geopolitical issues that continue to loom over the region are still a cause for concern. In the first part of this issue we help you take a closer look at global politics and how macroeconomic factors affect commodities and financial markets in the region. Our country focus for this month is Egypt. We speak to the Chief Executive of Banque Du Caire and also explore how the government has managed to climb out of an economic rut which sprung out of the Arab Spring.

In addition to this, our February issue also delves into Sukuk, risk management and cybersecurity.

Hoping for a good Q1 this year, we wish you a productive read.

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CONTENTS FEBRUARY 2020 | ISSUE 227

ANALYSIS 6

Political play

NEWS

18

10

News Highlights

THE MARKETS 14 Rallying commodities 16 New decade, better prospects

COVER INTERVIEW 18

A testament to Egypt’s success

COUNTRY FOCUS 24 The revival of Egypt

DEBT CAPITAL MARKETS 32 The “conventional wisdom” of pricing

RISK MANAGEMENT 34 Time to take action

ISLAMIC FINANCE

COVER INTERVIEW

A TESTAMENT TO EGYPT'S SUCCESS Tarek Fayed, Chairman and Chief Executive Officer, Banque du Caire

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36

More hope for Sukuk

WEALTH MANAGEMENT 38

32

Women and wealth

38

ISSUE 09

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TECHNOLOGY

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A Banker Middle East Supplement

43 Breaking the mould

BREAKING THE MOULD

46 2020: The banking business

41

model changes faster

& Senior Vice President, Alaa Elshimy, Managing Director Group, Middle East Huawei Enterprise Business

48 Cybersecurity in an interconnected world

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ANALYSIS

Political play Geopolitics will always be the central theme in the Middle East. The start of 2020 was not an exception to the rule. Following recent developments that kickstarted the year, we explore how these events would affect our region’s financial markets

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PHOTO CREDIT:kentoh/iStock

L

ast year witnessed various protests spread across continents from Hong Kong to the Middle East to Africa and South America.

At the end of 2019, Iraq still had a high level of street protests as demonstrators demanded more jobs, a lower cost of living, and a crackdown on government corruption. In Libya, an ongoing conflict has worsened, temporarily disrupting oil production in a number of fields. In Iran sanctions and the crisis against the US began to heighten. Although they now seem to be contained and isolated, these crises appear to stem from wider issues that could bring more turmoil this year, a suggested First Abu Dhabi Bank’s (FAB) Global Investment Outlook 2020.

A ROUGH START The start of 2020 was plagued by the US-Iran tensions following the assassination of Qassem Suleimani, commander of the QUDS Force in Iran’s Revolutionary Guard Corps (IRGC). Dubbed the boldest US action against any senior Iranian political leader, the attack came on the back of increasing tensions between both countries and represented a change in US policy aimed at introducing a credible military deterrence strategy in the region, said Franklin Templeton in a recent note.

“THE MARKET IS EXPECTED TO DIGEST RECENT DEVELOPMENTS, WITH THE OVERALL RISK PROFILE TO NORMALISED IN THE COMING MONTHS. WHILE THE US AND IRAN HAVE SIGNALLED AN INTEREST IN AVOIDING MILITARY ESCALATION, THE ISSUE WILL MOST LIKELY CONTINUE TO LOOM OVER THE REGION FOR SOME TIME.” — Franklin Templeton

A number research firms have said that an escalation of tensions to a direct military conflict is something that is highly unlikely. “Iran is likely to continue with its low-intensity warfare, especially as its economy remains under pressure from choking economic sanctions, most likely using proxy assets to target the US or its interests in Iraq, Lebanon or the Strait of Hormuz,” said Franklin Templeton.

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ANALYSIS

France, Britain and Germany, key signatories of the 2015 Joint Comprehensive Plan of Action nuclear deal— have also expressed support of near-term de-escalation of current tensions, opening the door to a possible diplomatic breakthrough that could alter the current impasse. Moreover, China and Russia are also said to have most likely dissuaded Iran from taking more significant action. The growing influence of both countries in the region in addition to Iran’s increasing political and economic reliance on them, will probably act as a key deterrent for Iran.

Similarly, the FAB report also stated that a further deterioration of tensions in the region is unlikely as it is not in the interest of any country in the world to see events that could further slow the global economy. In fact, the volatility that any escalation would cause could provide buying opportunities, and investors in the region have many times profited from taking such chances when presented with it. Besides, with OPEC cuts already pushing oil prices higher, any escalation is likely to increase oil prices and boost revenues for GCC countries. This is in turn positive in the long-term and could help a swift recovery for asset prices from these countries.

“THE VOLATILITY THAT ANY ESCALATION WOULD CAUSE COULD PROVIDE BUYING OPPORTUNITIES, AND INVESTORS IN THE REGION HAVE MANY TIMES PROFITED FROM TAKING SUCH CHANCES WHEN PRESENTED WITH IT. BESIDES, WITH OPEC CUTS ALREADY PUSHING OIL PRICES HIGHER, ANY ESCALATION IS LIKELY TO INCREASE OIL PRICES AND BOOST REVENUES FOR GCC COUNTRIES.” — First Abu Dhabi Bank, Global Investment Outlook 2020

Franklin Templeton does not expect a significant escalation in risk that could derail the global growth outlook. The market is expected to digest recent developments, with the overall risk profile to normalise in the coming months. While the US and Iran have signalled an interest in avoiding military escalation, the issue will most likely continue to loom over the region for some time.

OTHER RISKS Right before the World Economic Forum began at Davos this year, the IMF revised its global growth forecast to 3.3 per cent from 3.4 per cent for 2020 and 3.4 per cent from 3.6 per cent in 2021. This came as a surprise for many and set the tone for the rest of the discussions for the week.

Apart from the overarching theme of political conflict and unrest, the FAB report also cited an anticipated rally in risk asset prices, a liquidity squeeze, US presidential elections, overcrowding in the private market and inflation, as the key risks that could impact financial markets both globally and in the region.

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In what FAB called a stock market ‘melt-up’, the risk is one that envisions a strong rally in risk asset prices for 2020.

The main potential driver for a melt-up event in 2020 is that the economic data became more positive at the end of 2019, while most commentators remained negative. Although manufacturing in the US, China and even Europe began to show signs of a rebound, many analysts continue to predict a recession in 2020.

Passive investment, such as in index-tracking funds, has been increasingly popular in the last couple of years. The overall market has grown to a size that have triggered a liquidity squeeze in the market. FAB said that investors are becoming even more enthusiastic about exchange-traded funds (ETFs) creating a risk of feedback loops, in which managers of passive funds buy more stock of the companies on the rise.

If the performance of an index becomes tied to fewer stocks, there is a greater probability that a significant move down in a small number of companies becomes contagious.

Overcrowding in private markets has also become a concern for investors, said the FAB report. One of the sideeffects of a decade of easy money has been the exponential growth of the private market. McKinsey has estimated that the net asset value of private equity across the globe has grown sevenfold since 2002, twice as fast as that of public equities. By 2017, there were 8,000 companies backed by private equity firms, twice as many as the number in 2006, with the amount invested in venture capital growing at an annual rate of 18 per cent since 2015. This has created valuation issues in private markets.

A small meltdown in the leveraged loans market at the end of 2018 triggered outflows of approximately $15.7 billion, reported Bloomberg. Perceived deal quality also deteriorated in the private credit space. Considering the size of the private market, if values of more private companies are heavily discounted and related loan markets must see a rerating, it could eventually reverberate through public markets.

Over the last few years inflation has always been a legitimate concern for industry players. However, these fears are kept at bay as the global economy maintains its resilience from a deflationary cycle. From the changes in behaviour generated by technological advances to the dearth of fiscal stimulus since 2011, markets have enjoyed almost a decade of near-zero or negative interest rates. What if it suddenly makes a comeback?

If fiscal stimulus returns to the developed world, it could help rebuild business confidence, a key factor that gets money circulating faster. This, coupled with record levels of debt and easy monetary policies of some of the biggest central banks could cause inflation to rise, explained FAB. Benign or so-called ‘creeping inflation’, in which companies can gently pass on to consumers, can enable operating margins to be maintained. However, anything faster than this could spell trouble for the $11.8 trillion of negative-yielding debt (as estimated by Bloomberg mid-December) since higher inflation entails rising interest rates. It could also cause markto-market losses to investors holding this debt. The bank added that the situation could be worse as investors and central bankers have become accustomed to low inflation and are not pricing-in the possibility of a rise in consumer prices.

Taking all this into consideration, despite some optimistic sentiments, we continue to operate in an environment of elevated risk, similar to the last few years. An approach to price-in risks for all transactions remain to be the safest bet moving forward.

CPI Financial 2020 Events Calendar April 14

June 10

Banker Middle East Banking Technology Summit & Awards The Banking Technology Summit sheds light on the most critical developments in banking technology and innovation in the region. It is an exclusive gathering of C-level executives from banks, regulators and technology leaders to discuss ways of enhancing business performance, foster innovation and maintain competitiveness.

Islamic Business & Finance Awards The awards ceremony is the longest-established Islamic banking and finance awards programme honoring outstanding performance in Shari’ah-compliant finance. The gala dinner is attended by over 150 of the top Islamic bankers in the region, as well as global leaders in Islamic finance. It rewards excellence and celebrates the achievements of the Islamic finance industry.

The summit is followed by the inaugural Banking Technology Awards recognising the achievements of banks and technology providers who are leaders at the forefront of digital transformation.

September 9

October 14

Banker Middle East Retail Product Awards

Banker Middle East Industry Awards

The Retail Product Awards celebrate the most successful financial products and services. It provides a benchmark for the financial services sector and recognises the most innovative retail banking products, services and solutions while celebrating exemplary institutions across the region that have designed remarkable financial solutions to better serve consumers.

The Industry Awards is the most prestigious event in the banking calendar, attended by over 350 C-level executives and key decisionmakers across the Middle East. The annual awards programme benchmarks and promotes banking and financial excellence in the region, giving due recognition to outstanding institutions that shape the market.

November 4

November 25

Emerging Technologies in Finance

Regulations & Compliance

The summit will explore the power of emerging technologies that shape the financial industry, putting a spotlight on regulation and risk management measures that entails. Issues such as innovating new products for a more sophisticated customer base, increasing financial inclusion and preparing for future cybersecurity and digitisation challenges will all be discussed at the event.

WEALTH Arabia Summit The summit is the only platform in the region that specifically caters to high net-worth individuals (HNWIs) and their most trusted representatives in wealth management. The summit brings together HNWIs, family offices, senior investment executives, wealth managers and private bankers for actionable investment advice from the world’s most informed individuals. This is an invitation-only event offering an intimate environment for focused discussion on key drivers shaping the future of investment.

CPI Financial FZ LLC • PO Box 502491 Al Shatha Tower, Office 1209 Dubai Media City, Dubai, U.A.E. Tel: +971 (0) 4 391 4681 • Fax: +971 (0) 4 390 9576 www.cpifinancial.net

NEWS HIGHLIGHTS

Saudi Arabia auctions $5 billion in bonds as Gulf tensions ease Saudi Arabia sold its first eurobond of the year as tension in the Middle East eased following the US assassination of a top Iranian general, reported Bloomberg.

The Kingdom issued $5 billion of debt, taking advantage of low borrowing costs globally. Saudi Arabia is seeking to plug part of its growing budget deficit by selling about $32 billion of local currency and international debt over the course of the year.

Saudi Arabia issued a $1.25 billion seven-year tranche at 85 basis points over US Treasuries and a yield of 2.54 per cent, a 12-year offering of $1 billion was priced at a spread of 110 basis points and yield of 2.88 per cent and a $2.75 billion 35-year tranche.

Citigroup, Morgan Stanley and Standard Chartered have been appointed as global coordinators and joint lead managers while BNP Paribas, HSBC Holdings, JPMorgan Chase & Co. and NCB Capital are also passive joint lead managers.

Saudi Arabia last sold eurobonds in October 2019, when it raised a $2.5 billion Sukuk.

In December 2019, Fahad Al-Saif, the Head of Saudi Arabia’s Debt Management Office, said that the country would probably soon return to global debt markets. The Kingdom issued $13.4 billion of euro and dollar bonds last year, more than any other emerging market aside from Turkey.

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Lebanon forms new government after three months of protest

Saudi Aramco international listing still on the cards, says finance minister Saudi Arabia’s Finance Minister said that Saudi Aramco is still considering listing shares abroad, reported Bloomberg.

Mohammed Al-Jadaan, the Saudi Finance Minister, said, “It’s still on the cards, we made that very clear, we will consider it, but I do not think it’s going to be anytime soon.”

Al-Jadaan added that Saudi Arabia may raise an additional $4 billion in international bonds this year, in line with its original plan, after the Kingdom managed to reduce how much it pays to borrow in its latest debt sell.

The Aramco IPO ended up being very different from what Crown Prince Mohammed Bin Salman had envisaged when he first floated the idea in 2016 with an ambition to raise as much as $100 billion.

Saudi Aramco offered less than two per cent and opted for a local listing after global investors baulked at its hopes of valuing the company at $2 trillion.

Instead, the oil giant relied heavily on local investors and funds from neighbouring Gulf Arab monarchies.

Lebanon has unveiled its new cabinet three months after mass protests against entrenched corruption brought down the government and shook the economy, reported Bloomberg.

The incoming team of 20, led by former education minister Hassan Diab, will have to act fast to address the country’s worst financial and economic crisis in decades.

Remittances and other inflows on which Lebanon’s economy has traditionally relied have plummeted as confidence has dwindled, prompting banks to impose informal limits on the withdrawal and transfer of hard currency in a bid to hold on to what remains of their reserves.

The Lebanese pound has weakened by more than a third against greenback on the black market since protests began in October 2019 triggered by plans to tax WhatsApp messaging application.

Lebanon’s precarious financial situation has many investors pricing in a sovereign default. A $1.2 billion Eurobond that matures in March 2020 saw a record slump last week, fuelled by reports local lenders have been selling the instruments to avoid participating in a central bank-initiated voluntary debt swap.

GFH Financial Group issues $300 million Sukuk Bahrain’s GFH Financial has issued $300 million five-year Sukuk which was oversubscribed 2.5 times, exceeding $750 million.

In a statement, the investment group said that the Islamic bonds saw strong participation from international investors who received 48 per cent of the allocation while the remaining 52 per cent was allocated to regional investors.

Societe Generale and Standard Chartered were joint lead managers together with Emirates NBD Capital, KAMCO Investment as well as Mashreq Bank, SHUAA Capital and Warba Bank.

GFH stated that the strong market demand and successful closure of the Sukuk reflects market confidence in the investment group which was supported by S&P and Fitch ‘B’ rating.

Dubai's DP World buys 44 per cent stake in Swissterminal Holding Dubai port operator, DP World has acquired a 44 per cent stake in Swiss container terminal operator Swissterminal Holding and the Mayer family, who founded the business, will remain a majority shareholder.

The partnership is expected to expand the companies’ terminal networks, increase efficiency and grow their service portfolios.

DP World is developing technology to remove inefficiencies in the supply chain, focusing on faster-growing markets and key trade routes.

In a statement, state-controlled DP World said that Swissterminal operates additional locations in ZurichNiederglatt, Basel-Birsfelden as well as Basel-Kleinhueningen and Liestal.

The terminals are connected to Europe’s leading container ports in Rotterdam and Antwerp as well as the ports of La Spezia, Genoa, Ravenna and Trieste south of the Alps.

Furthermore, the cooperation is anticipated to expand the companies' terminal networks, increase efficiency and grow their service portfolios. With the transaction, no major structural changes within the respective companies are planned, and Roman Mayer will continue to serve as Swissterminal's CEO.

US hits Turkey’s Halkbank with millions in contempt fines

Egypt's sovereign wealth fund teams up with UK’s Actis for private investment

The federal prosecutors in New York said that Turkey’s Halkbank should pay millions of dollars in fines for its continued failure to respond to US sanctionsevasions charges, reported Bloomberg.

Prosecutors charged the bank in October 2019 with aiding a yearslong scheme to help Iran evade US economic sanctions and access $20 billion in frozen oil revenue. Since then, Halkbank has refused to accept service of the indictment or answer the case, leading prosecutors to deem it a fugitive from justice.

In a court filing, the US government asked a federal judge to impose a daily $1 million fine that would double each week the bank refuses to appear in the case.

The US argued that Halkbank improperly ignored an initial summons, intentionally frustrated efforts to serve the summons and indictment, attacked the charges in the press and failed to show up for a required court appearance.

While Halkbank does almost no business in the US, it has some ties to the nation’s financial system, which the government could limit or sever.

The Sovereign Fund of Egypt (TSFE) has agreed to partner with Actis, a UK-based private equity firm to help attract and steer private investment into Egypt as well as to cooperate in energy and infrastructure projects.

The MoU between the two entities allows for partnership in high–profile areas such as energy and infrastructure and is expected to support the TSFE to attract private investment through co-investment with foreign investors in value accretive opportunities serving to unlock the potential of Egypt’s assets and resources.

The sovereign wealth fund, which was established in 2018 with paid-in capital of EGP 5 billion ($310 million) and EGP 200 billion authorised capital, aims to take control of some of the government’s most promising assets in industries such as power and real estate and bring in private investors to develop them.

Reuters reported that TSFE will start off by selling a 25-year concession, owned by the Egyptian Electricity Holding Company, to operate three 4.8GW power plants built

by Siemens under a EUR 6 billion ($6.65 billion) deal signed in 2015.

KFH shareholders approve the acquisition of Ahli United Bank Kuwait Finance House’s (KFH) shareholders have approved the acquisition of Bahrain's Ahli United Bank (AUB), a step closer to the completion of the region’s first cross-border merger in recent years at a time when several other banks are consolidating.

The shareholders agreed on the acquisition of 100 per cent of the capital shares of AUB by way of share swap at an exchange ratio of one KFH share for every 2.326 AUB shares.

The merged entity would have assets of $101 billion and shareholder equity of $10.5 billion, with an annual forecast profit of $1.5 billion, based on past performance.

The deal is expected to give KFH access to regional markets with a population of over 430 million people and a median annual per capita income of approximately $42,000 on the basis of purchasing power parity.

The acquisition of AUB will turn KFH into a direct investment and banking destination, reducing group costs across its markets, enhancing the efficiency of resources allocation and increasing profitability.

Nakheel appoints ICD’s CEO as its new Chairman HE Mohammed Ibrahim Al Shaibani, the Chief Executive Officer of Investment Corporation of Dubai and Director General of The Ruler’s Court, Government of Dubai will take over as Chairman of the Dubaibased palm-shaped island developer Nakheel, replacing Ali Rashid Lootah.

Nakheel stated that Lootah’s resignation follows an invitation from HH Shaikh Ahmed bin Saeed Al Maktoum to assume a new position with the Dubai World Board.

Lootah, who steered the state-owned developer through a $10.5 billion debt restructuring, left the company after 10 years in the role.

Al Shaibani is one of four new board members, which also include former Nakheel Chairman Sultan bin Sulayem, Khalifa Al Daboos and Issam Galadari, who will be appointed as directors to the board in addition to the current directors, Khalid bin Bakhit Al Falasi, Ibrahim Hussain Al Fardan and Adel Khalifa Al Shaer.

Lootah replaced Bin Sulayem as chairman in 2010.

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NEWS HIGHLIGHTS

NBB acquires a 78.8 per cent stake in Bahrain Islamic Bank The National Bank of Bahrain (NBB), which owns 29 per cent of Bahrain Islamic Bank (BisB), has acquired a 78.8 per cent stake in the Islamic bank, a month after the national bank offered to buy up to 100 per cent of the Shari’ah compliant lender’s paid-up ordinary shares.

Following the acquisition, the NBB and Bahrain Islamic Bank brands will continue to operate as two independent banks.

The offer which initially opened on 18 December 2019 was launched by NBB in a bid to develop its Islamic banking activities and to offer to its client base a full range of conventional as well as Islamic banking services.

In a bourse filing, NBB stated that 93.55 per cent of the acceptances were from institutional shareholders of BisB and the remaining 6.45 per cent were from individual shareholders.

Similarly, 94.95 per cent of all acceptances opted for the cash offer of BHD 0.117 per BisB share, while the remaining 5.05 per cent opted to swap their BisB shares with newly issued NBB shares at a share exchange ratio of 0.167 NBB shares per BisB share.

BisB will remain listed on Bahrain Bourse and the Islamic bank will continue to operate under its normal course of business as well as maintain its operations as a subsidiary of NBB.

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Egypt looks at green bonds to tap into a wider investor base Egypt plans to issue green bonds by the end of the current fiscal year to diversify its debt offerings and draw in new foreign funds, reported Bloomberg.

The move, announced by Deputy Finance Minister Ahmed Kouchouk, is part of the government’s broader push cut debtservicing costs by varying its offerings.

Finance Minister Mohamed Maait said the plan was still being discussed and that the issuance may be denominated in US dollars or euros.

Cost-cutting is a key part of Egypt’s broader economic programme, which was kick-started in late 2016 with the devaluation of the currency in a bid to end a crippling dollar shortage. The moves helped secure a three-year, $12 billion International Monetary Fund loan and shore up investor confidence but have yet to attract the sorely needed private sector growth the government is now focused on.

Dubai Islamic Bank completes Noor Bank acquisition Dubai Islamic Bank (DIB) has completed the acquisition of Noor Bank through a share swap deal. As part of the agreement, DIB has issued 651 million new shares to take its issued share capital to 7.2 billion shares.

In a bourse filing, DIB stated that the deal is expected to position DIB as one of the largest Islamic banks in the world with total assets exceeding AED 275 billion. The new DIB shares have been listed and admitted to trading on the Dubai Financial Market.

HE Mohammed Ibrahim Al Shaibani, the Chairman of Dubai Islamic Bank, said, “The acquisition of Noor Bank is a landmark achievement, establishing DIB as one of the largest Islamic banks in the world and amongst the largest banking entities in the UAE.” “The acquisition and the ensuing integration is expected to generate significant synergies ensuring robust profitability and returns for the shareholders in the coming years,” said Dr. Adnan Chilwan, the Group CEO of Dubai Islamic Bank.

Saudi Arabia records a 51 per cent increase in FDI in 2019, says Invest Saudi

Dubai’s Emirates NBD seeks to take over Al Jaber’s DIFC plot Emirates NBD, Dubai’s biggest bank is considering seizing a plot of land in the Dubai International Financial Centre that belongs to debt-laden Al Jaber Group.

The bank plans to take over or sell the undeveloped land in the financial hub after becoming unsatisfied with little progress in assets sales under Al Jaber’s debt restructuring.

The land—worth about $70 million— was used as collateral to secure a loan for Chairman Obaid Khaleefa Al Jaber Al-Marri. Al Rihab Real Estate Company, a unit of Al Jaber, defaulted on a mortgagerelated to the land.

Al Jaber last year agreed to raise about $445 million from asset sales by the end of 2019 while members of the Al Jaber family and other shareholders pledged to raise as much as $210 million by selling personal assets.

Family-owned Al Jaber, which borrowed heavily to expand in construction, engineering and shipping, is one of several businesses in the UAE that ran into trouble after the 2008 financial crisis. The company signed a pact to alter the terms on around $4 billion of debt in 2014 and agreed to restructure up to $1.5 billion last year.

Invest Saudi said that Foreign Direct Investment (FDI) to Saudi Arabia rose to $3.50 billion in Q3 2019 compared to $3.18 billion a year ago.

Saudi Arabia opened several key sectors to 100 per cent foreign ownership, including manpower recruitment services, recruitment agencies and offices as well as audio-visual media services, real estate brokerage services and road transportation services.

The Kingdom had opened other sectors such as healthcare, education as well as wholesale and engineering services segments to full foreign investment two years earlier.

In a report, Invest Saudi, the state entity in charge of promoting foreign investment, said that a total of 1,131 of foreign companies were created in 2019, a 54 per cent increase from 2018, adding that this was the biggest rise in 10 years.

The government has made attracting greater foreign investment a cornerstone of its Vision 2030 plans to diversify the economy of the world's top oil exporter away from a reliance on crude revenues.

Of the 1,131 investor licences issued in 2019, 69 per cent were full foreign ownership and 31 per cent accounted for joint venture partnerships with local investors.

In October 2019, the Saudi Arabian General Investment Authority signed 23 MoUs valued at $15 billion on Saudi Arabia climbed three places in the World Economic Forum’s 2019 Global Competitiveness Report rankings, becoming the world’s 36th most competitive economy of 141 surveyed.

Alizz Islamic Bank approves share swap for proposed merger with OAB Alizz Islamic Bank’s Board of Directors has approved a share swap ratio for the proposed merger with Oman Arab Bank (OAB).

In separate bourse filings, Alizz Islamic Bank and Oman International Development and Investment Company said that their respective Board of Directors approved a share swap ratio of around 81 per cent: 19 per cent for the shareholders of OAB and Alizz Islamic Bank respectively.

Alizz Islamic Bank’s board also recommended the lender’s shareholders to approve the merger between the two Muscat-based banks.

According to Alizz Islamic Bank, the actual swap ration will be based on the net asset value as per the audited financial statements for the year ended 31 December 2019.

Furthermore, appropriate price adjustments will be made to movements in both the banks’ financials between 31 December 2019 and the actual transaction date, said Alizz Islamic Bank’s legal adviser and company secretary.

The proposed merger and the indicative swap ration will remain subject to the approval of the shareholders, the Central Bank of Oman as well as the Capital Market Authority and other relevant authorities.

The successful completion of the proposed merger would provide Oman Arab Bank with a larger Islamic franchise and asset base, allowing the bank to improve its interest income and depositgathering ability.

Sovereign Ratings as of 1 February 2020 Issuer

Foreign Currency Rating

Last CreditWatch/Outlook Update

1 Bahrain

B+/Positive/B

30-Nov-2019

2 Central Bank of Bahrain 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+/Positive/B B/Stable/B B-/Stable/B B+/Stable/B AA/Stable/A-1+ CCC/Negative/C BBB-/Stable/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

30-Nov-2019 12-May-2018 03-Sep-2015 20-Oct-2017 20-Jul-2011 15-Nov-2019 06-Oct-2018 20-Apr-2019 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

Rallying commodities A further escalation in geopolitical tensions could provide additional short-term upside to oil and gold prices

T

ensions between US and Iran after Trump’s withdrawal from the 2015 nuclear deal in May 2018 intensified last year and escalated further in January 2020 when the US assassinated one of Iran’s most powerful military commander. The US airstrike against Qassem Soleimani prompted counterstrikes against US military bases in Iraq but although the long-time foes avoided an outright military conflict, the risks have increased.

According to UBS, the US airstrike against one of Iran’s most powerful generals sent oil and precious metal prices firmly higher, while negatively affecting risk assets such as industrial metal prices.

When it comes to the Middle East everything becomes international. The risk of further actions leading to the outright conflict has significantly increased following the downing of a US-built Boeing 737 flown by Ukraine International Airlines. The plane was shot down by Iranian forces during a period of tit-for-tat military strikes in the aftermath of the killing of General Soleimani.

The refusal by Iranian aviation officials to send the black boxes, the flight data recorders, to be analysed abroad is likely to increase international pressure on Iran, already embroiled in a long-running standoff with the US over its nuclear programme.

A further escalation in geopolitical tensions could provide additional short-term upside to oil and gold prices. Oil extended its price surge as the fallout between the US and Iran escalated after the assassination of one of the country’s army generals.

PHOTO CREDIT: Simon Dawson/Bloomberg

PRECIOUS METALS

14

Bloomberg reported that futures jumped above $70 a barrel in London when the US State Department said that there was ‘heightened risk’ of attacks near energy facilities in Saudi Arabia. also jumped as much as 2.2 per cent to $70.11 on ICE Futures Europe and was at $70.04 in Singapore.

“That being said, in our base case we still target a oil price drop to $60/bbl during the first half of 2020,” said UBS in its commentary.

The precious metal complex (silver, platinum and palladium) tends to benefit from bouts of market uncertainty, while industrial metals are down in line with risk assets, with equities and growthsensitive currencies coming under pressure, said UBS. Gold is expected to reach $1,600 an ounce. Negative real rates in the US and a weaker US dollar favour stronger precious metal prices in general. Given its safe-haven status, gold advanced the most within the precious metals complex.

BANKER MIDDLE EAST | FEBRUARY 2020 | ISSUE 227

The risks of a broader US-Iran conflict is low, but there is growing concern over the security of energy infrastructure in the Gulf and Strait of Hormuz.

S&P Global Platts said that bullion, which climbed 2.4 per cent over the previous two sessions to approach $1,600 an ounce, advanced even after a gauge of US service activity rose to a fourth-month high in December 2019.

According to PwC, geopolitical tensions in the Middle East has the potential to support even higher prices in the very short run. However, the impact usually fades over a longer period of time.

UBS said that given its safe-haven status, gold advanced the most within the precious metals complex. Gold held near the highest level in more than six years on demand for the metal as investors watch for Iran’s next move in a showdown with the US. Gold then saw a drop when the US and Iran stepped back from a deeper military conflict, blunting the appeal of haven assets. It headed back towards levels it was trading at before the US-Iran confrontation.

“WHILE THERE ARE HEIGHTENED RISKS OF RETALIATORY ATTACKS AROUND OIL FACILITIES IN SAUDI ARABIA’S EASTERN PROVINCE, THE UNCERTAINTY AROUND HOW AND WHEN IRAN WILL LIKELY RETALIATE IS SPREAD ACROSS OIL AND OTHER COMMODITIES.” — S&P Global Platts

OIL PRODUCTION FROM THE MIDDLE EAST Oil production includes crude and Natural Gas Liquids, values are in mbpd

BLACK GOLD S&P Global Platts Analytics reported that the risks of a broader US-Iran conflict is low, but there is growing concern over the security of energy infrastructure in the Gulf and Strait of Hormuz. The Strait of Hormuz is a critical shipping route for almost one-third of the world’s crude oil supplies, and the vast majority of hydrocarbons exports from Saudi Arabia, Qatar (LNG), Abu Dhabi as well as Kuwait, Iraq, and Bahrain. Iran has repeatedly threatened to close the passage whenever the Islamic Republic clash with the US. Oil and gas exports account for most of their exports and government revenue and these sovereigns have no alternative export routes. A more serious escalation in the Middle East would have a broader economic and financial market impact through sharply higher crude oil prices. The region accounts for almost one-third of global oil supply.

According to UBS, Iran and Iraq produced 2.13 million barrels per day and 4.65mpbd of crude in November 2019, respectively, and combined they accounted for nearly eight per cent of global oil liquids supply in November 2019.

The US State Department also warned about a possible risk of attacks particularly in the eastern province of Saudi Arabia close to oil and gas facilities. S&P Global Platts stated that while there are heightened risks of retaliatory attacks around oil facilities in Saudi Arabia's eastern province, the uncertainty around how and when Iran will likely retaliate is spread across oil and other commodities.

In September 2019, Saudi Aramco’s Khurais and Abqaiq oil fields were attacked by Houthi rebels, forcing the stateowned oil giant to suspend production of 5.7 million barrels a day—well above half of the Kingdom’s overall daily output. The targeted oil facilities can process up to 8.45 million barrels of crude oil a day between them, the bulk of production in Saudi Arabia.

Furthermore, market players are concerned that the US-Iran tensions could impact the political stability of Iraq and negatively impact oil production in the secondlargest Organisation of the Petroleum Exporting Countries producer after Saudi Arabia. The Iraqi oil ministry said that production and exports were not affected by the conf, although a number of US oil workers have been evacuated from the Iraqi oil fields near Basra.

Shipping companies were also on high alert following escalated tensions in the Middle East with risks of freight rates rising sharply, higher war insurance premiums and other risk mitigation efforts being implemented.

Source: IEA, UBS

AMPLE SPARE CAPACITY Values are in mbpd

Source: IEA, UBS

GOLD PRICE MOVING HIGHER ALONGSIDE LOWER TIPS YIELD Daily data

Source: Bloomberg, UBS

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15

MARKETS

New decade, better prospects Market sentiment on 2020 has varied across different areas of the industry. From a global perspective, Damian Bunce, Chief Commercial Officer of Saxo Bank speaks with Banker Middle East on trends that will shape the industry this year

L

ooking at where we are now, what are your views on market sophistication in the Middle East?

Having just returned from a visit to Dubai I have been excited to see the rapid evolution and increasing market sophistication of banks and financial services in the GCC and wider Middle East. This is evidenced by the practises of some of the bigger banks who are making strong moves to innovate and utilise technology to modernise and stay relevant to their customers.

We are seeing a significant shift in the outlook of the big banks with many looking at innovative ways to offer digital and online wealth management services to their clients. This is a positive development for the likes of Saxo Bank as we really believe the bank of the future will survive and thrive best by collaborating and this is at the heart of our institutional partnerships.

“THE BANKING INDUSTRY HAS TRADITIONALLY RELIED ON COMMISSIONS AND THE INDUSTRY IS EVOLVING TO A ZERO-COMMISSION STRUCTURE.” — Damian Bunce

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We believe that soon banks will not develop much technology themselves. Instead, the successful ones will operate with an open model which makes it easy to add new services without adding high costs and complexity. This will be a big change for banking customers in the region. Traditionally, it’s been the case that if you have wealth in the Middle East you will typically have an advisor who invests money on your behalf. However, we are now increasingly seeing larger banks introduce technology initiatives offering those services to their clients online. I can only see this trend accelerating and this is reflected in our business too.

In addition to the shift in the overall banking landscape, we are also seeing the regulatory environment is becoming increasingly sophisticated.

Another important evolutionary mark for the Middle East and Saudi Arabia in particular was the Aramco IPO. This is going to further transform Saudi and the region. It’s an exciting time!

As chief commercial officer, where do you see opportunities?

Wealth management is especially interesting to us right now, particularly in the area of independent financial advisors (IFAs).

We see that segment as being ripe for technological innovation in a way which is right at the heart of our institutional offering.

to modernise, or to run a parallel new and dynamic system.

The risk is that if they do neither they face the huge risk of being swallowed up by the new fintech companies who are making their mark on the industry.

These new and dynamic fintechs are a real threat to the banking industry as they deliver relevant and razor-sharp digital customer experience that makes banks look dusty and foot-dragging.

We as consumers, trust the internet now and if someone offers me a bank account with good interest rates and incentives, I may not switch my salary account to them overnight, but I would definitely use it. The big banks who do not innovate will soon find that they cannot really be as nimble as these fintech companies and thus there is a real risk they could lose customers.

PHOTO CREDIT: matejmo/iStock

Saxo Bank has a prominent presence in the Middle East, how would you describe your pipeline in this market for 2020?

I strongly believe that we are going to see the IFA segment evolving quickly on a global level. It’s even already happening in the Middle East.

In addition, we’re seeing opportunities in large banks all over the world that have very costly IT infrastructures. We all know that the core competency of banks is service to clients, however many banks are being weighed down by an outdated infrastructure technology. For those banks bold enough to make big changes to the likes of flexible technology and cloudbased solutions, the future is bright.

When a bank switches to a more open model, it gets the benefit of both more flexibility but also lower costs. Given that banks worldwide are all under pressure to reduce costs, they are already looking to outsource investment technology.

I’m very excited about our business pipeline for 2020. We are already doing business with many big-name banks in the region. From an institutional business perspective, we have a very full and healthy pipeline.

On the retail side, we continue to expand our business to better service what our clients want. There are many wealthy individuals in the Middle East who want access to global capital markets, they want to trade with leverage, they want to trade foreign exchange.

We are also seeing a shift to ethical investing—that is the directing of savings and investments towards companies and funds that use sustainability drivers to add value to shareholders and we expect to see this trend growing exponentially.

“WE ARE ALSO SEEING A SHIFT TO ETHICAL INVESTING—THAT IS THE DIRECTING OF SAVINGS AND INVESTMENTS TOWARDS COMPANIES AND FUNDS THAT USE SUSTAINABILITY DRIVERS TO ADD VALUE TO SHAREHOLDERS AND WE EXPECT TO SEE THIS TREND GROWING EXPONENTIALLY.” — Damian Bunce

What are the main challenges in realising these opportunities?

There are a number of challenges in financial services as a whole and Saxo Bank is not immune to them. One of those is the drive to drop commissions to zero. The banking industry has traditionally relied on commissions and the industry is evolving to a zero-commission structure. Under this new structure, all banks, including Saxo, have been affected by the fact that this revenue stream is not going to exist in the coming years. Banks now need to develop their businesses to make money in different ways. Some examples of these may be through lending, margin trading with leverage, and securities financing.

The second big challenge in the industry is something we see as an opportunity at Saxo Bank and that is the issue with the core technology of banks. Some of these big banks are running core banking systems on legacy technology and they are facing a big decision as to whether they want to unwind those systems

Damian Bunce

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COVER INTERVIEW

A testament to Egypt’s success Tarek Fayed, Chairman and Chief Executive Officer of Banque du Caire, shares his insights into the bank’s upcoming IPO and Egypt’s economic rebound

W

hat are your thoughts on the performance of Egypt’s economy last year?

The Egyptian economy has witnessed a great improvement since the successful execution of the economic reform programme by the government and the Central Bank of Egypt (CBE) in November 2016 which included several pillars, mainly the liberalisation of the foreign exchange and fiscal reforms.

The outcome of these reforms was reflected across various key macroeconomic indicators including gross domestic product (GDP) which reached to 5.6 per cent in the 2019 financial year. Unemployment rates were recorded at 7.8 per cent and the decline in inflation rates to record was at 7.1 per cent. The liberalisation of the exchange rate led to a high influx of foreign currency, bringing foreign exchange reserves to $45.4 billion at the end of December 2019. This helped the Egyptian economy attract direct and indirect foreign investments which in turn stimulated local investment recording considerable growth rates.

Our expectation is that the economy will witness a huge leap in growth rates across various sectors. This is expected to be achieved on the back of major national projects implemented by the government, particularly in construction, infrastructure and energy—all of which attract investments, reduce public budget deficit and create job opportunities.

The improvement in the exchange rate was also a result of the measures carried out by the central bank which led to an increase in foreign exchange resources for banks including Banque du Caire’s. This in turn enabled the bank to direct those resources to a large base of customers, providing foreign trade operations and foreign currency needs for national projects.

“WE LOOK FORWARD TO HAVING THE PUBLIC OFFERING IN THE FIRST/SECOND QUARTER OF 2020.”

— Tarek Fayed

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How is digital transformation making way in the country’s financial sector?

Egypt has made a remarkable journey towards digital transformation which began with the establishment of the National Payments Council. This was set up by a comprehensive plan to spread societal awareness on the importance of digital transformation and achieving breakthroughs in digital infrastructure. Egyptian banks witnessed a qualitative shift in digital transformation as many electronic payment methods and services became available.

The central bank introduced various initiatives on financial inclusion and digital transformation. They include: encouraging citizens to use digital financial services; creating awareness on the diversity of banking products to meet the needs of the different segments of society; issuing control instructions for payment systems and mobile phone wallets; introduced the mobile payment acceptance (QR Code); introduced the first national payment scheme “Meeza”; encourage entrepreneurship and transformation of the informal sector to work under the umbrella of the formal sector; providing greater liquidity to the banking sector and creating greater growth rates for the national economy.

Over the next five years, digital transformation will also increase GDP rates creating a suitable climate for a digital economy in a way that supports the state’s plans to convert to a system of financial inclusion while promoting economic growth. As one of the important agendas in achieving Egypt’s 2030 vision, it also represents one of the pillars of sustainable development and an essential pillar for building competitive and diversified economies.

What is Banque du Caire’s approach to digital transformation?

We have many plans for digital transformation and financial inclusion. We recently introduced a comprehensive payment service through the ‘Qahera Cash’ mobile wallet. New services were added in the app to meet various customer needs and reach a larger segment of customers encouraging them to subscribe and use the service.

The initiative also facilitates subscription and reduces the fees for the service. We also added new deposit and withdrawal outlets to enable customers to access their money without having to visit the bank’s branches.

“THE SIGNIFICANT IMPROVEMENT IN BOTH FISCAL AND MONETARY POLICIES CAME AFTER THE SUCCESSFUL ADDITION OF THE ECONOMIC REFORM PROGRAMME IN NOVEMBER 2016.”

— Tarek Fayed

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We hope you enjoy our new intuitive design that is easy to navigate and provides added depth.

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There is still a significantly large unbanked population in Egypt. What is your approach to financial inclusion?

When we looked at financial inclusion figures, we witnessed a very high increase in the ratio, reaching 34 per cent by end of 2019. A lot of initiatives were carried out in this by both the government and central bank aiming to transform the country into a cashless society. For example, new regulations were released in May 2019 to stop accepting cash for any transactions exceeding EGP500 across all government entities.

Investment in technology came at the top of the bank priorities for 2020 to broaden the reach of the unbanked segment, particularly in rural areas. For example, Banque du Caire succeeded in acquiring 250,000 unbanked customers over the last three years under the microfinance business and leveraging on technology.

As previously mentioned, the bank is working on the digital onboarding of small businesses as we target to increase productivity search by more than 40 per cent. We also plan to leverage on the new initiative—EKYC—that the CBE plans to launch in 2020 as technology will play an important role in reaching the unbanked.

Tarek Fayed

The bank also launched internet banking services for retail customers in the second quarter of 2019. We plan to do the same for corporate clients this year, in addition to a mobile banking service.

The bank has a continuous development plan in place encompassing a suite of new products and services. One of the most notable ones is the ‘Meeza’ card, including debit and prepaid cards to limiting the use of cash as the bank has issued more than 450,000 cards thus far.

Following central bank approvals, the bank was the first to launch the mobile acceptance of payment through a QR code scan to support a large category of merchants encouraging them to use the service.

We also implemented the first mobile phone payment process in the Egyptian market. It provided fast and safe solutions for merchants to receive payments from a large base of mobile phone customers (reaching more than 13 million customers), giving them greater opportunity to increase sales and follow-up on transactions made through electronic wallets.

This step is part of Banque du Caire’s keenness to create new digital banking channels to meet the needs of different customer segments and keep pace with developments in the global banking services sector, whilst encouraging a culture of financial inclusion backed by electronic payment methods.

The bank also plans to digitise its microfinance platform, open two digital branches by mid-year and upgrade the core banking system over the period of 18 - 24 months.

Recent figures indicate that digital transformation is on its right course. Even though 49 per cent of Egypt’s total population are internet users, 28 per cent of them use mobile banking.

Additionally we have 34 per cent of the population that are eligible to own an account within a financial institution, which means there is still room to increase the percentage of internet banking users.

“OUR FINANCIAL INCLUSION INITIATIVES WERE AIMED AT INCREASING AWARENESS AND SPREADING THE BANKING CULTURE ESPECIALLY AMONGST YOUTH AND WOMEN IN A WAY THAT DRIVES THE ECONOMY FORWARD, ENCOURAGING SELF-EMPLOYMENT AND INTEGRATION OF THE INFORMAL ECONOMY INTO THE FORMAL ECONOMIC SYSTEM.” — Tarek Fayed, Chairman and Chief Executive Officer of Banque du Caire

Currently, Banque du Caire’s infrastructure enables the bank to cater to this segment through simple products encouraging citizens to deal with banks. Yet the awareness remains the main challenge in which the government, CBE and banks are taking very serious steps to address.

For a better reach, the bank is also expanding its current branch network of 230 with an additional 25 new branches every year, particularly in the untapped markets to transform the branch model to a more customer-centric approach to better cater for the different customer needs.

In support of women inclusion, an agenda which is on the top of the central bank’s priorities, Banque du Caire recently launched the ‘Bokra’ account which is specifically designed to meet the banking needs of women, through a package of services and promotional offers tailored to this segment. We also plan to launch a variety of banking services for youths in the coming months.

Additionally, we are working on a strategy to launch innovative technology banking solutions and services for microproject clients.

Banque du Caire has been a very active player in the CBE’s financial inclusion initiatives, through designing distinctive custom-made banking products and services to fit the needs of the youth and the women segment.

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The bank has also launched on ground activations in a number of Egypt’s governates throughout the year advocating financial literacy and raising awareness about financial inclusion, while providing products that meet the banking needs of Egyptians.

Through this account Banqe du Caire targets women from different social and economic classes, with different saving needs, located across Egypt’s different governorates, especially rural areas where the reach of banking products and services are still in early maturity stages.

Banque du Caire was named as one of the banks that would float its shares on the Egyptian Stock Exchange. There has been a delay since this announcement was made. What are your views on this and how would the IPO impact your business and the domestic banking landscape?

We look forward to having the initial public offering in the first/second quarter of 2020. The IPO will be open to retail and institutional investors—whether Egyptian, Arab, or foreign— to ensure a diversity in the bank’s shareholder structure, in line with the rules and laws of the Egyptian Stock Exchange and the Central Bank of Egypt.

With an impressive track record, an all-time high brand recognition, and a dynamic performance over the past few years, a broad base of investors is looking to subscribe to the bank’s shares, as it is one of the oldest Egyptian banks that enjoy a robust performance at all levels with excellent growth rates, and a market share of about four per cent.

Moreover, there are many positive indicators surrounding the timing of the offering—the improvement and attractiveness of the Egyptian economy which make the transaction more attractive to investors as well as the encouraging performance of the Egyptian banking sector which is demonstrated by the healthy financial indicators of operating banks.

How do you envision Banque du Caire’s role in the country’s banking sector and overall economy?

The Egyptian banking sector witnessed major reforms during last decade that targeted the entire sector ranging from laws, policies and procedures, to staffing as well as monetary and fiscal policies. This reform which was the main shield of the Egyptian economy during the tough period which began in 2011.

In 2014 Egypt had launched a full and comprehensive, nationwide infrastructure revamp. This, coupled with the economic reform and the foreign exchange liberalisation, were the measures that kept Egypt’s economy afloat.

These large steps led to a solid banking system evidenced by the strong solvency and liquidity position of the entire sector.

As part of this strong system, Banque du Caire succeeded in positioning itself as a major player over last couple of years.

Th bank became one of the top five banks in the market in terms of assets size, growth ratios and branch network.

In-line with the direction the country was heading, Banque du Caire was a major market player in financing the private sector and national projects, supporting the overall economy’s welfare.

Banque du Caire holds a

4%

market share in Egypt

Fayed said that the IPO will be open to retail and institutional investors—whether Egyptian, Arab, or foreign—to ensure a diversity in the bank’s shareholder structure.

“THE BANK ALSO PLANS TO DIGITISE ITS MICROFINANCE PLATFORM, OPEN TWO DIGITAL BRANCHES BY MID-YEAR AND UPGRADE THE CORE BANKING SYSTEM OVER THE PERIOD OF 18 - 24 MONTHS.” — Tarek Fayed

Over the course of 2018 and 2019, the bank’s corporate portfolio increased by about 110 per cent through the financing of diversified sectors including but not limited to contracting, industrial, real estate, pharmaceuticals, oil and gas, power and food industries.

It is worthy to mention, that the fiscal policy which was efficiently managed by the Central Bank of Egypt had its positive impact on rates and inflation—a low inflation rate, an appreciation of the Egyptian pound appreciation against the US dollar, lower unemployment rates and a higher GDP, amongst other indicators.

Over the last two years, Banque du Caire well-utilised its large branch network and client base to reposition itself in the market. We enhanced our suite of product offering to include smart and up-to-date products including digital channels to reach all targeted clients.

The business model we are currently implementing provides us with the required level of banking services and products to support all relationship channels either through corporate services, retail banking, microfinancing or SMEs, while maximising our returns, adding the highest value to our clients and the Egyptian economy.

By applying the new model, we were very selective in staffing. We expanded the existing team and onboarded highly qualified individuals from the market in all areas. We also set up a corporate service division to provide the best customer experience for our corporate banking relationships.

Additionally, we introduced two new differentiated product lines, namely: Debt & Structured Finance and Global Transaction Banking. Both areas have had a positive impact on our clients’ journey and improved our market share, and most importantly increased our share of our clients’ wallet.

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COUNTRY FOCUS

The revival of Egypt The critical macroeconomic reforms which were introduced to unlock billions in support grants successfully corrected the country’s sizeable external and domestic imbalances

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BANKER MIDDLE EAST | FEBRUARY 2020 | ISSUE 227

PHOTO CREDIT: Sima Diab/Bloomberg

liberalisation of the foreign exchange market and fiscal consolidation to ensure public debt sustainability, said the IMF. The government’s fiscal reform measures were critical in stabilising the economy—growth has accelerated and current account and fiscal deficits have narrowed. Similarly, Egypt’s foreign currency reserves have risen while public debt, inflation and unemployment have significantly declined.

According to EY’s Economic Report 2019, the IMF bailout programme came with stringent conditions and to secure the deal, Egypt was forced to float its currency, introduce new taxes and slash energy subsidies—all of which sent inflation galloping above 30 per cent for most of 2017, a high that had not been seen in a generation.

While the process required sacrifices in the short-term, the reforms were critical to stabilise the economy and lay the foundation for strong and sustainable growth to improve living standards for Egyptians.

PwC stressed that the economic reforms would help achieve more sustainable, inclusive and private sector-led growth which will help create jobs for youths while ensuring adequate resources are available for social protection.

“THE EGYPTIAN ECONOMY IS BEING SUPPORTED

BY THE GOVERNMENT'S ONGOING EFFORTS TO IMPROVE THE BUSINESS OPERATING ENVIRONMENT.” — S&P

REAPING THE BENEFIT

The economic reforms have started to pay off for Egypt’s long-suffering population.

I

n mid-2016, Egypt’s economy was teetering on the edge as investors shunned the country and entrepreneurs scoured the black market for greenback. An unsustainable policy mix left Egypt facing low growth, rising public debt and a mounting balance of payments problem with severe shortages of foreign exchange as well as an overvalued exchange rate.

According to the World Bank, the government’s strong ownership of the Extended Fund Facility (EFF) with the International Monetary Fund (IMF) and decisive upfront policy actions were essential in establishing credibility and restoring confidence. Now Egypt is being hailed by investors as one of the region’s fastest-growing economies, favoured by international investors who seek high yields in an increasingly uncertain global environment.

Egypt’s economic reform programme implemented a significant policy adjustment that was anchored by the

The critical macroeconomic reforms which were introduced to unlock billions in IMF funds successfully corrected the country’s large external and domestic imbalances. Cairo emerged from a three-year IMF programme in July 2019, which provided a $12 billion loan as the country endorsed sweeping and widely unpopular economic measures.

The Washington-based fund stated that the completion of the review paved the way for the last $2 billion instalment, bringing total disbursements to $12 billion—the full amount approved in 2016 to aid the authorities’ economic reform programme.

The country has since attracted tens of billions of dollars into its debt market and the central bank’s foreign reserves have surged to more than $44 billion. The Egyptian economy is being supported by the government's ongoing efforts to improve the business operating environment,” said S&P. In June 2019, the finance ministry announced the implementation of the 2019/2020 fiscal year budget with a total of EGP 1.6 trillion in expenditures, an increase of EGP 150 billion compared to the previous year's budget.

The Ministry of Finance said that the government earmarked around EGP 149 billion for product subsidy programmes.

The government allocated around EGP 52.9 billion towards petroleum products, EGP 35 billion less compared to the previous year.

Egypt’s fiscal discipline caught the attention of the three main rating agencies—Fitch Ratings, Moody’s and S&P—who could not help but upgrade the country’s sovereign ratings as well as their outlooks, citing the country’s strong economic growth prospects following fiscal reforms.

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COUNTRY FOCUS

The IMF commended Egypt for achieving the 2018/2019 primary surplus target of two per cent of GDP which helped to anchor a further decline in the public-debt-to-GDP ratio.

The fund added that it will be important to maintain primary surpluses at this level over the medium term to keep public debt on a downward trajectory.

The success of the government’s structural reforms enabled the modernisation of the economy which includes steps to support exports and reduce non-tariff barriers. Egypt also managed to streamline and enhance the industrial land allocation process as well as support SMEs and strengthen public procurement.

Fitch Ratings expects growth to continue to around 5.5 per cent this year, with inflation to averaging eight per cent in 2020-2021, down from 14.4 per cent in 2018, following a strengthened macroeconomic performance last year. Egypt’s real GDP growth reached to 5.6 per cent in 2019, with inflation dropping to single digits.

“THE GOVERNMENT’S STRONG OWNERSHIP OF THE EXTENDED FUND FACILITY (EFF) ARRANGEMENT WITH THE INTERNATIONAL MONETARY FUND (IMF) AND DECISIVE UPFRONT POLICY ACTIONS WERE ESSENTIAL IN ESTABLISHING CREDIBILITY AND RESTORING CONFIDENCE. — World Bank

Despite last year’s uprisings fuelled by allegations of graft and misuse of public funds, the government is still making efforts to improve transparency and accountability of state-owned companies and eradicate corruption. These reforms are vital for private investment—an essential factor to inclusive growth.

Excessive tax evasion is fueled by corruption and comes in many shapes and forms across the different economic sectors in Egypt. According to PwC, both external auditors and tax inspectors can facilitate tax evasion in exchange for ‘underthe-table’ monetary compensation.

Similarly, in a survey by the World Bank, 68 per cent of Egyptian companies said that corruption acts as a major constraint on their activities. One-fifth of companies surveyed by the World Bank expected to pay a bribe to obtain an operating licence with 27.9 per cent reporting being asked for a bribe to obtain a construction permit, 25 per cent for a water connection and 13 per cent expecting to bring gifts when meeting tax officials. However, despite high levels of corruption, Egypt manages to sustain robust growth, with improving fiscal outturns and stabilising external accounts.

The country’s macroeconomic situation has evidently improved since 2016, supported by the government’s commitment towards the reform programme as well as decisive upfront policy actions.

HIT THE GROUND RUNNING As part of structural reforms, Egypt launched the Sovereign Fund of Egypt, the country’s first sovereign wealth fund to bolster private investment. Modelled after sovereign wealth funds of its Arabian Gulf allies, Egypt’s new investment arm seeks to generate additional wealth from under-utilised state assets.

26

BANKER MIDDLE EAST | FEBRUARY 2020 | ISSUE 227

According to the International Forum of Sovereign Wealth Funds (IFSWF), the Sovereign Fund of Egypt was created

by Law No. 177/2018 and its mandate is to contribute to the sustainable economic development of Egypt by managing the country’s assets to maximise their value for future generations.

Partnering with the private sector, the fund will seek to attract domestic and foreign investment as well as build on economic reforms which began in 2016 with the flotation of the Egyptian pound. Bloomberg has reported that the sovereign wealth fund is looking to oil-rich Gulf allies to drum up foreign investment, the country presses on with the next phase of its planned economic reform.

In November 2019, Egypt and the UAE agreed to set up a $20 billion joint investment platform to invest in a range of sectors and assets. The investment platform managed by the Sovereign Fund of Egypt and the Abu Dhabi Development Holding Company.

Ayman Soliman, CEO of the Sovereign Fund of Egypt, said that after launching a $20 billion investment platform with the UAE, it is now setting its sights on Saudi Arabia, Kuwait and Oman as partners.

The sovereign wealth fund, established in 2018 with a paidup capital of EGP 5 billion ($310 million) and EGP 200 billion ($54.4 billion) in authorised capital, in part of the government efforts to revive the nation’s economy.

While Egypt will wholly own the Sovereign Fund of Egypt, the private sector is allowed to acquire stakes of over 50 per cent in sub-funds and affiliated companies. Private sector investors will also be able to invest in various financial instruments, stocks, bonds as well as other securities inside and outside Egypt.

According to PwC, Egypt’s new sovereign wealth fund is being touted by the government as the latest component of its economic revival. The fund is aimed at helping the state better utilise its assets and attract foreign investments that have so far been overshadowed by an infusion of overseas cash into the local debt market.

TAPPING UNDER-UTILISED STATE ASSETS Egypt also plans to raise up to EGP 100 billion ($5.7 billion) by selling minority stakes in at least 20 state-owned enterprises on the stock market. The country’s public sector has long been criticised as bloated and inefficient; officials have struggled to push the firms toward profitability.

The current programme marks a first step towards attempting to strike a balance between efficiency, profitability and raising revenue for the government. The government plans to offer minority stakes in Alexandria Mineral Oils Company, Eastern Tobacco, Alexandria Container, Cargo Handling, Abu Qir Fertilisers and Heliopolis Housing. The second phase of the listings was postponed last year due to unfavourable market conditions.

Similarly, the Governor of the central bank said that stateowned lender, Banque du Caire, will offer a stake of its shares, ranging between 30 and 40 per cent, which is expected to garner between $300 million and $400 million (more on this on page 18).

The Ministry of Finance said that the initial public offering (IPO) is focused in areas such as petroleum services, chemicals, shipping, maritime and real estate to help boost state finances.

In Q1 2019, the government appointed several consultancy firms to manage the sale of stakes in 23 companies. In the first phase of the IPOs, the government offered investors the chance to acquire a majority stake in state-held Heliopolis Housing in July 2018.

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COUNTRY FOCUS

There has been a lot of activity on the Egyptian Exchange (EGX) in the last nine months. Cairo for Investment and Real Estate Development (CIRA) announced its intention to offer up to 37.8 per cent of the company’s outstanding share capital, representing 207 million ordinary shares currently owned by Social Impact Capital.

Egypt’s Fawry for Banking & Payment Technology Services—the first company to make its trading debut on the EGX in 2019, raised around EGP 360 million ($22 million) in an oversubscribed private placement ahead of its IPO. Fawry’s listing in August 2019 was the first by a private owned firm since Sarwa Capital’s IPO in October 2018 as high-interest rates attract investors to fixed income assets over equities.

Similarly, the country’s newly established sovereign wealth fund plans to acquire a stake of up to 30 per cent in power plants co-built by Siemens with international investors taking the rest. The move is part of Egypt’s drive to spur greater foreign participation in the Middle East’s fastest-growing economy.

for next year and increased electricity rates by around 25 per cent—measures that made it even harder for the middle class to make ends meet.

PwC stated that although the elimination of most fuel subsidies was a move that was said to be regressive, it encouraged energy efficiency, helped protect the budget from unexpected changes in oil prices and free up fiscal space for social spending.

The recently closed IMF bailout programme’s economic reforms have started to pay off for Egypt’s longsuffering population. Fitch Ratings suggested that Egypt’s economic reforms have helped strengthen growth, reduce

The government’s fiscal reform measures were critical in stabilising the economy.

“EGYPT’S NEW WEALTH FUND IS BEING TOUTED BY THE GOVERNMENT AS THE LATEST COMPONENT OF THE ECONOMIC REVIVAL.” — PwC

CITIZENSHIP BY INVESTMENT Egypt is leaving no stone unturned in boosting its finances and luring foreign investors who fled during the 2011 unrest. In December 2019, the Egyptian Cabinet approved the country’s citizenship by investment law, offering of citizenship to foreigners who would have acquired property or invest in the country.

This follows the promise that was floated in 2018 as the government seeks to diversify its sources of revenue. Under the new law, foreigners could become citizens either by purchasing a 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 investing $750,000 could withdraw the funds in local currency after five years, while a $1 million investment allows a withdrawal after three years, both without interest.

However, a $250,000 deposit is non-refundable and goes directly into state coffers. However, Egypt places restrictions on foreign investment projects and forbids foreign ownership of agricultural land and property in the Sinai Peninsula.

A BITTER PILL TO SWALLOW In a recent report, the World Bank, said, “despite the authorities’ success in stabilising the macro-fiscal environment, strengthening confidence in the economy, the adopted measures came with adverse socioeconomic effects.”

The highest impact came from the increase in inflation rates fuelled by the large currency depreciation, which triggered a sharp increase in the cost of living. Majority middle-class Egyptians were hit hard by the 2016 currency devaluation and subsidy cuts that sent prices soaring with almost a third of the population now living in poverty.

Under the $12 billion IMF bailout programme, Egypt hiked fuel prices as much as 50 per cent with another scheduled

28

BANKER MIDDLE EAST | FEBRUARY 2020 | ISSUE 227

The government recently finalised the details of a new oil and gas contract to attract more foreign investments than the $10 billion already coming into the energy industry in 2019.

With the completion of the IMF programme, Egyptian officials successfully averted an economic collapse and set the country on a more sustainable path.

Economic growth accelerated to 5.6 per cent in the fiscal year that ended in June 2019, the highest level since 2010.

Debt and the budget deficit, though still hefty, have been on a downward trend. The deepening and broadening of effective reforms are critical to underpin the positive outlook for growth and unemployment.

PHOTO CREDIT: Sima Diab/Bloomberg

unemployment, increase foreign exchange reserves, and put public debt on a downward path.”

S&P Global stated that the stable outlook for Egypt balances its expectation that current account deficits will remain as a smaller percentage of GDP and that growth prospects will remain strong, against risks of fiscal slippages and an increase in the already-large stock of relatively short-dated government debt issued at high interest rates.

Egypt's economy is expected to grow 5.5 per cent annually over the next three years and it will be driven by more investments in a ‘robust’ pipeline of projects as well as an increase in natural gas production and a rebound in tourism.

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29

COUNTRY FOCUS

EGYPT in numbers

POPULATION

FISCAL BALANCE

100 million

24 years

-6.7%(2020 est.)

-8.6 %(2019) -9.6% (2018) -10.6%(2017) -12 %(2016) -8.2% (2015)

Source: Worldometers

Source: The World Bank

10m Source: Worldometers

MEDIAN AGE

GDP NOMINAL GDP

$302 billion (2019 est.) $250 billion (2018 est.) $235 billion (2017 est.) $333.9 billion (2016 est.) $333.6 billion (2015 est.)

Source: The IMF

100m

UNEMPLOYMENT RATE

11.8%

11.4%

Source: The IMF

GDP PER CAPITA

$13.750 $14,000 (2019 est.) $13,400 (2018 est.) $12,700 (2017 est.) $12,500 (2016 est.)

Source: The IMF

30

BANKER MIDDLE EAST | FEBRUARY 2020 | ISSUE 227

(2020 est.)

11.2%

Source: The World Bank

GDP COMPOSITION

Agriculture:

ANNUAL GDP GROWTH

5.9% in 2020 (est.)

5.6% in 2019 5.3% in 2018 4.1% in 2017 4.3% in 2016

10.4%

11.9% Services:

55.7%

(2017 est.)

Industry:

33.1%

Source: CIA World Factbook

PUBLIC DEBT

-9.8% of GDP (2017 est.)

Source: CIA World Factbook

BUDGET DEBT

104.4% of GDP (2017 est.)

111.2% of GDP (2016 est.)

Source: CIA World Factbook

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DEBT CAPITAL MARKETS

The “conventional wisdom” of pricing Similar to bonds, indicative pricing is also decisive factor for Sukuk issuances, explains Mohammed Khnifer, Senior Associate, Debt Capital Markets at the Islamic Corporation for the Development of the Private Sector (ICD)

O

ne of the most known misconception among prospective issuers (in emerging and frontier markets) is that Sukuk pricing differs from bonds—well, it does not! Debt capital market bankers use the same conventional wisdom for pricing of bonds. Knowing the indicative pricing is the most decisive factor for reluctant issuers who weigh the other option of using loans or bonds.

conventional and non-interest demand across different investor classes. Some 50 per cent of the sovereign Sukuk issuances are subscribed by conventional bond investors. The addition of Islamic investors in the funding pool will create price tension between these two distinct investor types leading to better price discovery. All investor classes—Islamic, regional and international—are important to create price tension.

KNOW-HOW

Credit rating agencies assess the relative credit risk of debt securities, borrowing entities (issuers of debt) and the creditworthiness of governments and their securities.

Obtaining a rating facilitates the marketability of the Sukuk.

From a credit perspective, Sukuk represent the same credit risk as that of the underlying obligor (borrower).

Depending on the initial term length (tenor), a relative benchmark would be used for Sukuk pricing. The size of the spread is denominated in basis points (bps) and it varies according to the risk of the borrower. The relative value of indicative pricing is driven by: the issuer’s own Sukuk/bonds outstanding; the issuer’s credit default swaps; and peer group analysis.

If there is a lack of benchmark for a sovereign in terms of its own bonds, peer bonds could be used as a proxy to arrive at final pricing. Remember that “pricing is an art”. Hence, there could be other methodologies that will deliver almost the same results for the indicative pricing.

In certain trades, there will be marginal or no difference in pricing between a Sukuk and a conventional bond for the issuer.

RATINGS

DISTRIBUTION AND DEMAND By capitalising on the demand and supply gap, the cost of funding can be lowered for the issuer. Sukuk supply and demand imbalance may offset new-issue premiums. Sukuk attracts both

32

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MARKETS RISK MANAGEMENT

Time to take action As we enter a new decade, we speak to Dr. Mazen Najjar, Partner at McKinsey & Company,to learn more about potential risks facing the banking industry and the best way to approach them

B

eing an expert in this area, what do you see as the biggest risks to financial institutions these days?

The next ten years will be subjected to more transformation than the last decade.

Financial institutions will need to go back to the foundation.

Historically, banks rose to prominence and disrupted the barter model, because they were successful at gaining people’s trust, identifying needs and offering privacy while keeping commodities in a safe place.

Today, customers’ expectations of banking services are changing as technology and new business models emerge and evolve. Banks will also have to cope with the evolution of new types of risks—e.g. cyberrisks, non-financial risks, AML, and fraud—all of which require new skills and tools. The risk function is likely to have broader responsibilities, to be very engaged at a strategic level and to have stronger, collaborative relationships with other parts of the bank.

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BANKER MIDDLE EAST | FEBRUARY 2020 | ISSUE 227

At the same time, the talent pool will experience a massive shift in expertise towards better analytics and greater collaboration away from operating processes. IT and data will likely be much more sophisticated, often employing big data and complex algorithms. As a result, banks will need to make better risk decisions at lower operating costs while creating superior customer experiences.

In your opinion do banks fully understand the nature of the risks and challenges you mentioned above?

Awareness and action are two important distinctions. Banks are aware of these risks, but what they need to do is take action.

If we look at our latest Global Banking Annual Review 2019 report, we noted that from 600 banks around the world, almost 40 per cent of them are able to generate a return far beyond their cost of capital, but 60 per cent of banks are printing returns below the cost of equity. There are immediate steps that banks can take to reinvent themselves.

Front and centre are customers and their ever-rising expectations. Banks need to look at their business models and the way they address customer needs. Today’s consumers and businesses are accustomed to personalisation and rapid fulfilment through e-commerce. They expect the same kind of nearinstantaneous service and customised products from their banks.

In addition, customer-centric products that are digitised endto-end are driving most financial sales or transactions and in certain markets more than 70 per cent of sales happen through digital channels.

A second force is greater competitive pressure. Our report shows that up to 80 per cent of banks have at least explored a possible partnership with a fintech company, which means that the seamless and simple apps and online services that they offer, are beginning to break banks’ heavy gravitational pull on customers. Banks are reducing their cost-to-income ratio by 20-30 per cent due to successfully implemented digital transformations. We’re already seeing that a few global banks have either digitised their existing bank or launched a new “attacker” or native bank that is set-up specifically to disrupt or position themselves as an alternative to the traditional model. These banks have become more agile and efficient and

provide a higher yield-on-time rate than those who have not successfully crossed any digital transformation thresholds.

The third trend is related to emerging and evolving risk types that arise from new business models especially in an increasingly digital world. For instance, digital channels present new kinds of risk (including the greater exposure of digital assets). Banks need a renewed focus on resilience, using highly effective advanced analytics and AI risk tool. All while building the talent and the advanced data analytics infrastructure required.

“THE RISK FUNCTION IS LIKELY TO HAVE BROADER RESPONSIBILITIES, TO BE VERY ENGAGED AT A STRATEGIC LEVEL AND TO HAVE STRONGER, COLLABORATIVE RELATIONSHIPS WITH OTHER PARTS OF THE BANK.” — Dr. Mazen Najjar, Partner, McKinsey & Company

What is the best way to tackle cybersecurity risks?

Financial institutions should consider the following seven practises that are essential to digital resilience: 1) to include cybersecurity in management and governance processes; 2) prioritise information assets and related risks; 3) strengthen cybersecurity protection for key assets; 4) build security features into IT systems; 5) use “active defences” to stay ahead of attackers; 6) plan and test responses to cybersecurity incidents; 7) and engage all employees on a company-wide education process on vital processes that can expose the organisation from information sharing to phishing campaigns and cybersecurity drills.

What is your take on open banking in this region?

Over time, there will be a movement towards open banking in the Middle East, as open architecture will add value to the industry in the way customers can seamlessly move from one financial journey to another. But this will not happen overnight.

This region is concentrated around key-industry players and it will take a concerted effort from a few movers and shakers to make it a reality. I think it will happen at a manageable speed where all the parties can sit around a table and agree on the right way forward, together.

What is your outlook on this market for 2020?

I think that 2020 will see a continuation of the consolidation that has been happening across the region. We will also start to see more meaningful strategic moves and bets, cross-border and beyond traditional segments and markets. Technology will enable banks to offer increasingly customised services—such as the possibility to create the “segment of one,” tailoring prices and products to each individual. And as a result of these disruptions, efficiency and resilience will emerge as key themes. Banks will then need to rethink their operating costs so they can deliver more value at lower cost while managing risks.

FOR MOST COMPANIES, THE RISK-BASED APPROACH IS THE NEXT STAGE IN THEIR CYBERSECURITY JOURNEY Proactive cybersecurity

Risk-based approach Maturity-based approach

Security not considered

Building capabilities

Security schmecurity

Strengthen essential security and resilience fundamentals to plug gaps

Lack of capability and awareness throughout organisation, including among senior leadership

Establish cyber operating model and organisation to professionalise cybersecurity function

Example activities • Assess cyber maturity (eg, data protection, access management) with or without benchmarks to highlight capability gaps • Evaluate cyber awareness across organisation

Example activities • Build security operations center, incident-response playbooks, and identityand access-management function; install multifactor authentication on gaps; enable use of virtual private network • Create and staff chief information security officer and connect to other relevant areas

Foundational

Reduce enterprise risk Identify, Prioritise, deliver, manage, and measure security and privacy controls in line with enterprise-riskmanagement framework Set risk-appetite thresholds for linked pairs of key risk indicators and key performance indicators Include stakeholders from full enterprise in cyber operating mode Example activities • Implement cyberrisk quantification • Measure and report on reduction of risk, not progress of capabilities

Reduce enterprise risk Transform processes and adoption of next-generation technologies to reduce detection and response times to within recovery-time objectives Embed security in technology products, services, and processes from point of inception through to execution to achieve complete " security by design" Fully incorporate customers, partners, third parties, and regulators into management of enterprise resilience Example activities • Deploy advanced analytics and machine learning for preventative detection • Implement security by design with multilayer responsetime reduction

Advanced

Source: McKinsey & Company

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35

ISLAMIC FINANCE

More hope for Sukuk Bolstered by a continuation of the steady trajectory in 2019, factors including liquidity, technology and regulatory initiatives are expected to support a healthy pipeline of issuances this year

G

lobal Sukuk issuances witnessed a 25.6 per cent hike last year from 2018 numbers, with foreign currency issuances leaping 20.8 per cent. This was driven by high levels of liquidity in Indonesia, good performance in Malaysia, Turkey's efforts to tap all available financing sources and the return of some GCC issuers to the market.

Total Sukuk issuance for 2020 is expected to reach $160 billion-170 billion this year, including $40 billion-$45 billion of foreign currency issuance, according to S&P. This represents an approximately 5 per cent growth on the $162 billion seen in 2019. The research and ratings agency added that ample global liquidity and negative yields on more than $10 trillion of debt mean that issuers with a good credit story will find relatively easy entry to the Sukuk market this year.

2019: A GOOD YEAR Notable players last year were the usual suspects—Malaysia and Indonesia.

Nevertheless, the GCC also pulled it weight with higher issuances of local currency denominated government Sukuk from Saudi Arabia and a few private sector issuers. In Kuwait, the central bank continued to offer Sukuk as liquidity management instrument for Kuwaiti banks. Bahrain’s issuance volumes increased only slightly as the government had less need to tap capital markets having dusbrsed funds from the $10 billion GCC support package. On the other hand, the UAE witnessed a marginal drop as corporates front-load their issuance programmes in 2018 to prepare for less supportive market conditions.

THE SUKUK MARKET PERFORMED WELL IN 2019 180 160 140 Billion $

120 100 80

40 20 2014

2015

2016 Reopening

Source: S&P

36

BETTER PROSPECTS Additional easing by the US Federal Reserve is unlikely and only a marginal deposit rate cut by the European Central Bank is expected this year. S&P suggests that global liquidity remains abundant. While some issuers with a good credit story will find it easy to tap the Sukuk market, others will continue to prefer conventional instruments because they are easier to issue—and this is usually the case with new issuers.

Apart from that, continuous support from the industry itself as a whole, such as incentives from governments, consultative efforts from regulators and standard setting bodies as well as innovative propositions from banks and fintechs will all assist in bringing the industry mainstream.

S&P pointed out several global themes that bode well for Islamic finance— technological innovation, sustainable investments and diversification—will continue to open the market to new players particularly small and midsize issuers.

BANKING ON INNOVATION

60

0

In the wider Middle East, Turkey increased its volumes, with total Sukuk issuance of $13.8 billion in 2019, compared to $8.4 billion in 2018. Turkish had to tap all available pockets of liquidity including the Sukuk market as it has been under significant pressure in recent months due to their heavy reliance on external debt and declining rollover ratios.

BANKER MIDDLE EAST | FEBRUARY 2020 | ISSUE 227

2017 Total issuance

2018

2019

On the tech front, 2019 witnessed the launch of a blockchain-enabled platform for Sukuk issuance and management.

Yet to gain traction in the market, the platform simplifies the Sukuk issuance process having the potential to effectively boost issuance. As it relies on a set of standarised legal documentation for the

Sukuk structure, an issuer can simply insert its underlying assets and build its investor book on the platform. With the whole transaction managed on blockchain, it improves transparency and traceability, making standardisation more achievable in Islamic finance transactions.

A FEW COUNTRIES WERE RESPONSIBLE FOR THE SUKUK MARKET'S STRONG PERFORMANCE IN 2019 70 60

OIL AND POLITICS These two factors continue to be the main risks impacting large Islamic finance markets. S&P suggests that the most obvious impact would be made by lower oil prices.

A lower price would mean higher financing needs for GCC governments, which would then need to choose between conventional or Sukuk instruments. And historically, the conventional bond route seems to be the preferred option. Similarly, a higher oil price would likely mean lower financing needs and lower issuance volumes for GCC governments.

Since the start of the new year escalated tensions between US and Iran was a legitimate concern by many parties.

However, the situation seemed to have stabilised and analysts believe that a fullfledge direct military confrontation is something that is highly unlikely. S&P said that any escalation will remain contained as a direct conflict would be economically, socially, and politically destabilising for the entire region, including US-Gulf allies.

It added that a potential intensification of proxy conflicts will also further undermine confidence and investment in the region— which is something that is undesirable for main economies in the region.

If a protracted and wider conflict emerges, assuming export routes remain functional, the fiscal benefit of potentially higher oil prices for Gulf sovereigns will likely be offset by the adverse effect on capital outflows and weaker economic growth, the ratings agency said. In case of a significant increase in tensions, investors could shift their attention to more stable regions. Such a situation would prompt an increase in funding costs, a lower appetite for regional instruments, or major foreign funding outflows.

40 30 20 10 0

Bahrain Indonesia

Kuwait

Malaysia 2018

Qatar

Saudi Arabia

Turkey

UAE

15

9

2019

Source: S&P

SUKUK INVOLVEMENT FROM NON-CORE COUNTRIES IS STILL LIMITED

2019

36

41

2018

38

2017

39

0%

10%

41

20%

14

42

30%

GCC countries

40%

50%

Malaysia

7

15

60%

Other Asia

70%

80%

3

90%

100%

Other countries

Source: S&P

SUKUK CONTRIBUTION TO GCC FUNDING DECLINED IN 2019 140

30

120

25

100

20

80

15

%

Socially responsible investment is a trend that became increasingly popular over the last 12 months. Green bonds and Sukuk issuances are expected to increase this year as more investors buy into the concept and benefits become more apparent.

Additionally, as GCC countries transition towards less carbon-intensive economies, green projects are expected to increase, with some funds like raised through the Sukuk market.

Billion $

SUSTAINABLE INVESTMENTS

Billion $

50

60 10

40

5

20 0

2018

Conventional bonds-FC (left scale)

2018 Sukuk-FC (left scale

0

Sukuk in the funding mix (right scale)

Source: S&P

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37

WEALTH MANAGEMENT

Women and wealth The rise of a new generation of millennial women are changing the way companies do business. Amy Bryant, Deputy Chief Executive Officer at Jersey Finance, tells us how

38

BANKER MIDDLE EAST | FEBRUARY 2020 | ISSUE 227

GCC women have traditionally held strong matriarchal roles, with some leading advisory roles in family businesses, which can provide GCC women with many opportunities in strategic wealth planning and management.

W

hat are your views on the sophistication of the wealth management landscape in the UAE and wider GCC?

With an estimated $1 trillion of wealth set to transition between families and generations in the Middle East during the next decade, immense opportunities await High Net Worth Individual (HNWI) investors and wealth management companies in the region.

According to our proprietary research in 2018, there is a growing preference from HNWI clients to professionalise the way succession planning is managed, within a more sophisticated wealth management landscape than a few decades ago. The wealth management industry helps support the growing local and international investment ambitions of HNWIs and family businesses. Against this backdrop, international finance centres (IFCs) and jurisdictions with a long-standing tradition in wealth management that can demonstrate their dedication to transparency, strong regulation and quality, will lead the way in this fast-changing environment.

“WE STRONGLY BELIEVE THAT GCC HNWI CLIENTS NEED TO MATCH THE COMPLEXITY OF COMPLIANCE PROCEDURES WITH THE RIGHT EXPERTISE IN WEALTH TRANSITIONING.” — Amy Bryant

As the GCC is predominantly a family and very personal wealth market, wealth transition and succession planning are still the two topics that we focus on most in the region.

According to Jersey Finance’s research, 92 per cent of wealth management professionals said that HNWI clients are poorly prepared and inadequately structured for the transition of wealth across generations.

Only

PHOTO CREDIT: PamelaJoeMcFarlane/iStock

30%

of family firms survive the transition to the second generation; and only

10%

make it to the third generation.

Source: Hawkamah

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WEALTH MANAGEMENT

force to help improve national aspirations in relation to meeting localization, specialism and business diversification targets.

Plus, governments in the GCC region are supportive of women’s growing role in C-level positions in the public and private sectors alike, as board members and as active economic contributors to society.

In addition, GCC women have traditionally held strong matriarchal roles, with some leading advisory roles in family businesses, which can provide GCC women with many opportunities in strategic wealth planning and management.

What issues were brought up at the Jersey Finance’s Women and Wealth Event Series last year?

Amy Bryant

“WOMEN, PERHAPS, PLACE GREATER EMPHASIS ON LONG-TERM PLANNING, COMMUNICATION, DISPUTE PREVENTION, AND ON SUSTAINABLE AND EQUITABLE GROWTH.” — Amy Bryant, Deputy Chief Executive Officer at Jersey Finance

Additionally, when we consider succession, family businesses are at clear risk nowadays. Hawkamah Institute for Corporate Governance studies show that family businesses are often vulnerable at times of transition, with only 30 per cent of the family firms survive the transition to second generation and only 10 per cent make it to the third generation. To counter this risk, suitable strategies ought to be put in place and perhaps outdated structures revisited to ensure they are effective and compliant.

As such, we strongly believe that GCC HNWI clients need to match the complexity of compliance procedures with the right expertise in wealth transitioning. This is the area where Jersey Finance sees the greatest demand, as Jersey firms can provide guidance in both structures and products, services and the merits of structuring through a leading IFC.

How do female HNWIs fit into the picture above?

A notable change worth mentioning in the GCC region, particularly in the Saudi Arabia, UAE and Kuwait, is the increased role of women in business as these countries diversify their work

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Following our inaugural ladies only educational event in 2018, we ran a series of events across the GCC (KSA, Kuwait & UAE) in October, focusing on women and wealth management.

The Gulf region is seeing continued growth of women’s key roles in the workforce, in engaging and managing wealth and in taking significant financial decisions at corporate level. A panel of industry experts offered their insights on several recent trends and the evolution of wealth management. They provided case studies of successful structuring of complex assets for family businesses and personal estates.

The underlying messages were focused on the tremendous achievements of women in the GCC, and of encouragement for them to take a seat at the decision-taking table. The unique dynamics of family-owned businesses are particularly important for successful succession planning, portfolio diversification or when a family member decides to change their investment strategy.

Women, as part of family businesses in the GCC, are highly impacted by incidents that affect the family structure or business strategy. Their concerns, therefore, tend to focus around succession planning, impact investment, voting rights, divorce and governance, to ensure the sustainable development of the business and private family wealth. They also seek to identify and consolidate their role within these evolving structures.

However, these issues are not exclusive to women, they are shared across genders and generations, but women’s approach to solving them may provide an insight into a perspective that may slightly differ from men’s. Women, perhaps, place greater emphasis on long-term planning, communication, dispute prevention, and on sustainable and equitable growth.

So, what distinguished these female-focused events from the rest, is that they provided women with the platform to voice their concerns in an organised space where advisors and audience members could relate to each other, in what GCC women called their own ‘majlis’ or ‘diwaniya’.

And the above-mentioned positive developments, along with the rise of a new generation of millennial women that are changing the way companies do business, brings about an unprecedented opportunity for the Emirati & GCC families to re-evaluate their wealth management strategies.

Where are the opportunities in this space?

Recent developments and advancements in the regulatory and legal architecture for wealth management show that family business succession and structuring is better placed in well-regulated, compliant jurisdictions. Planning is key to avoid risks, breakdown in family relationships, or outright failures.

We were privileged to host this series of events in inspiring and informing some of the leading GCC women to ask the right questions, seek advice and contribute their talents and knowledge to the success of their business and societies.

ISSUE 09

BREAKING THE MOULD Alaa Elshimy, Managing Director & Senior Vice President, Huawei Enterprise Business Group, Middle East

SUPPORTED BY

ORGANISED BY

14 April 2020, Dubai, UAE

s r e k n s a r b o t e r a u v t o u f & inn 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.

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

TECHNOLOGY

BREAKING THE MOULD Alaa Elshimy, Managing Director & Senior Vice President of Huawei Enterprise Business Group, Middle East, sheds light on how the company is not just a technology solutions provider as it aims to establish a footprint in banking through new experience-based business designs and models

H

uawei has always been known for its mobile devices. Tell us more about how the company has evolved to serve other market sectors.

When many people think of Huawei, they think connections, whether that is our heritage in telecommunications infrastructure or our popular smart devices. In fact, we have been investing in connectivity for the past 30 years. With integrated solutions across four key domains—telecom networks, information technology (IT), smart devices, and cloud services—we are committed to bringing digital to every person, home, and organisation for a fully connected, intelligent world.

Huawei continues to enhance its information and communications technology (ICT) portfolio across multiple domains.

This includes cloud, ficial intelligence (AI), campus networks, data centres, the internet of things (IoT) and intelligent computing.

We remain a trusted partner for customers in various industry sectors such as finance, transportation, energy, and more. Globally, 228 Fortune Global 500 Companies have chosen Huawei as their digital transformation partner.

How does Huawei aim to serve the financial services industry?

Alaa Elshimy

Huawei is providing more than infrastructure boxes to its financial service customers. Huawei would like to share more of an understanding and methodology of digital banking. The banks in our region are going through a remarkable change and challenges right now—and will over the next 10 years. That is due to the rise of digital banking and new business models which specialists call Banking 4.0.

Huawei’s value proposition is to help banks be ready for the digital banking era through our comprehensive technology solutions and our software partners, who offer digital core and product systems.

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TECHNOLOGY

Banks ultimately make money from their products through specific channels. Banks are always thinking about how to expand these channels and optimise their products to be more attractive to customers. Banking 4.0 has the answer.

Through the digital approach, banks can greatly expand their channels through apps and a new digital ecosystem. A bank may acquire its customers through UberEat or Costa, for example, as many e-wallet applications do. It’s a new kind of embedded banking; embedded into every corner of our life, brought to life together with numerous ecosystem partners.

Moreover, digital banking enables financial institutions to be nearer to their customers in order to adjust and design products in a better way. Consumer behaviour and feedback, for example, is recorded in most banking apps. Banks can now use advanced data analytics tools like Huawei Gauss DB to harness this insight and guide the next phase of their product development.

“BANKING 4.0 HAS THE ANSWER. THROUGH THE DIGITAL APPROACH, BANKS CAN GREATLY EXPAND THEIR CHANNELS THROUGH APPS AND A NEW DIGITAL ECOSYSTEM.” — Alaa Elshimy, Managing Director & Senior Vice President, Huawei Enterprise Business Group, Middle East

What edge does Huawei have in digital banking?

It’s not only Huawei—it’s us and our software partners. Huawei has established a very comprehensive and effective digital banking ecosystem including business designs, products, security and more. Huawei and our partners have already gone through the prosperity of digital banking in China and are now contributing to the quick development of digital banking in other territories. These experiences have been incredibly valuable to Huawei. Instead of just offering technology solutions, Huawei and our partners offer new business designs and business models, which are proved by real practise.

Apart from the Middle East, which other financial markets does Huawei currently serve?

Huawei’s strategy is to deeply cooperate with banks with a great ambition to change and be innovative. One example is DBS Bank in Singapore. They have launched a digital transformation plan in 2013 and reforms to the business’s IT in all aspects. DBS is very innovative. It has been cooperating with Huawei for almost four years, inviting Huawei to be the supplier for its internet protocol (IP) network, storage, and virtualization platform, and has recently purchased the Dorado high-end storage from Huawei.

Another example is Sberbank in Russia. Sberbank’s strategy is to ensure the ability to compete with global technology companies while remaining the best bank for customers and businesses. In other words, they want to be a technology company. Sberbank started a cooperation with Huawei in 2012. Now Huawei is one of the main suppliers for its IP network, storage, and servers. In 2018, we established a joint innovation centre to develop solutions in innovative areas including advanced reduced instruction set computing (RISC) machine (ARM) servers, ficial intelligence, and others.

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Huawei is also very successful in financial markets in Western Europe. Crédit Agricole and BPCE from France, Santander Bank from Spain, Generali Insurance and BPM bank from Italy, are all Huawei customers.

Apart from these geographies, Huawei still has a [long] way to go in the Middle East financial market. We are thus placing greater efforts in introducing ourselves to local customers and letting them know of our unique value proposition.

What are your plans for the region this year?

In 2020, a highly connected and intelligent world will no longer be an abstract idea. It will be a reality that transforms industries and improves health and human lives. To that end, Huawei Enterprise recently launched our Huawei Horizon Digital Platform. This converged, open, and efficient platform was built on our extensive technological experience. With it, we are better able to work with customers and partners to build a foundation for the digital world.

“THE MIDDLE EAST IS ALREADY A PIONEER IN THE ICT FIELD AND REMAINS A VERY IMPORTANT MARKET FOR HUAWEI GLOBALLY.” — Alaa Elshimy

This year, we will also be introducing new intelligent campus solutions under the HiCampus umbrella, and intelligent data centre solutions, HiDC, as part of this Horizon Digital Platform. Such solutions integrate technologies such as AI, machine learning, and IoT to help enterprises reduce the complexity of their IT systems and build a future where everything connects.

We will also continue to enhance the development of Huawei Wi-Fi 6, powered by 5G technology that will enable significant advancement in the application, network, and coverage of enterprise campuses. In addition, we will continue to focus on our new-generation of AI-powered OceanStor Dorado All-Flash Storage, designed for missioncritical enterprise systems such as those found in the banking world.

In short, the global financial services industry is undergoing unprecedented changes, bringing many opportunities to the foreground. Throughout 2020, we will continue to develop

and enhance our smart finance solutions along with our partners to support business innovation in the region.

What is your outlook on current market conditions?

Over the last few years, digital transformation has become an industry megatrend. Enterprises are using ICT technology to improve working efficiency, create business innovations, and provide better customer service. The arrival of the digital society provides exciting new opportunities for all industries to grow and develop. Emerging technologies such as AI, cloud, big data, and IoT, will underpin and accelerate digital transformation in these industries— especially in banking.

The Middle East is already a pioneer in the ICT field and remains a very important market for Huawei globally. We are committed to leveraging cutting-edge digital technology to bring more convenience to people's lives and drive economic growth in the Middle East.

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2020: THE BANKING BUSINESS MODEL CHANGES FASTER Venkataramana Gosavi, Senior Vice President and Global Head of Sales, Infosys Finacle, explains why the business model for banks is proving to be more remunerative than the traditional one

T

he year 2020 will keep the momentum from previous years going in respect to change in the banking business model due to severe pressure from market forces. Here, 'business model' refers to an umbrella term comprising the following aspects of banking:customer focus or segment, distribution channel, products and services, ecosystem approach, business technology landscape, operating model (including revenue model and cost structure), and workforce (people and competencies). All of them are reshaping the banking business model individually and more so collectively.

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For example, when it comes to distribution, banks are playing with their channel mix; now it is all about perfecting the non-branch digital channels, since that is where 90 per cent of transactions occur. Thanks to open banking, channels will remain central to business model-change over the next couple of years as transactions migrate to distribution networks that are not bank-owned. This change will be more pronounced especially in open payments, where non-bank players from fintechs or big tech dominate the market. In India for example, just three non-banking players, namely, Google Pay, Paytm and Phone Pe hold nearly 90 per cent ma share of over 1 billion open payments transactions done monthly.

Sponsored Content

PHOTO CREDIT: elenabs/iStock

THE BANKING BUSINESS MODEL IN 2020

“CHANNELS WILL REMAIN CENTRAL TO BUSINESS MODEL-CHANGE OVER THE NEXT COUPLE OF YEARS AS 50 PER CENT OF ALL TRANSACTIONS MIGRATE TO DISTRIBUTION NETWORKS THAT ARE NOT BANK-OWNED.”

The ecosystem approach has given rise to a business model that is proving to be more remunerative than the traditional one. According to a leading consulting company, the returns on sales and distribution of third-party products (sourced from ecosystem partners) are significantly superior to the returns on owned products where manufactured products that appear on the balance sheet account for 53 per cent of revenue, they deliver only 35 per cent of the profit at an ROE of 4.4 per cent.

On the other hand, distributed products may not appear on the balance sheet, but they contribute 65 per cent of profits and 20 per cent ROE. From an operating model point of view, the predominantly digital model favoured by challenger banks is cutting cost to income ratios to almost half of that of incumbent banks in many markets. Examples here include neo banks, such as digibank from DBS and Liv from Emirates NBD whose cost to income ratios are way lower than their parent banks.

While incumbent banks can also digitalise their way to lower costs (a global bank’s analysis estimates cuts between 30 per cent and 50 per cent), they risk losing 10-30 per cent of revenues to new competitors who are even more adept at digital capabilities.

Be that as it may, incumbent banks have little option but to move forward. Those who were content to pursue a “me-too” universal banking model for decades are now scrambling to find that elusive differentiation to make their organisations stand out. Banks are the first to admit that they are not great innovators.

In the latest EFMA Infosys Innovation in Retail Banking Study, only 14 per cent of banks rated themselves as innovation pioneers. Most banks continue to differentiate themselves based on fees and charges or advisory services—a ploy that does not suffice anymore. Rather, incumbent banks must take a leaf out of the challenger bank playbook to enter their customers’ primary journeys well before the need for a banking product or service becomes explicit. A few progressive banks have made their move with an API store, such as the API Sandbox from Emirates NBD, or a marketplace for primary needs (DBS Bank’s used car marketplace is one example).

Broadly, a bank can approach business model revision in one of two ways: by identifying a focus area of excellence without changing its basic model or by evolving its existing model into a new one.

In 2020, the banking business model will continue to evolve around the world, albeit at different speeds. While the EFMA Infosys survey indicates that one in two banks will remain full-stack banks, the others are likely to intensify their adoption of new business models, while pursuing more than one strategy.

2019 witnessed a number of consolidation exercises such as the Abu Dhabi Commercial Bank–Union National Bank– Al Hilal Bank merger and the Emirates NBD takeover of Denizbank mid-year, as well as the BB&T–SunTrust merger in the closing months; in 2020, apart from increaed pace of consolidation, change will also come about in the form of alternative business models.

While regions with mandated open banking infrastructures will obviously evolve faster, the Middle East too will progress attributed to a number of government-led initiatives for setting up large fintech ecosystems.

Universally, banks that move early will benefit more.

DEVELOPING A FOCUS AREA TO EXCEL IN: • Be the scale leader by growing the business organically or acquiring from a growing pool of unsustainable banks.

• Be the value leader as the most cost-efficient player in the market—the key to this is ubiquitous automation.

• Be the customer experience leader that leverages the quality and uniqueness of its experience to drive the business.

• Be the product or service leader that excels in its niche, be it unsecured lending, mortgage, student financing, or any other areas.

Source: Infosys

EVOLVING THE EXISTING BUSINESS MODEL: • Be a manufacturing bank by producing best-in-class products that can also be white-labelled and sold through ecosystem partners—CBW Bank in the US and Fidor Bank from Germany are examples here.

• Be a value aggregator, curating best-in-class products to fulfil more than just banking needs, similar to Paytm in India and Starling Bank in the UK • Be a distributor, focused only on acquiring and servicing customers, without middle and back office burdens. Many neo banks, such as Moven, N26, and BankOpen are following this model.

• Be a segment player that focuses primarily on a few customer segments, such as manufacturing companies or e-commerce retailers—a good example here is Credit Agricole.

Source: Infosys

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TECHNOLOGY

CYBERSECURITY IN AN INTERCONNECTED WORLD Onur Ozan, Head of Middle East, North Africa and Turkey at SWIFT, explains how the Middle East financial industry is tackling adversaries

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PHOTO CREDIT: BlackJack3D/iStock

The UAE was ranked

6th

on the list of most targeted countries by banking malware attacks in the third quarter of 2018 Source: Kaspersky

T

he financial sector is arguably among the most advanced when it comes to the use of IT and has invested heavily in IT security systems. It is also one of the most interconnected worlds—and a clear target for cybercriminals.

The World Economic Forum (WEF) has cited cyberattacks as a top global risk for several years running. Financial institutions in the Middle East are facing an increased frequency of cyberattacks. The UAE was ranked sixth on Kaspersky’s list of most targeted countries by banking malware attacks in the third quarter of 2018, and Kaspersky expects a further rise in malware attacks as the level of financial activity increases. The financial sector in the region is mature and lucrative, which makes it among the fastest growing markets in the world and an attractive target for cybercriminals.

Fraud and cyberthreats are not new challenges for the financial industry. However, in recent years, we have seen threats become increasingly more organised, more sophisticated, and more global than ever before. In early 2016, Bangladesh Bank famously became the victim of a cyberattack that resulted in an attempted theft.

While only a fraction of the funds were stolen, the event proved a watershed moment for the financial industry. It rapidly became clear that this incident was not going to prove a single occurrence but was part of a wider and highly adaptive campaign targeting banks around the world. In the few years since the Bangladesh Bank incident, we have seen the cyberthreat continue to evolve, with banks now facing attacks of increasing levels of sophistication.

In our industry, cybercriminals seek to corrupt the local operating environment and payment processes of financial institutions by obtaining valid operator credentials and injecting fraudulent transactions directly into the interface that connects to the SWIFT network.

“THE LONGER IT TAKES A BANK TO NOTICE IT HAS BEEN ATTACKED THE BETTER CHANCE THE CRIMINALS HAVE OF CASHING FUNDS OUT OF THE SYSTEM COMPLETELY.” — Onur Ozan

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TECHNOLOGY

“KASPERSKY EXPECTS A FURTHER RISE IN MALWARE ATTACKS AS THE LEVEL OF FINANCIAL ACTIVITY INCREASES.” — Onur Ozan

Onur Ozan, Head of Middle East, North Africa and Turkey, SWIFT

"BANKS IN OUR REGION DO NOT OPERATE IN A VACUUM AND ARE PART OF A WIDER ECOSYSTEM. THEY INTERACT AND TRANSACT WITH NUMEROUS COUNTERPARTIES ON A DAILY BASIS, SO CYBERSECURITY RISKS REPRESENTED

BY THEIR COUNTERPARTIES ALSO NEED TO BE ASSESSED.” — Onur Ozan

Cybercriminals are skilled and determined, can breach networks in minutes and then evade detection for months.

Once fraudulent payments have been sent, attackers will typically cover their tracks, hiding evidence of their actions.

Using various tools and techniques, they delete or manipulate records and deliberately corrupt systems to confuse forensic experts. The longer it takes a bank to notice it has been attacked the better chance the criminals have of cashing funds out of the system completely.

Since the Bangladesh Bank incident, banks have devoted significant resources to strengthening their defences. But as the industry steps up its defences, cybercriminals change their tactics. Initially, they would issue fraudulent payments outside business hours to avoid detection but have more recently turned this approach on its head, acting during business hours to blend in with legitimate traffic. Increasingly,

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criminals are also using new payment corridors and have started using European currencies in fraud attempts in addition to the US dollar.

These new tactics make it more difficult for banks to spot anomalous transactions. However, there are measures Middle Eastern banks can put in place that help them to check that their transactions are indeed legitimate. Antifraud tools help detection by analysing data and looking for trends and anomalies that can help to pre-empt potential attacks. Such tools are important in strengthening the global financial community’s defences against cyberthreats as the frequency and speed of payments increases, and their use is having a tangible positive impact in helping banks to protect themselves against fraud.

Banks in our region do not operate in a vacuum and are part of a wider ecosystem. They interact and transact with numerous counterparties on a daily basis, so cybersecurity risks represented by their counterparties also need to be assessed. Industry know-your-customer (KYC) utilities can help by allowing banks to centralise and share information about themselves with relevant counterparties. Given the significant reliance banks have on each other through longestablished customer trading relationships, a utility approach to KYC makes good business sense. SWIFT’s KYC Registry, for example, has more than 5,000 financial institutions on its books and enables banks to provide validated information, making it cheaper and easier for their correspondents to access the information they need.

Another area of critical importance in tackling cybercrime is information sharing, especially given the global and connected nature of the financial industry. The more relevant and timely intelligence information the financial community can share through trusted channel, the better chance it has of avoiding or fending off an attack.

The UAE Banks Federation has launched an industry initiative to create an Information Sharing and Analysis centre, bringing together cybersecurity data from 13 banks to compare and analyse the level of threats. SWIFT also launched the SWIFT Information Sharing and Analysis Centre (SWIFT ISAC) to facilitate the community’s access to actionable cybersecurity threat intelligence, enabling the community to better defend itself against potential future cyberattacks.

SWIFT has also engaged closely with industry experts such as anti-virus vendors and incident response teams. We are already seeing the benefits of this collaboration, which has resulted in the quick identification of financial institutions targeted by cybercriminals. In most cases, before attackers were even able to generate fraudulent messages.

Combating fraud is a challenge for the whole financial industry and there are no quick fixes. Cybersecurity will undoubtedly continue for the foreseeable future, but the threat can be turned into a manageable nuisance if financial organisations are vigilant, maintain robust cyberdefences, and collaborate with each other as much as possible

Building a Fully Connected, Intelligent World

Digital banking is coming Change or be changed | Technology innovation | Open architecture | Leading practice on digital banking |

For more information, please visit the official website of Huawei Intelligent Finance or email us at Enterpriseme@huawei.com.

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