#229 - April 2020 by CPI Financial

APRIL 2020 | ISSUE 229 MIDDLE EAST

B R AT I

APRIL 2020 | ISSUE 229

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A NEW NORTH ON THE INVESTMENT COMPASS Masroor Batin, CEO for Middle East and Africa, BNP Paribas Wealth Management

A NEW NORTH ON THE INVESTMENT COMPASS

Masroor Batin, CEO for Middle East and Africa, BNP Paribas Wealth Management A CPI Financial Publication

SPECIAL REPORT COVID-19: THE IMPACT

6 A quick chat with the WHO 12 Building a contingency plan

24 LEGAL PERSPECTIVE The shape of things to come

46 TAXATION Tackling taxes

51 TECHNOLOGY

Leveraging a new landscape

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hope this letter finds you and your family safe and well. We know that these are troubling times with COVID-19 (the novel coronavirus) impacting every part of our daily lives. We will be covering the impact of the virus in the coming issues of Banker Middle East (BME). Please feel free to reach out to us if you wish to contribute to the content. As an integral part of the banking and finance community, BME has continued to support the industry for over 20 years and we hope to do so for the next 20. In recognition of the fact that we are all suffering from the financial impact of COVID19, we are offering you the opportunity of supporting Banker Middle East by taking advantage of discounted packages. Whilst we need your support, it is equally important for you to keep your customers informed of the various actions your bank is taking to alleviate the challenges presented by the COVID-19. The world needs media to communicate and the banking and finance sector needs the same. We are that platform for you. Whenever institutions are faced with a crisis, the first cut is usually made on advertising. However, numerous studies have found that maintaining or even increasing advertising budgets during economic crises has proved to be beneficial. Companies that maintained or grew their advertising and marketing spend, saw greater revenues and profits after the crisis. Some benefits of this include: • Your corporate/brand/product message is far more likely to be noticed due to fewer ads in the market. • Your institution is more likely to be remembered when the markets improve. • You would have partnered with a publication that is known to have ‘stood the test of time’ in continuously supporting the industry through thick and thin. As I am sure you know, Banker Middle East is the flagship title of CPI Financial. It is now celebrating its 21st year of publishing and is the only monthly publication solely dedicated to the banking and finance industry in the MENA region. Having survived geopolitical and economic crises, we are now facing a crisis of a different type. We will continuously strive to provide the most comprehensive portfolio of products and services, as well as delivering the highest levels of customer service. Please give me a call and let us know how we can help each other. We will ride out this crisis, together. Thank you for your continued support.

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CONTENTS APRIL 2020 | ISSUE 229

SPECIAL REPORT COVID-19: THE IMPACT

6 8 12 16 18

A quick chat with the WHO Teetering on the edge? Building a contingency plan Volatility and downward pressure Foreseeable pain points for banks

NEWS

20 News Highlights LEGAL PERSPECTIVE

24 The shape of things to come 26 Reciprocating territories: Bridging the gap COVER INTERVIEW

30 A new north on the investment compass

COUNTRY FOCUS

34 A balancing act 40 Economic diversification in Bahrain ISSUE 11

CORPORATE BANKING

42 Digital and analyticsâ&#x20AC;&#x201D;the next horizon in Middle East corporate banking

TRADING AND BROKERAGE

44 The future of trading and brokerage

COVER INTERVIEW 51

TAXATION

46 Tackling taxes

Leveraging a new landscape

CYBERSECURITY 54 A concerted effort

COVID-19: THE IMPACT

LEVERAGING A NEW LANDSCAPE

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

PAYMENTS

56 Four innovations financial institutions in the Middle East should expect to implement

INSURTECH

58 Tech for a good cause

12 4

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

EDITOR'S NOTE

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hese are trying times. I hope you are keeping safe. The world is almost coming to a stop in the face of an unprecedented health crisis. In the weeks leading up to the closure of this issue, COVID-19 has caused things to change so quickly, almost on an hourly basis. Fear and panic reverberated across societies, governments have come together to mitigate the inevitable impact of the outbreak, economies are grinding to a halt—all in a domino effect to fight the spread of this pandemic. COVID-19 has now become the largest near-term challenge for us all. In such bizarre and uncertain times, it is crucial for us to keep positive. Not all is doom and gloom—as Napoleon Hill puts it, “Every adversity, every failure, every heartache carries with it the seed of an equal or greater benefit.” Although it may seem bleak, there are indeed opportunities in times like these. As we embrace a new (temporary) normal, the complete switch in our livelihood and daily routines create new avenues of prospects and improvement. Corporates, including financial institutions, are finding new ways to operate more efficiently as well as create new products and services for a domestic society. What is most prominent is the importance of technology. This is an opportune time to restructure businesses, strengthen contingency plans, implement more cost-efficient measures, create a whole new suite of products and services as well as reinforce technological capabilities in communication and cybersecurity. In this issue of Banker Middle East, we have a section dedicated to COVID-19 where we speak exclusively to the World Health Organisation (WHO). Within these pages you will also see a more detailed picture on how it will impact the region’s banking and finance industry, how it affects financial markets and economies, as well as recommendations on managing these repercussions. Moving on to longstanding issues our industry is facing, we also shed light on the regulations that came in place on bankruptcy and reciprocating territories, economic diversification in Bahrain, taxation as well as new trends in corporate banking and trading. Our cover story this month features the head of BNP Paribas Wealth Management in the Middle East, Masroor Batin, as he shares his thoughts on current market volatility and diversification over the long term. Every cloud has a silver lining; and our hope here at Banker Middle East is to continuously provide you with relevant information and leading recommendations to help you navigate out of this storm. Stay home and stay safe.

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MARILYN BIDUYA marilyn@cpifinancial.net Tel: +971 4 391 4682

cpifinancial.net ©2020 CPI Financial. All rights reserved. No part of this publication may be reproduced or used in any form of advertising without prior permission in writing from the editor. Printed by Al Ghurair Printing & Publishing - Dubai, UAE

Nabilah Annuar Editor, Banker Middle East PUBLISHED BY CPI FINANCIAL FZ LLC REGISTERED AT DUBAI MEDIA CITY, DUBAI, U.A.E.

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SPECIAL REPORT COVID-19: THE IMPACT

A quick chat with the WHO In an exclusive interview with Banker Middle East, Dr Margaret Harris, spokesperson for the World Health Organisation, shares her thoughts on the the pandemic and the panic it has caused

he WHO declared the novel coronavirus (COVID-19) a pandemic. Based on your experience with infectious diseases what is the trend with pandemics? How long do you expect this to last and when would it dial down? We cannot accurately predict how long this will last. Modelling studies are useful for providing scenarios to assist planning but no one at this stage can give an accurate time frame. China and Korea have shown that it is possible to slow down and eventually stop new cases by taking strong, committed public health measures—testing to find every case, isolating all people with a case, finding and quarantining all people exposed to someone infected, protecting health workers by increasing capacity of hospitals, increasing number of medical and nursing team as well as providing physical protection, urging physical distancing and clear messaging and efforts to engage the community and gain the commitment of every member of the community. Singapore took early social distancing measures and used strong effective risk communication to slow their outbreak from the beginning.

Dr Margaret Harris

In your opinion, what are the best measures authorities can take to manage the situation? Learn from the countries that are managing their outbreaks successfully.

Some have said the media coverage surrounding COVID-19 has sparked widespread fear and panic. What are your views on this? It is understandable that people find this a frightening situation and yes, misinformation can exacerbate fear and stimulate panic. Much of this is spread on social media—what we call an ‘infodemic’—and we are working with partners such as Google, Facebook, Instagram etc. to correct and prevent the spread of misinformation. The vast majority of media professionals and outlets have been wonderful, responsible partners working 24/7 to provide accurate, clear information and for this we thank each and every one.

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

“LEARN FROM THE COUNTRIES THAT ARE MANAGING THEIR OUTBREAKS SUCCESSFULLY.” — Dr Margaret Harris

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SPECIAL REPORT

Teetering on the edge? As COVID-19 roils markets threatening to tip the global economy into recession, in an unprecedented move, governments around the world unlock emergency stimulus packages to limit the losses. We take a closer look at this concerted effort and how economies fare in such uncertain times

he economic impact of the novel coronavirus (COVID-19) could be much bigger than originally anticipated. Aside from the human toll, the growing economic implications of the epidemic is casting a darker shadow over the outlook on global growth. The travel and movement restrictions imposed by governments are hurting credit markets. UNCTAD, the UN’s trade and development agency, said that apart from the tragic human consequences of the COVID-19 pandemic, the economic uncertainty it has sparked will likely cost the global economy $1 trillion in 2020. The four main transmission channels of COVID-19 on the GCC region stem from slowing Chinese energy demand from the region, declining Chinese tourism flows into the region, Chinese disruptions to supply chains impacting trade flows into the Gulf and precipitously lower oil prices, said MUFG. Reports on how the outbreak of COVID-19 is affecting supply chains and disrupting manufacturing operations around the world are increasing daily, but economists think the worst is yet to come. Equally important, the outbreak is likely to inflict more pain on non-oil activities in the Arabian Gulf region further, due to disruptions to travel, which has second-order implications for airlines, hotels and the retail industry. While the virus has roiled markets and threatens to tip the global economy into recession, governments around the world are unveiling emergency stimulus packages to mitigate the economic fallout. COVID-19 is forcing authorities to restrict international travel, shut schools and even go into full lockdown in a bid to contain the spread and prevent it from overwhelming public services.

“THE UAE’S AED 100 BILLION TARGETED ECONOMIC SUPPORT SCHEME AND OTHER MEASURES THAT WERE INTRODUCED TO REDUCE THE ECONOMIC EFFECTS OF COVID-19 WILL LIMIT BANKS’ LIKELY MATERIAL ASSET QUALITY DETERIORATION FROM THE VIRUS.” — Moody’s

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

MITIGATION EFFORTS In a globally coordinated move, central banks across the Middle East and North Africa slashed their key interest rates following an emergency move taken by the US Federal Reserve to boost dollar liquidity in response to the impact of the coronavirus outbreak. “Given this outbreak has spread relatively rapidly and policymakers have rolled out a strong response, we also expect a large economic impact throughout H1 2020,” said MUFG. Mark Haefele, Chief Investment Officer of UBS Global Wealth Management, said, “Broad fiscal spending and rate cuts are blunt instruments for dealing with the short-term economic impact of the virus, but should provide investors with some confidence that growth can be strong once the recovery gets underway.” The US Federal Reserve reduced its benchmark interest rate by a full percentage point to near zero and promised to boost its bond holdings by at least $700 billion as the regulator moves to save the world’s biggest economy from the fallout of COVID-19. Following the announcement from World Health Organisation, there has been a wave of activities as governments, central banks, regulators, and firms introduced a series of unprecedented measures to strengthen their economies, operations and portfolios as the threat of economic disruption looms. The UAE’s central bank launched a AED 100-billion stimulus package to support the financial sector urging banks and financial institutions to review and update their business continuity plans to ensure the readiness of the country’s financial sector for a potential worsening of the situation. According to Moody’s, the UAE’s AED 100 billion Targeted Economic Support Scheme and other measures that were introduced to reduce the economic effects of COVID-19 will limit banks’ likely material asset quality deterioration from the virus. Regional banks such as Emirates NBD and Alizz Islamic heeded the call by introducing an array of measures to help support individuals and businesses in their respective countries. Similarly, UAE firms such as Aldar Properties, Dubai Investments, Dubai Holding and Meeras unveiled their economic relief packages to support their portfolio of companies, customers and partners as well as residents and tenants of their properties.

PHOTO CREDIT:Bill Oxford/iStock

COVID-19: THE IMPACT

CHANNELS OF CORONAVIRUS ECONOMIC IMPACT Impact on global economy from the coronavirus Economic effects DEMAND SHOCK Falling consumer demand from spread of the coronavirus

SUPPLY SHOCK Production disruption from restricted movement

FINANCIAL MARKET SHOCK Volatility in financial markets

Channel of impact Travel/tourism slowdown Flight and cruise restrictions to affected areas, cancellation of business and vacation travel, cancellation of large events

Consumption slowdown Quarantine restrictions, school/factory/business closures, fear and aversion to public gatherings

Stress on healthcare systems

Fall in oil/ commodity prices

Higher demand for healthcare services and products

Lower demand keeps commodity prices low and volatile

Supply chain disruptions Factory closures in affected regions lead to delays and shortages down supply chains globally; uncertainty and low sentiment affect investment

Financial market volatility Lower demand keeps commodity prices low and volatile

Sectors affected Negative

Negative

Airlines, cruise lines, hotels, travel/leisure

Local services, wholesale/retail trade, transportation, education

Technology, autos, telecom, shipping, pharma

Healthcare system

Commodity exporters

Financial institutions

Positive Remote communications

Positive Online media, online retail

Positive Sectors that benefit from supply chain relocation

Positive Vaccine developers

Positive Households

Positive Comsumer finance, housing, reservecurrency countries

Source Moody's Investors Service

THE MARKETS Stock exchanges across the Gulf also introduced regulations to curb the domino effect of the coronavirus. Bahrain Bourse, the Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) have temporarily closed their trading floors and customer affairs counters as a precautionary measure to contain the spread of the virus. After a stunning sell-off that was said to be the biggest since the 2008 financial crisis, President Donald Trump’s US bull market has been laid low by a pandemic that threatens to sink the global economy. Financial markets have gone into freefall and volatility has spiked to levels last seen during the global financial crisis. Bloomberg reported that the Dow Jones Industrial Average lost more than 30 per cent of its value in just over a month, almost wiping out all of its gains since President Trump was inaugurated three years ago. The S&P 500 Index was not too far behind the Dow, while the Nasdaq Composite Index’s return remains in the double digits—although on a downward trajectory with the rest. In a calculative move, the UAE’s Securities and Commodities Authority imposed a five per cent daily lower fluctuation limit for shares as markets in Dubai and Abu Dhabi were slowly joining a global rout. However, the regulator left room for some shares to drop as much as seven per cent for a limited number of shares for some chosen companies.

ON A BIGGER SCALE With COVID-19 now present in every continent, the global macro impact has more than doubled. S&P Global stated that after an initially optimistic view, markets have reacted with alarm to the global spread of the virus. There was a 12 per cent

“WEAKER GLOBAL OIL DEMAND WILL STRAIN GCC ECONOMIES AND THE EFFECT WILL BE AMPLIFIED BY CONCENTRATIONS IN CHINA, THE REGION’S LEADING TRADING PARTNER.” — S&P Platts

drop in global equities since recent highs, virtual closure of the bond market, and the sharpest spread widening in history. The key risks of COVID-19 are higher funding costs for more-leveraged borrowers and capital outflow risk for emerging markets that have high external imbalances. S&P Global said that monetary and fiscal policies—already in line with policy-rate cuts from Australia and the US—could help calm markets facing high volatility and uncertainty, although market illiquidity may remain challenging until the severity of the epidemic becomes clearer According to MUFG, from an oil markets perspective, should lower oil prices endure, then this will be a testing period for MENA hydrocarbon exporters that encompass high fiscal breakeven oil prices to fund national budgets and large-scale economic diversification programmes—with lower economic growth, fiscal consolidation and potential credit rating downgrades on the table. The breakdown in OPEC+ negotiations for deeper production curbs in response to reduced oil demand stemming from the COVID-19 pushed oil prices below $40 per barrel, claiming possibly the epidemic’s first casualty. S&P Platts stated that weaker global demand will strain GCC economies and the effects will be amplified by concentrations

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SPECIAL REPORT COVID-19: THE IMPACT

SECTORS' EXPOSURE TO IMPACTS OF CORONAVIRUS VARY-EMEA CORONAVIRUS HEAT MAP High exposure

Moderate exposure

Low exposure

Automotive and auto suppliers

Chemicals

Building materials

Apparel

Manufacturing

Construction

Retail (non-food)

Oil & gas

Technology services

Passenger airlines

Steel production

Real estate

Tourism/Lodging/Cruise

Metals & mining

Retail (food)

Global shipping

Services companies

Telecoms

Consumer durables

Media

Defense

Restaurants

Gaming

Utilities

Leisure & entertainment

Education services

Packaging

Beverages

Pharmaceuticals Healthcare services

Potential positive impact Internet service companies, retail (online), gold mining Source Moody's Investors Service

in China, the region’s leading trading partner. China, the world’s largest crude oil importer, buys around 40 per cent of its crude from the Middle East and the world’s second-largest economy is the largest the region oil buyer globally, at just over four million bpd. Furthermore, COVID-19 is expected to have an unprecedented impact on global air travel compared with previous pandemic or epidemic events such as 2009's H1N1 virus or SARS in 2003. From Australia to Canada, the airline industry turmoil has deepened following a drop in demand triggered by the coronavirus crisis and the government’s advice not to travel. Oman Air, Etihad Airways, Emirates Airline and Qatar Airways are among the regional carriers who are taking measures to survive including asking pilots and crew to take unpaid leave, parking other planes, cut corporate pay and scale back international flights. The International Air Transport Association (IATA) said that governments must urgently consider providing aid to airlines in the Middle East to help them cope with a liquidity crisis due to the coronavirus outbreak. S&P Global said that coronavirus pandemic could reduce global air passengers by up to 30 per cent in 2020. The outbreak of COVID-19 is also presenting the tourism sector with a major and evolving challenge. The World Tourism Organisation (UNWTO) stated that tourism is currently one of the most affected sectors and the organisation revised its 2020 forecast for international arrivals and receipts, although such any predictions are likely to be further revised. The GCC’s hospitality industry, which includes sectors like airlines, hotels, and retail will see lower revenue because of decreased tourism and business flows as travel aversion and restrictions bite during the peak tourism season.

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

Fitch Ratings said that travel aversion and restrictions will also reduce transit and outbound travel by visitors and residents respectively. Several GCC states have suspended their travel connections, as well as restricted entry by foreigners, except for GCC nationals and holders of diplomatic passports. According to S&P Global, Saudi Arabia received 23.6 million tourists in 2018, with a large portion visiting for pilgrimage, while in the UAE, Dubai received 16.7 million tourists in 2019 and the tourism sector contributed 11.5 per cent of GDP at the end of the year. The much-anticipated Expo 2020 Dubai is expected to receive 25 million visitors in just six months and officials expect more than 70 per cent will come from outside the UAE. Moreover, the impact of the epidemic on the region’s hospitality sector also puts the real estate sector in the spotlight. The sector has been under increasing strain for the past three years and the spread of COVID-19 is worsening the situation. Over the first two months of 2020, the volume of real estate transactions in Dubai proved relatively resilient, said S&P Global. The Real Estate Regulatory Authority reported that sales totalled AED 14 billion up from AED 13.9 billion during the same period in 2019. The impact of the COVID-19 pandemic is unfolding in real-time and if the pandemic lasts longer than is currently anticipated then the economic shocks may be significantly greater than expected. The magnitude of the epidemic on the global economy will depend on how quickly the virus is contained, the steps authorities take to contain it, and how much economic support governments are willing to deploy during the epidemic’s immediate impact and aftermath.

SPECIAL REPORT COVID-19: THE IMPACT

Building a contingency plan Speaking to Banker Middle East, Godfrey Sullivan, Managing Director & Partner at Boston Consulting Group, tells us what to expect in the months to come and how to strategise for it

an you give us the best and worst-case scenarios for the financial services sector in this current situation?

There are, of course, many unknowns surrounding the COVID-19 crisis, the first of which is the ultimate impact on human health across the world, and it remains impossible to say how far and wide it will spread before it runs its course. Financial institutions are facing a broad range of operational issues, including how to operate branches if client traffic significantly slows, how to operate trading floors, how to optimise investment management in volatile markets, and how to cope with the profitability hit caused by lower interest rates. The best-case scenario is that the global health community works together efficiently and effectively to find a solution to the crisis in the near future. In terms of impact on the performance of financial institutions, the latest estimates at a global level, even with a significant degree of approximation, show a strong impact. Profitability may drop by 40 to 60 per cent, the cost-to-income ratio may increase by 15 percentage points, margins may decrease by more than 20 per cent, and non-performing loans may surpass 10 per cent.

“FINANCIAL INSTITUTIONS ARE FACING A BROAD RANGE OF OPERATIONAL ISSUES, INCLUDING HOW TO OPERATE BRANCHES IF CLIENT TRAFFIC SIGNIFICANTLY SLOWS, HOW TO OPERATE TRADING FLOORS, HOW TO OPTIMISE INVESTMENT MANAGEMENT IN VOLATILE MARKETS, AND HOW TO COPE WITH THE PROFITABILITY HIT CAUSED BY LOWER INTEREST RATES.” Godfrey Sullivan

— Godfrey Sullivan

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

What are your views on the interest rate cuts and benefit of the financial stimulus in relevant countries for the financial service sector? Central banks such as the People's Bank of China and the US Federal Reserve have already taken measures to anticipate a potential economic slowdown by lowering interest rates with a direct impact on the bottom lines of financial institutions. Such measures could lead banks into unchartered territory given the fact that interest rates are either at historic lows or negative in a number of geographies. It's a given that Europe and Japan have been dealing with negative interest rates for some time now, but US markets are now starting to price negative rates for US dollars. Certain governments will reasonably focus, with specific measures, on avoiding corporate bankruptcy and preventing people from losing their jobs. We are already seeing examples of these measures in the US and Europe, such as postponement of taxation to companies, programmes to support the income of families, or even more extreme measures such as using public funds to inject new equity in companies.

“IN OUR VIEW, BOARD MEMBERS AND MANAGEMENT EXECUTIVES MUST TAKE SPECIFIC STEPS BOTH FOR THE LONG TERM AND THE MEDIUM TERM. IT IS APPARENT THAT THE GLOBAL ECONOMY IS FACING A TRIPLE SHOCK, ON THE SUPPLY SIDE, DEMAND SIDE, AND IN-MARKET CONFIDENCE.” — Godfrey Sullivan, Managing Director & Partner at Boston Consulting Group

What are your views on the current measures taken by financial institutions in reaction to the outbreak of the pandemic? The current measures being taken by financial institutions to navigate the COVID-19 crisis have been both prudent and correct. Around the globe and particularly across Asia, six essential actions have already been deployed:

Profitability may drop by

40 60%

to the cost-to-income ratio may increase by

15 20%

percentage points margins may decrease by more than

and non-performing loans may surpass

10%

• Protecting staff and ensuring business continuity: This includes reviewing business continuity plans, optimising internal communication to accurately and regularly inform staff, and reassuring employees that their well-being is the management's top priority. Simultaneously, institutions are now offering medical consultations and temperature screenings for staff, rotating groups of homebased staff within specific teams, and preparing management continuity if a senior leader is forced to self-quarantine. • Responding quickly and thoughtfully to clients: Institutions understand that clear and regular communication with clients regarding how the crisis is impacting overall financial markets and their savings is essential. Client connections now are being made in a more meaningful way by communicating the regional and global status of the crisis from a health perspective. Informing clients about the evolution of the markets, supporting their decisions not to sell financial instruments at a significant loss during a period of high volatility, and providing fast access to credit such as overdrafts or quick loans is proving very important. • Managing physical networks and promoting alternatives: Institutions are reviewing and promoting alternative channels and accelerating the deployment of the functions required in apps and digital platforms. In Asia, several banks have closed a significant amount of their branches and stopped teller services, making apps, and digital platforms essential. In Europe, some banks are asking clients that have internet banking contracts not to come to branches without an appointment or to use advanced self-service ATMs while cashiers opening hours are being temporarily reduced.

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SPECIAL REPORT COVID-19: THE IMPACT

• Deploying agile and highly reactive stress testing to anticipate diverse scenarios: Banks are setting up rapid and frequent stress testing and scenario analysis to set new limits and make credit card and market decisions. This is due to the unpredictable range and speed at which the coronavirus may spread, and institutions understand the potential implications. • Proactively manage the credit risk of clients, especially corporate ones and SMEs: Companies will experience increasing liquidity needs, that in the term, will be reflected in drawing on the unused part of credit lines. Supporting viable clients with specific solutions and enhancing credit management and collection capabilities for the ones that will not survive the downturn, is crucial. • Launching and accelerating efficiency programmes: We see preparation for a potential downturn and lower revenues moving forward, and banks are beginning to communicate their cost reduction ambitions to the markets and launch immediate, high-return initiatives with medium to long-term time horizons.

“THERE IS CURRENTLY AN OPEN AND ONGOING DEBATE AMONG ECONOMISTS IN RELATION TO WHETHER COVID-19 WILL TRIGGER A SIGNIFICANT ECONOMIC SLOWDOWN, FULLBLOWN RECESSION, OR IF IT WILL FADE AWAY WITHIN A FEW WEEKS OR MONTHS AND PERMIT A REBOUND.” — Godfrey Sullivan, Managing Director & Partner at Boston Consulting Group

• Engaging in active dialogue with public stakeholders, supervisors, and governments: Similar to the financial crisis between 2007-2009, banks are working on government-backed programmes to lend funds to struggling firms, and it is in the interest of lenders to show forbearance toward borrowers under challenging situations.

What are the vital things that board members and management executives should keep in mind in carrying out their business contingency plans? In our view, board members and management executives must take specific steps both for the long term and the medium term. It is apparent that the global economy is facing a triple shock, on the supply side, demand side, and in-market confidence, and this was recently emphasised by the VIX index as it hit 55— not far from the highest ever level in October 2008. The crisis has prompted companies in virtually all industries to seek an optimal way to navigate their way through, and banks need strategies to help maximise their level of resilience and prepare for any macroeconomic and financial scenario.

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

What key elements should also be included in ensuring the continuity and sustainability of the financial institution's business? Financial institutions must take four additional actions to ensure business continuity and sustainability: • Accelerate the move toward digital sales and service: Banks must accelerate both retail and wholesale client migration to online channels and platforms, as well as foster new ways of working and interacting between relationship managers and clients such as phones and video channels. Many have already launched initiatives in this direction and seized the opportunity to make progress on their respective paths to becoming bionic institutions. • Reinvent models: Accelerating discussions and decisions regarding their portfolio of activities is key to continuity and sustainability, with an example being selecting asset class with a "right to win" in capital markets. Moreover, they should speed up analysis and decisions related to deconstructing the value chain, which could lead to determining which parts of the value chain to keep such as client fronting and which parts to outsource, such as trading, back office, and IT. • Prepare for new opportunities: Despite their difficulty to navigate and endure, economic shocks can also present unexpected opportunities. Banks should carefully search and screen potential consolidation opportunities and aim to enhance themselves for years to come. The next economic shock may be even more complicated, and they benefit from lower acquisition prices due to the current conditions. • Rethink planning for low probability and high impact risk events: In the aftermath of the SARS outbreak from 2002-2004, most financial institutions had identified pandemic flu as a critical risk event that could have an adverse impact on their balance sheets and business models. However, this gradually dropped from the risk inventory until the emergence of COVID-19. This is not the last time the industry will be tested, and banks require a more robust framework to be ready for low probability and high impact events.

In light of everything, what is your current outlook on financial markets and the global economy this year? There is currently an open and ongoing debate among economists in relation to whether COVID-19 will trigger a significant economic slowdown, full-blown recession, or if it will fade away within a few weeks or months and permit a rebound. Regardless of what transpires, it is safe to say that financial markets, the global economy, and 2020 revenues and profitability are very likely to suffer as a direct consequence of lower interest rates and a minimum of six months reduced economic activity in base cases. Financial institutions must act immediately and decisively to contain the COVID-19 crisis, strengthen their resilience, and thrive in the post-crisis landscape.

SPECIAL REPORT COVID-19: THE IMPACT

Volatility and downward pressure We take a look at how the pandemic affects corporates and the financial system as a whole

OVID-19 has had an unprecedented domino effect on economies over the last few weeks. Governments, multi-national organisations and central banks have all rallied to contain the repercussions of the pandemic. “The pandemic has put an abrupt end to one of the longest bull-runs in history,” said Mathieu Vasseux, Head of Financial Services MEA at Oliver Wyman. Speaking exclusively to Banker Middle East, he explained, “The massive gains of 2019, with many markets gaining 30 per cent have already been erased. To soften the impact, central banks have intervened by directly purchasing assets from not only banks but also investors, like Bank of Japan, offering repo of a wide range of securities including commercial paper and stocks, performing currency interventions, liquidity injections across the financial system and interest-rate cuts to zero almost across the board for developed countries.” In a recent statement released by Fitch Ratings, the direct impact the outbreak may have on a financial institution’s operations include: 1) Funding and liquidity pressures as well as market valuation losses arising from dramatic movements in the capital markets; 2) A decline in asset quality or market value that may result from exposure to highly affected corporate sectors or as a result of consumer or commercial borrower payment forbearance, delinquencies or defaults; 3) Revenue pressures arising from lower business volumes; 4) The impact on spread and investment earnings from depressed interest rates; 5) Lending and trading activities especially vulnerable to sharply lower oil prices; 6) For insurance companies—the impact of stock market volatility on investment values and capital as well as the impact of heightened insured claims; and 7) The impact of current or potential monetary policy easing, regulatory stimulus, fiscal stimulus, or direct government or parent support. “The impact of COVID-19 will lead to a steep deterioration of credit quality as corporate revenues and personal incomes face a deep decline due to travel restrictions and quarantine measures seen across the globe including the Middle East,” said Vasseux. He said that most large corporates are drawing their full credit lines similar to the recent announcement from Boeing. Others are trying to issue debt, but only the highest quality names can issue in this market environment and at spreads 200bps higher than a few weeks ago. As such, this will increase the prospects of defaults and banks in particular will suffer more losses.

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“The pandemic will also result in higher funding cost, and we already see funding costs double in the high yield segment as issuances slow. We already witnessed a doubling of credit spreads in many segments of high yield,” he added. The reduction of interest rates by central banks may provide some welcome relief reducinng funding stress for banks, monetary easing will not have a direct impact on supply chains nor will it erase the impact of quarantining on businesses. Vasseux urged governments to prioritise fiscal stimulus packages that could soften the impact of COVID-19. He said, “In light of the disruption of the global economy and intervention of central banks, businesses should work towards implementing short-term risk management and mitigations to manage the credit cycle’s rapid shift. This includes adopting early warning systems, collateral management, recoveries and remedials. Legally, many clients might invoke force majeure, which could reduce banks’ recovery ability and trigger complex legal proceedings.”

Mathieu Vasseux, Head of Financial Services MEA at Oliver Wyman

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SPECIAL REPORT COVID-19: THE IMPACT

Foreseeable pain points for banks Bhavin Shah, Partner at Roland Berger’s Dubai office, tells Banker Middle East of his projections and the importance of taking a proactive stance in trying times

Bhavin Shah

“POSSIBLE RATES CUTS AND INCREASED PROVISIONING ON BAD LOANS (DUE TO A DECREASING ASSET QUALITY) ARE LIKELY TO EAT INTO THE PROFITS OF BANKS IN THE REGION.” — Bhavin Shah

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ith everything that is currently going on, what is your outlook on this market for 2020?

Given the grave situation regarding the COVID-19 virus, I believe that it is only fair that we discuss the potential impact of this health crisis on the economy and government measures directed at it. The crisis, declared by the WHO as a pandemic, has already caused the slowing down of several global economies. The US stock market has been sent into a bear state. Trade across the globe is expected to be hit hard; the Middle East is no exception. For the region, the outbreak of the virus could lead to reduced borrowing and lending. In response to this, governments and central banks all over the world have enacted fiscal and monetary stimulus measures to counteract the disruption. The Central Bank of the UAE has announced a comprehensive AED100 billion stimulus package to help retail customers and corporates overcome financial constraints. The Targeted Economic Support Scheme consists of AED50 billion from the Central Bank funds through collateralised loans at zero cost to all banks operating in the UAE and of AED50 billion funds freed up from banks' capital buffers. These measures are aimed at helping retail and corporate customers in tough times and will enter into force with immediate effect. Plethora of other initiatives are being taken by the Central Bank to ease the burden on consumers. While we may discuss the outlook for banking and financial services, we must always remember that the severity of the impact of this pandemic will determine the validity of these outlooks and opinions.

What are your views on the banking and finance sector in this region? The evolution of financial services in the region has arguably been slow and painful over the last decade. Changing customer preferences, aggressive rivals cornering market shares and the regulatory environment have necessitated

enormous strides. Looking ahead to this year, global and regional economic uncertainty signals challenging times for the region's banks. Increasing cost of funds, rates cuts by the Fed, rising non-performing assets, financial crime, cyberrisk and many more factors will pose a threat for GCC banks. We believe that such an environment can provide many opportunities as well. Awareness of these issues coupled with counter innovative strategies, agility, and careful planning can lead banks to better than expected performances. According to our view, taking a proactive rather than reactive stance will be the most important distinguishing factor for a superb leadership performance. All in all, it is safe to say that certain trends are dominating banking in the region: An overbanked region The effects of an overbanked population have recently started to become visible. In the midst of unfavourable economic conditions, smaller banks have suffered more than their larger peers and have struggled to remain liquid. The downward trend in real estate prices has resulted in a decrease in asset quality for these small banks. Consequentially, a wave of consolidation has swept the banking industry. This enables the industry to eliminate excess capacity in the medium run. Technological disruption Even though banks in the region have lagged in this regard compared to global peers, heavy investment has been made in efforts to digitalise product and service offerings. Collaboration between start-ups and established financial institutions is the way forward to drive innovation in the region. Financial inclusion Recent data suggests that the region has seen increased financial inclusion. However, gender and youth inclusion remain important issues to be further discussed and improved Islamic finance The region has witnessed a growth of managed Islamic assets with Shari'ah-compliant product offerings on the rise. For example, DIFC recorded a 45 per cent growth between Q2 2018 and Q2 2019.

Where do the main challenges lie? Macroeconomic conditions 2019 was a turbulent year, to say the least. And we have started 2020 with dangers looming of potentially the biggest pandemic the world has ever seen. This is coupled with a great degree of rising political uncertainty and subdued economic performance. Falling oil prices will likely have a major impact on banking not directly but because funding for most banks in the region comes from the state or state own funds, which are heavily dependent on oil revenues. Two-fold competition Fintech players and foreign banks are proving fierce competitors for traditional banks in the region. The advent of technology driven ecosystems and products is likely to induce structural level change discussions for banking in the region.

“WHILE WE MAY DISCUSS THE OUTLOOK FOR BANKING AND FINANCIAL SERVICES, WE MUST ALWAYS REMEMBER THAT THE SEVERITY OF THE IMPACT OF THIS PANDEMIC WILL DETERMINE THE VALIDITY OF THESE OUTLOOKS AND OPINIONS.” — Bhavin Shah

Independence of banks This is an important factor to ensure sustainability of banks. Banks in the region are often used by governments as tools to serve ulterior purposes. For instance, in Bahrain, retail banks' loans and exposure to the government have been close to 30 per cent in recent years. Reduced profitability Possible rates cuts and increased provisioning on bad loans (due to a decreasing asset quality) are likely to eat into the profits of banks in the region.

Where do you see opportunities? Despite the various challenges and the grim macroeconomic view, there exist silver linings for banking in the region. Technological disruption in financial services is being driven by fintechs. This is an opportunity for traditional banks to collaborate and devise ways to move ahead. An atmosphere of collaboration and partnerships can already be seen evolving. For example, Emirates NBD partnered with DIFC Fintech Hive to enable select fintech start-ups to use their API sandbox to co-create and innovate customer centric solutions. Such partnerships enable the development of superior intelligence and hence, better products and processes. SME financing is also an area of opportunity. Regional governments have identified the need to increase SME contribution to GDP for their economies. The governments have included SME support as part of their national transformation agendas. For example, Monshaat in KSA and the National programme for SMEs in UAE. This translates into an opportunity for banks to make available the correct products for the sector to capitalise on the expected lending.

Bhavin Shah is a Partner at Roland Berger in Global Financial Services Competence Centre, based in Dubai. He focuses primarily on banks, sovereign wealth funds, capital markets, asset management, private equity, development institutions, and regulators. Within these niches, he has specific expertise in strategy, large-scale transformations, restructuring/crisis management, mergers and integration, digital/ fintech, financial crime and regulatory compliance, enterprise risk management, public finance, and economic policies. Bhavin holds an MBA and a Chemical Engineering degree and is an alumnus of Harvard Business School. He has been recently awarded as 'Young Global Leader' by World Economic Forum.

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NEWS HIGHLIGHTS

Dubai banks to offer relief packages to companies, individuals HH Sheikh Mohammed bin Rashid Al Maktoum, the Vice President and Prime Minister of the UAE and Ruler of Dubai has asked local banks to offer companies relief measures including refinancing and repayment referrals as part of measures to mitigate the impact of COVID-19 on the economy. The relief measures will prioritise key industries contributing to the UAE’s economy and sectors most impacted by the coronavirus such as health care, aviation, hospitality and retail. According to the Dubai Media Office, the measures announced by the banks seek to support the UAE Government and the Central Bank of the UAE’s six-month economic stimulus package as well as the Dubai Government’s three-month economic stimulus package to support businesses. The measures include offering refinancing, repayment deferrals or lower repayments where required. From 1 April until 30 June 2020, Dubai-based banks will waive loan repayments for three months for individuals on unpaid leave and small businesses. Dubai-based banks implementing these initiatives are Emirates NBD, Emirates Islamic, Dubai Islamic Bank, Mashreq Bank and Commercial Bank of Dubai. The banks will also reduce the minimum monthly balance for business accounts to AED 10,000 ($2,700).

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UAE, Indian lenders face exposure to beleaguering Finablr Oman plans to trim budget, draft public debt law in response to COVID-19 Oman plans to reduce spending by five per cent in response to COVID-19 and the plunge in oil prices, a day after the Sultanate unveiled a $20 billion incentive package for financial institutions to combat the impact of the new coronavirus on the local economy, reported Bloomberg. The Sultanate is preparing a public debt law and is conducting a comprehensive review of public spending. Oman TV said that the government will conduct a budget review every three months to monitor adherence to spending limits. Oman has additionally approved funds to augment food reserves and to underwrite measures it’s taking to shore up the economy. The government did not say where the money is coming from, but Oman is planning on drawing on reserves and selling assets this year. The Central Bank of Oman said that it’s prepared to add OMR 8 billion ($20.8 billion) in liquidity as a buffer against the economic fallout from the virus, largely skirting a budget that is been battered by the crash in oil prices.

Banks from the UAE and India risk losing millions of dollars due to their exposure to London Stock Exchange-listed Finablr, the foreign-exchange operator that is preparing for potential insolvency, reported Bloomberg. The firm has been hurt by a liquidity squeeze at both group and operational business level as well as the fallout from NMC Health, coronavirus-related travel restrictions and a downgrade of Travelex’s bonds. UAE-based National Bank of Fujairah and Commercial Bank International and India’s Bank of Baroda are still owed about $300 million by Finablr’s parent BRS Ventures, which is owned by Bavaguthu Raghuram Shetty. The loan was used to refinance a bridge loan for the acquisition of Travelex Holdings. BR Shetty pledged around 56 per cent of his shares in the firm as collateral for the loan when he was unable to repay it after Finablr’s initial public offering (IPO) last May 2019. Since listing in London, the shares have plummeted about 93 per cent, giving Finablr a market value of GBP 77 million ($89 million) when it was halted from trading last week that is down from a peak of GBP 1.5 billion in December 2019.

Oman plans to raise $1 billion to plug its budget deficit Oman, the most vulnerable Gulf country in the oil-price war, plans to raise more than $1 billion in loans in the first half to bridge its budget deficit. The Sultanate, which is rated junk by the three major rating companies, is in talks with local and international banks about the borrowing. If oil prices remain low the government will focus on asset sales and reserves to fill a widening gap. According to the International Monetary Fund, Oman is still addressing the impact of the last oil price crash in 2014 and is set to post its seventh straight budget deficit. The largest Arab crude producer outside OPEC calculated its 2020 budget with a deficit of OMR 2.5 billion ($6.5 billion) based on an average oil price of $58 per barrel, way above oil’s current level of about $35 a barrel. Oman’s debt is projected to continue increasing in the next two years, despite Moody’s expectation that the government will begin implementing a significant medium-term fiscal adjustment programme to slow in the next few months and curb the increase in the debt burden.

Saudi Arabia unveils measures to mitigate COVID-19 impact Saudi Arabia has unveiled a series of measures that would enable companies to redirect SAR 120 billion ($32 billion) as they struggle to combat the impact of the coronavirus pandemic. The ministry of finance said that it would exempt the private sector from some government fees and delay other payments, for now saving firms SAR 70 billion. The steps will also allow businesses to delay value-added tax payments for three months. In a statement, the ministry of finance said that the government ‘has the ability’ to diversify its sources of financing between public debt and reserves, enabling it to face the current challenges. The Kingdom plans to switch spending to sectors that are most affected by the epidemic and boost money for health services. The Saudi Arabian Monetary Authority recently launched a SAR 50 billion package to support business, including SAR 30 billion for banks and financing companies that are deferring loans for SMEs.

BlackRock, Italy’s Snam bid for stake in $15 billion ADNOC unit

Saudi government agrees to slash five per cent of 2020 budget

BlackRock, KKR & Co. and Italian infrastructure operator Snam are among firms that made initial bids for a stake in Abu Dhabi National Oil Company’s (ADNOC) natural gas pipelines, which could be valued at about $15 billion. The firms are competing with other bidders including Australian fund manager IFM Investors and Ontario Teachers Pension Plan that submitted first-round offers in recently days. Global Infrastructure Partners and Singapore sovereign fund GIC Pte have also expressed initial interest in acquiring a stake in the business. ADNOC is deciding when to set a timeline for the next round of offers. Travel restrictions have made in-person meetings and due diligence visits more difficult, and other sale processes have been held up as tightening credit markets hampered bidders’ access to funding. The Abu Dhabi state energy giant seeks to sell as much as 49 per cent of the business through a lease structure. Abu Dhabi has been opening up the operations of its state-owned oil producer to foreign partners, part of a push to diversify the UAE’s economy and generate additional sources of funding. ADNOC listed its fuel retail unit and sold a stake in its $11 billion drilling business to Baker Hughes Co. KKR and BlackRock agreed last year to invest $4 billion in ADNOC’s oil pipeline network, securing two decades of guaranteed returns. GIC also bought a stake in the business later.

Saudi Arabia finance minister said that the government has approved a SAR 50 billion partial reduction in 2020 budget, representing less than five per cent, in areas that have the least social and economic impact, according to local newswire, Saudi News Agency. Mohammad Al-Jadaan, Saudi Arabia’s Minister of Finance and Acting Minister of Economy and Planning said that due to the global economic conditions, the Kingdom has taken measures to reduce the impact of low oil prices and additional measures will be taken to deal with the expected drop in prices. Saudi Arabia is working on limiting the spread of COVID-19 to protect government installations and agencies and the continuity of their work. Al-Jadaan said that the government is working on preliminary measures to ensure the provision of the financial requirements necessary to implement the preventive and direct measures to deal with the consequences of the epidemic. “The government will provide all the additional appropriation required and the necessary health services for prevention, treatment and spreading and Saudi Arabia is keen on prioritising social spending and reorienting its spending with the social and economic requirements of the phase,” said Al-Jadaan. Given the potential continuation or exacerbation of COVID-19 effects and its consequences on the global economy, Al-Jadaan said that government developments will be re-evaluated, items of expenditures will be reviewed and appropriate decisions will be taken in a timely manner.

Turkey unveils $15.4 billion aid package to counter COVID-19 outbreak The Turkish President Recep Tayyip Erdogan unveiled a TRL 100 billion ($15.4 billion) plan to help businesses ride out the economic storm caused by the coronavirus pandemic. The government will introduce a set of new measures such as tax cuts and payment deferrals for businesses, and an increase in minimum pension payouts. Turkey is following countries around the world in pledging stimulus packages in coordination with central banks as the global economy grinds to a halt. Infections in Turkey are increasing, a growing threat to tourism and manufacturing industries just as growth was beginning to take off after a downturn. The government said that sectors including retail and transportation will receive a sixmonth deferral on some tax and insurance premium payments. Turkey’s steps come on the heels of an emergency response by the central bank which introduced a slew of measures aimed at easing lenders’ access to liquidity. The Turkish central also lowered its benchmark interest rate by a full percentage point, pushing official borrowing costs adjusted for inflation near the world’s lowest.

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NEWS HIGHLIGHTS

Middle East countries join global stimulus with $47 billion to fight crisis Three of the biggest Arab economies have pledged almost $47 billion in stimulus to limit the economic damage of the COVID19 outbreak, joining a global effort meant to soothe markets and salvage growth. Saudi Arabia unveiled a SAR 50 billion ($13.3 billion) package to support private businesses, soon after its counterpart, the UAE announced an AED 100 billion ($27.2 billion) programme to assist its lenders. Egypt also said that it will allocate EGP 100 billion ($6.4 billion) to combat the coronavirus. The UAE’s Targeted Economic Support Scheme includes an AED 50 billion aid package for banks in the country through collateralised, zero-interest loans. Banks will also be allowed to free up capital buffers, which will make another AED 50 billion in liquidity available to lenders. Saudi Arabian Monetary Authority said that it’s preparing funding to support private businesses, which includes SAR 30 billion available to banks and financing companies in return for deferring SMEs’ loans. The UAE central bank reiterated the longstanding peg of the country’s currency to the US dollar, saying that the oil-rich nation’s ample reserves of AED 405 billion as of 10 March 2020 are adequate to safeguard the stability of the national currency. Days earlier, Iran asked the International Monetary Fund for $5 billion to help it manage the outbreak.

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DIFC shrugs-off global trend, adds 2,000 jobs as registered firms increase Dubai International Financial Centre (DIFC) added more than 2,000 new jobs in 2019, a nine per cent year-on-year increase as the number of active companies at the Middle East’s major financial hub increased to 2,347. The financial hub is home to 737 active financial firms, representing an 18 per cent increase since 2018 and 64 per cent growth in five years. DIFC stated that it attracted 493 new businesses in 2019 and now counts 17 of the world’s top 20 banks, eight of the 10 leading global law firms, three of the top five insurance companies and six of the top 10 asset managers among its clients. Notable registrations in 2019 include AntFinancial’s global payments pioneer WorldFirst, Malaysia’s Maybank Islamic, the US’ Cantor Fitzgerald and Mauritius Commercial Bank. HE Essa Kazim, the Chairman of DIFC Authority Board of Directors and Governor of DIFC, said, “The centre’s success is being powered by our focus on sector diversification, investment in innovation and our unwavering commitment to attracting the best global and local talent.” The Governor of the DIFC said that Dubai’s financial district will be expanded gradually and only when there is demand for new space.

GCC central banks cut rates following the Fed’s decision The Saudi Arabia Monetary Authority (SAMA), the Central Bank of the UAE (CBUAE), the Central Bank of Bahrain (CBB) and the Central Bank of Kuwait (CBK) have slashed key interest rates following an emergency move taken by the US Federal Reserve in response to the impact of the coronavirus outbreak. The UAE’s central bank reduced the interest rate applicable to the one-week certificates of deposit by 75 basis points (bps) and maintained other rates at 50 bps. Kuwait’s central bank cut its deposit rate by 100 bps to 1.5 per cent, its lowest ever. The regulator also slashed its overnight, one-week and one-month repo rates by 100 bps to one per cent, 1.25 per cent and 1.75 per cent respectively. The Saudi central bank also reduced its repo rate by 75 basis points from 1.75 per cent to one per cent and the reverse repo rate by 75 basis points from 1.25 per cent to 0.50 per cent in a bid to preserve the Kingdom’s monetary stability given evolving global developments. Additionally, CBB also reduced key interest rate applicable to one-week deposit facility from 1.75 per cent to one per cent. The central bank also slashed the overnight, the one-month and the CBB lending rate from 1.50 per cent to 0.75 per cent, 2.20 per cent to 1.45 per cent and 2.45 per cent to 1.70 per cent respectively.

SAMA instructs banks to support businesses to avoid job cuts

Central Bank of Bahrain bans freezing of accounts after job loss

Dubai rolls out AED 1.5 billion stimulus package for next three months

The Saudi Arabian Monetary Authority (SAMA) has ordered lenders to provide concessional loans to businesses grappling with the fallout of the coronavirus so that companies will not have to cut jobs, according to local newswire, Saudi Press Agency. The regulator asked banks to immediately put in place a lending programme for at least six months to assist in maintaining employment levels and ensure business continuity as part of a series of the Kingdom’s measures to stem the impact of the COVID19 outbreak on the private sector. Furthermore, the central bank said that banks should also provide relief on debt repayments for any customers that have already been dismissed. SAMA stated that the measures taken include supervisory measures and precautionary policies to counter the impacts of the coronavirus epidemic in order to support banks to help them focus on providing the best banking services to their customers and meet their financing needs in the current circumstances. Bloomberg reported that the measures will come at a cost to shareholders as banks’ revenue will be put under more pressure by the waivers on fees and some interest charges. The central bank said that Saudi lenders should support and finance the country’s private sector by taking precautionary measures that are in the interest of the customer, the bank and the economy, whether by adjusting or restructuring the current funds without any additional costs.

The Central Bank of Bahrain (CBB) has banned retail banks from blocking accounts of customers who have either lost their employment or has retired if that customer has a financing arrangement with the bank, according to local newswire, Bahrain News Agency. The central bank said that the move is aimed at ensuring sound and fair banking practices, taking into consideration the interests of customers. The regulator prohibited the freezing of accounts by retail banks, regardless of whether or not contractually the bank has the right to take such action. The instruction by the central bank to keep accounts accessible following job losses or retirement even if the customer has a credit facility with the lender comes at a time when central banks around the world are weighing measures to mitigate the economic impact of the coronavirus. Across the Gulf region, the Central Bank of the UAE (CBUAE) also urged financial institutions to re-schedule loan contracts, grant temporary deferrals on monthly loan payments and reduce fees and commissions to customers as part of measures to mitigate the effects of coronavirus. The World Health Organisation advised countries to be prepared for a scenario in which the coronavirus turns into a pandemic where economic impact in affected countries can be relatively large.

The Crown Prince of Dubai, HH Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, has announced an AED 1.5 billion economic stimulus package for the next three months to mitigate the impact of the coronavirus on companies and the business sector in the emirate, according to local newswire, WAM. The package seeks to enhance liquidity and reduce the impact of the current global economic situation. Sheikh Hamdan, who is also the Chairman of the Executive Council of Dubai said that the stimulus package will provide the highest support for citizens, residents and investors in these exceptional circumstances. Dubai’s stimulus package seeks to reduce the cost of doing business and simplify business procedures, especially in the sectors of tourism, retail, external trade and logistics services. The package includes the cancellation of the AED 50,000 bank guarantee or cash required to undertake customs clearance activity. A bank guarantee or cash paid by existing customs clearance companies will be refunded. Dubai’s stimulus package also features two initiatives that seek to reduce the cost of living and doing business for citizens, expatriate residents and the business community through 10 per cent reduction in water and electricity bills and a 50 per cent decrease in deposit paid for water and electricity connections.

Sovereign Ratings as of 1 April 2020 Issuer

Foreign Currency Rating

Last CreditWatch/Outlook Update

1 Bahrain

B+/Stable/B

26-Mar-2020

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-/Stable/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 27-Mar-2020 15-Nov-2019 06-Oct-2018 26-Mar-2020 08-Dec-2018 17-Feb-2016 02-Jul-2007 05-Dec-2018 14-Feb-2020

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LEGAL PERSPECTIVE

The shape of things to come Sandeep Puri, Partner and Head of Banking & Finance (UAE) at Baker McKenzie Habib Al Mulla, on the region’s regulatory landscape in 2020 and broader challenges that arise from volatile operating conditions

here is no question that the past twelve months have been challenging for the regional financial sector. The economic slowdown and downward pricing pressures have made it harder for banks to grow revenues, and whilst a number of them have managed to lower costs (partly through redundancies) and post growth numbers, it would be fair to say there still remains a fair degree of uncertainty for the coming months.

A LEGAL RECOURSE

Sandeep Puri

“GIVEN ITS INFANCY, THE NEW PERSONAL INSOLVENCY LAW IS YET TO BE PUT THROUGH ITS PACES BUT IS CERTAINLY A POSITIVE STEP FOR THE UAE, ADDRESSING AN ISSUE IDENTIFIED BY MANY AS BEING THE DRIVING FORCE BEHIND THE NUMBER OF ABSCONDING DEBTORS IN THE UAE.” — Sandeep Puri

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Recognising the dynamic economic landscape and the consequential difficulties faced by consumers and corporates alike, the UAE has taken steps to mitigate such pressures by introducing new policies and processes, with two important developments discussed below. The UAE has developed a new insolvency law applicable to individuals (the Federal Decree-Law No. 19 of 2019 on Insolvency), allowing individual debtors to apply to the civil courts to seek a restructuring of their debts. The new law also protects distressed debtors against legal prosecution through the court-mandated appointment of an expert who works to establish a settlement that aims to resolve the debtor's financial constraints. Given its infancy, the new personal insolvency law is yet to be put through its paces but is certainly a positive step for the UAE, addressing an issue identified by many as being the driving force behind the number of absconding debtors in the UAE. Secondly, following consultation with the UAE, in January of this year we saw a declaration issued by the Central Government of India through the Ministry of Law and Justice, whereby the UAE was recognised as a reciprocating territory under Section 44A of the Code of Civil Procedure, 1908. Such recognition allows for a judgement issued by the courts of the UAE to be directly enforceable in India. The effect of this recognition is that UAE court judgements are treated as though they had been issued by the Indian District Court, potentially saving several years of judicial process, with commensurate anticipated cost-savings. Given the potential exposure of UAE financial institutions to corporate debtors backed by Indian individual sponsors, there has been considerable interest in the Indian Gazette notification, and banks and borrowers alike are waiting with

PHOTO CREDIT: mustafasen/iStock

bated breath to see how successfully UAE judgements will be enforced in India following its publication. This is likely to have a significant impact on the litigation strategy of banks and financial institutions with defaulters who may have fled the country, affecting both banks which already have UAE judgments against Indian defaulters and those who may be looking to bring a claim (having due regard to limitation periods for such claims). The expectation is that whilst banks will continue to feel the impact of global and regional economic headwinds, they are ultimately in the business of lending and will continue to do so, with a continuation of balance sheet lending for strong credits and lending to other corporates albeit with a closer scrutiny of credit terms and security packages.

BROADER CHALLENGES In light of the challenging economic landscape, local governments have continued to play their part in helping stimulate growth. The Government of Dubai, for example, increased its spending by 17 per cent for the 2020 fiscal year budget to AED 66.4 billion ($18 billion), the highest in Dubai's history and which includes significant investment into healthcare, education and infrastructure (including for Expo 2020). The UAE Central Bank has also pre-empted an increase in creditor/debtor discussions and set up the Consumer Protection Department, with the sole aim of protecting consumers of financial services and there is an expectation that further consumer protection regulations will follow. Looking more broadly at the landscape for financial institutions moving forward, 2020 has already been a tough year for many local and regional financial institutions. We have seen a number of large corporates entering into restructuring discussions at a retail level, major economies heading towards recession and the impact from the COVID19 continuing to unfold globally. What has no doubt helped some banks and financial institutions mitigate the adverse impact of these events are the proactive measures taken earlier to consolidate operations and reassess and streamline cost bases. We have also seen banks continuing to take a more conservative approach in their lending practices this year.

“THE EXPECTATION IS THAT WHILST BANKS WILL CONTINUE TO FEEL THE IMPACT OF GLOBAL AND REGIONAL ECONOMIC HEADWINDS, THEY ARE ULTIMATELY IN THE BUSINESS OF LENDING AND WILL CONTINUE TO DO SO, WITH A CONTINUATION OF BALANCE SHEET LENDING FOR STRONG CREDITS AND LENDING TO OTHER CORPORATES ALBEIT WITH A CLOSER SCRUTINY OF CREDIT TERMS AND SECURITY PACKAGES.” — Sandeep Puri

The expectation is that whilst banks will continue to feel the impact of global and regional economic headwinds, they are ultimately in the business of lending and will continue to do so, with a continuation of balance sheet lending for strong credits and lending to other corporates albeit with closer scrutiny of credit terms and security packages. There is likely to be a continued focus on cost-cutting and streamlining business operations, though for now it appears that the bulk of the UAE banking consolidation has already taken place (most recently with the merger of Dubai Islamic Bank with Noor Bank). There may, however, be space for further consolidation particularly in the wider region. As we continue to see global and regional economic pressures impact the UAE, we expect discussions between corporates and banks to centre around restructuring of existing financing arrangements or amending and extending trade facilities. As mentioned above, however, we fully expect local governments and central banks to continue to intervene as needed to facilitate banking business and introduce consumer protection measures to ensure consumer confidence is maintained whilst allowing local banks and financial institutions to remain resilient in the face of the constantly changing economic landscape.

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LEGAL PERSPECTIVE

Reciprocating territories: Bridging the gap Following recognition as a reciprocating territory by the Indian government, UAE banks begin to prepare for legal actions against defaulters in India. Sachin Kerur, Head of Middle East Region at Reed Smith, explains how this new move will impact the banking sector

n January 2020, the Indian Ministry of Law and Justice published an official notification recognising the United Arab Emirates as a ‘reciprocating territory’ for the purposes of enforcement of foreign judgments in India. This development potentially marks the dawn of a new era in the “golden age” of UAE-India trade, commercial, political and legal cooperation. At the same time, it has the potential to open floodgates of litigation and execution action against credit defaulters that have assets in India or have fled to India to avoid enforcement. Banks in the UAE are now said to be in good stead to pursue long-pending claims against their customers from whom financial recovery was, until now, a bleak prospect.

What does the notification entail? The 2020 notification (the Notification) provides that civil judgments issued by superior courts in the UAE are going to be directly enforceable in India, much like a judgement issued

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by an Indian court. “Superior courts” for this purpose are identified as the UAE Federal Courts, the local Emirate Courts as well as the courts of the Abu Dhabi Global Market and the Dubai International Financial Centre. Important exceptions to this enforceability principle are judgments from the UAE criminal courts and those relating to taxation or administrative charges and penalties.

Why is it so important? It is no secret that Indian and Indian-led businesses have a huge presence in the UAE—indeed the Indian expat population represents the largest foreign community in the UAE. Some of the biggest players in the real estate, manufacturing, infrastructure and retail sectors in the UAE are those of Indian origin. Many of these businesses have obtained credit facilities from UAE banks or UAE branches of foreign banks on the back of assets located in other jurisdictions including India and guarantees issued by Indian corporates or individuals.

PHOTO CREDIT: Oleksii Liskonihn/iStock

“BANKS IN THE UAE ARE NOW SAID TO BE IN GOOD STEAD TO PURSUE LONG-PENDING CLAIMS AGAINST THEIR CUSTOMERS FROM WHOM FINANCIAL RECOVERY WAS, UNTIL NOW, A BLEAK PROSPECT.” — Sachin Kerur

It has historically been next to impossible for a creditor to enforce a debt obligation against Indian assets or Indian individuals who have, following a default, fled home to India. Prior to the Notification, many Indian obligors exploited the ‘non-reciprocating’ territory status of the UAE to delay or avoid altogether the enforcement of a UAE court judgement. The only option for a bank in such a scenario was to initiate fresh civil proceedings in the Indian courts, seeking an Indian judgement which could then be enforced against the debtor’s Indian assets. The immense cost, time and inconvenience of litigating in India would usually deter banks from undertaking this route. This is expected to change with the issuance of the Notification. The level of change is something only time will tell, once there are some concrete legal precedents in place under the new regime. It should be noted that there are still grave concerns around the ultimate feasibility of bringing enforcement proceedings in India due to the lengthy delays typical of Indian court procedures.

current outstandings. Investigations also need to be made into the whereabouts of any individual defaulters and whether they have any valuable assets in India against which attachment can be sought. If there are existing UAE court judgments against any of these creditors, applications for the recognition and enforcement of such judgments in India will likely be the next course of action.

Formulating future credit and risk strategies The ultimate enforceability of a debt obligation against a borrower and its assets has immense bearing on a bank’s credit risk assessment. The idea that Indian defaulters will no longer be able to find a safe haven in their home country is likely to have a positive impact on UAE banks’ risk profiling of transactions with Indian counterparties. This will also perhaps facilitate the acceptance of guarantees by Indian companies and natural persons by banks in the UAE. It would be interesting to see how third-party litigation funders approach the change in the legal enforcement regime. One would expect that they would be more keen to fund litigation and enforcement proceedings against Indian businesses. If this happens, it will provide an additional comfort to UAE-based lenders.

All is well that ends well? While it remains to be seen how Indian court practice in relation to enforcement of UAE judgments evolves, the Notification should boost UAE banks’ confidence in Indian credit. Improved enforceability prospects also means that more UAE-centred disputes involving Indian counterparties are likely to be litigated in the UAE courts. We would expect to see more banks opting for dispute resolution clauses in credit agreements in favour of UAE courts rather than, for instance the courts of England or arbitration provisions. All in all, the development brought about by the Notification justifies a re-visiting of transactional risk and litigation strategies adopted by UAE banks in respect of its existing and potential Indian customers.

How UAE banks need to position themselves? It has been reported that quite a few UAE banks are considering commencement of execution action against defaulters in India as well as, in some cases, knocking on the doors of India’s insolvency court, the National Company Law Tribunal (NCLT). Obtaining expert advice from Indian legal practitioners is essential in this respect. Banks with Indian exposure on their books need to conduct internal audits to identify the relevant defaulters and their

Sachin Kerur

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For over 20 years, Banker Middle East has been serving the banking and financial community in the region. We are the longest-running GCC-based banking publication, continuously supporting the industry, providing informed commentaries, news, in-depth articles and analyses. As part of our integral role in the regionâ&#x20AC;&#x2122;s banking sector, we benchmark, recognise and actively encourage excellence within institutions. The Banker Middle East Industry Awards 2020 will give due recognition to the outstanding institutions that have shaped and continue to shape the financial landscape. Such achievements should be lauded accordingly, and as we have grown with the industry, we would like to thank you for your continuous support for the Banker Middle East Industry Awards, without which we would not be able to produce the most prestigious event in the banking calendar.

METHODOLOGY After each and every awards ceremony, together with feedback from the industry, throughout the year, we conduct our own research to ensure that our awards categories accurately reflect the current banking landscape and comprehensively recognise the achievements of the industry. As a result, we have expanded to 47 award categories that provide regional recognition to exceptional financial institutions across the wide spectrum of banking and finance, with added focus on technology to reflect the industryâ&#x20AC;&#x2122;s ongoing transformation. Institutions can nominate themselves in all relevant categories as deemed appropriate, provided the submission is sent in before the deadline, and in the required format. Award submissions will be critically evaluated and mutually analysed, utilising market knowledge, marketing materials, research and relevant company financial statements, before a shortlist is made. The editorial team will then create the shortlist based on those submissions, which will be announced on the CPI Financial website. The shortlist and all submitted materials will be then given to the judging panel which comprises senior executives from research and rating agencies, management consultancy firms as well as accountancy and auditing firms. The judging panel will then score each shortlisted institution for each category from 1-5, with scores sent back to the editorial team, which will tabulate the scores, along with independent scores from the editorial team itself. Each institution will be judged on five criteria: financials, marketing strategy, corporate strategy, digital adaptation and client care*, all of which will carry a 20 per cent weightage per criteria in the scoring system. The institution in each category with the highest score will be declared the winner. Winners will be notified in advance and trophies will be presented at the awards ceremony. *The client care criteria will require a submission of client testimonials and/or accolades won.

AWARD CATEGORIES Leaders in Banking and Finance 1. Best Bank in the Middle East 2. Lifetime Achievement Award 3. Banker of the Year 4. Outstanding Contribution to Banking & Finance 5. Leadership Excellence Award Financial Services 6. Best Retail Bank 7. Best Islamic Bank 8. Best Corporate Bank 9. Best Commercial Bank 10. Best SME Bank 11. Best Insurance Provider 12. Best Takaful Provider 13. Best Private Bank 14. Best Trade Finance Institution 15. Best Bank for Sustainable Financing 16. Best CSR Programme 17. Fastest Growing Bank 18. Capital Market Transaction of the Year 19. Best Marketing Campaign 20. Best Brand Positioning

Service Providers for the Banking Sector 29. Best Audit Firm 30. Best Accountancy Firm 31. Best Law Firm 32. Best Management Consultancy 33. Best Research & Consultancy Firm 34. Best Ratings Agency Technology 35. Best Digital Bank (Neobank)* 36. Best Mobile Banking Solution 37. Best Online Banking Service 38. Best Innovation in Digital Banking 39. Best User-Experience 40. Best Digital Transformation 41. Best Cybersecurity Implementation 42. Best Payment Solutions Provider 43. Best Cybersecurity Provider 44. Best Communications Infrastructure Provider 45. Best Core Banking Service Provider 46. Best Digital Banking Innovation Provider 47. Special Achievement in Digital Innovation *Our interpretation of a digital bank is a bank that operates exclusively on a 100%

Investment 21. Best Investment Bank (Conventional) 22. Best Investment Bank (Islamic) 23. Best REIT Manager 24. Best Wealth Management Firm 25. Best Private Equity Firm 26. Best Project Finance Institution 27. Best Brokerage Solutions Provider 28. Best Investment Management Firm

SUPPORTED BY

digital and mobile platform with no physical branchesâ&#x20AC;&#x201D;which is now often referred to as a Neobank. A digital bank is NOT a bank that offers digital and mobile solutions in addition to its traditional banking services.

SAVE THE DATE! 14 OCTOBER 2020 Dubai, United Arab Emirates

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COVER INTERVIEW

A new north on the investment compass In an exclusive, Masroor Batin, CEO for Middle East and Africa at BNP Paribas Wealth Management, talks about the shift from fixed income assets to equities and the rise of young, sophisticated investors

hat are your projections for 2020?

2019 began with a bit of a shock because the markets experienced a sharp correction at the end of 2018. However, 2019 eventually proved to be one of the best years on record with positive returns across most major asset classes. For example, the S&P 500 recorded a 31 per cent increase making it one of its best performances ever. 2020 also began with a shock. The global spread of the COVID-19 virus and, relatedly, a steep fall in the price of oil have contributed to significant market volatility as investors seek liquidity in the face of uncertainty. Markets for many asset types have experienced sharp movement as investors have reacted to the possibility of an abrupt slowdown in the global economy, disruption to travel and transport, and an unexpected tightening of credit. It is too early to say with certainty how this issue will play out. But it is clear that the policy response of international governments will play a large role in determining the intensity and duration of the acute stage of the pandemic. There is no easy fix, but a decisive and coordinated response (compared to a delayed and uncoordinated response) will mitigate the spread of the illness and hasten the subsequent economic recovery. Firm action now, exhibiting clear thinking, transparency and strong leadership, will help to accelerate the eventual return of household and business confidence, both of which are critical to long-term economic growth and market stability. Even putting the unpredictable effects of COVID-19 aside, the world is currently in the twilight stage of a long-term economic cycle. Wise investors are therefore those who have built solid levels of defensiveness into their portfolios. The key is diversification. I am absolutely convinced that in 2020, more than any other year, diversification is the cornerstone

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of a successful investment strategy. Even if some asset classes do ultimately outperform others, on a risk-rated basis, pursuing a broad mix of investments at the outset is the most sensible approach given the unprecedented levels of uncertainty and volatility.

What are the implications of regional political developments for the wealth and asset management sector? We have a confident outlook on our regional business. Developments such as the inclusion of local markets (e.g. Saudi Arabia) into significant global indexes have increased liquidity, attracted capital, and put the region on the map. The record-breaking IPO of Saudi Aramco in December 2019 had a similar effect. Many commentators have recently been fixated on various geopolitical issues. This is understandable, but their impact on our business—and indeed, on the regional wealth management sector more broadly—should not be overstated. The latest happenings have not turned investors off the region. Investors are very familiar with the long-term factors at play, and these considerations are already embedded into their decision-making. And perhaps most importantly, longterm wealth creation in the region has not slowed down, meaning that the pipeline of customers seeking global access, expertise and diversification opportunities continues to expand.

From where you’re sitting, what interesting themes do you see in wealth management? Through our own research and conversations with clients, we have identified 10 investment themes for 2020, which we have grouped into four broad ‘opportunities’.

“THE KEY IS DIVERSIFICATION. I AM ABSOLUTELY CONVINCED THAT IN 2020, MORE THAN ANY OTHER YEAR, DIVERSIFICATION IS THE CORNERSTONE OF A SUCCESSFUL INVESTMENT STRATEGY.” — Masroor Batin

Masroor Batin

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COVER INTERVIEW

The first opportunity is that investors are increasingly looking for yield. Getting good returns from fixed income assets is tough in the current environment, which is characterised by sluggish economic growth and low inflation, and this is set to remain the case for a long time. The picture is illustrated by the fact that, in Europe for example, almost 20 per cent of fixed income assets are negative yielding. For example, we look carefully at stocks which have a stable and growing dividend element baked into them. We call these ‘dividend aristocrats’—quality companies which are soundly managed, return a regular income, and still provide opportunity for capital growth. We expect these types of stocks to be very popular in 2020. The second opportunity is that investors increasingly want to take advantage of global megatrends. There are plenty of examples of this, but I will give you two.

“EVEN PUTTING THE UNPREDICTABLE EFFECTS OF COVID-19 ASIDE, THE WORLD IS CURRENTLY IN THE TWILIGHT STAGE OF A LONG-TERM ECONOMIC CYCLE.” — Masroor Batin

The first megatrend is deglobalisation. As the discourse of international trade comes under pressure from various directions, opportunities are springing up for investors in regional and local markets, including mid- and small-cap investments which tend to be more domestically orientated and therefore less reliant on extensive global supply chains. Some of our clients who have a medium- to long-term strategy and who have a relatively high-risk tolerance are looking with interest at this trend and capitalising where possible. The second megatrend we have observed is an expansion of opportunities around infrastructure spending. For many governments, catatonic interest rates mean that monetary policy cannot provide meaningful economic stimulus going forward. In this context, fiscal policy is an increasingly attractive solution. As governments spend more money on large-scale construction projects, energy facilities, and water and waste management services, investors are eyeing the good investment opportunities that this trend is throwing up. Returning now to the broad opportunity areas, the third is the growing popularity of sustainable investment strategies. This is a global trend, observed right across BNP Paribas global network. But it is particularly pronounced in this region, where a burgeoning class of young, entrepreneurial and conscientious investors has an explicit desire for its investments to bring about a positive social and

Masroor says that the growing demand for sustainable investments is a worldwide trend but it is particularly prominent in the Middle East.

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environmental impact. BNP Paribas Wealth Management is doing a lot of work to raise awareness and understanding of sustainable investment opportunities with our clients. Finally, we see potential upside in structural trends such as disruptive technology innovation. In the healthcare sector for example—the growth of the internet, the new means of communications (such as 5G) and artificial intelligence have considerably changed the industry at every level. The genome-sequencing methodology is a true revolution in treatment methods, and we believe that investors should consider these trends very closely.

How are your clients changing or adjusting their asset allocation over time? BNP Paribas Wealth Management serves Very High Net Worth and Ultra High Net Worth clients. In general, these investors are defined by their sophisticated approach. They want a global platform, good access to credit, and local and international diversification expertise. They partner with us because we provide these things. When it comes to changing asset allocation, a few patterns stand out. One, which I’ve already discussed, is that clients are looking to equities as a source both of growth and of income. Another is that many of our clients are keen to in diversify into “real assets” such as property and real estate. In a low interest rate environment, securing financing for these sorts of investments provides a positive carry given that the yields remain quite good. BNP Paribas is helping more and more clients identify real estate assets, financing them through our wealth management platform, and in some cases, even providing management services. To my knowledge, no other bank has such a comprehensive brokerage platform for real estate assets. Finally, a growing number of our clients are looking at private equity investments. Given the low growth environment and the fact that, at this late stage in the economic cycle, many asset valuations are quite high, private investments are an appealing proposition because they can target sectors such as technology which would be hard to access through public markets.

Is there currently strong demand for sustainable investments from your clients? To answer this question, it is helpful to first define sustainable investments. Simply put, they are investments which have a positive impact on any of the 17 United Nations sustainable development goals. These cover areas such as the environment, social inclusion, healthcare, education, and gender equality. Sustainable investments involve assets which benefit society as well as delivering sound returns for their owners. Growing demand for sustainable investments is a worldwide trend, but we see it very clearly here in the Middle East. In fact, this region is already familiar with the concept of values-based investing, because it is a key principle of Islamic finance. This has led to high levels of engagement on the issue with our local clients, many of whose activities centre around BNP Paribas’ ‘myImpact’ tool. This tool helps clients to define their goals and the impact they would like to have on environmental and social issues, which then allows us to identify and develop corresponding solutions. It is hard to isolate a specific driver of demand for sustainable investments, but I think that two observations are illuminating.

BNP Paribas Wealth Management has

EUR 393

billion in assets under management as of December 2019

The first is that many investors—especially the young entrepreneurs who form a growing share of our client base— bring to their financial decision-making an expanding range of ethical considerations. According to our 2018 BNP Paribas Global Entrepreneur report, 39 per cent of elite entrepreneurs want their investments to advantage society. There are many inspiring examples of organisations and public figures seeking to make our planet a happier and more responsible place. This spirit is shared by many investors. It is not simply that they want to tick a ‘sustainability box’ when it comes to evaluating their portfolios. Rather, they have an intrinsic interest in their investments delivering a positive impact and they adjust their strategies if this doesn’t happen. The second observation is that good companies with a positive social effect tend to have superior valuations compared to other companies. This point is worth emphasising. Ultimately, our clients are sophisticated investors looking for optimal returns from their capital. In most cases, assets with a positive external impact will be the best option for them judged by that objective, because companies rated highly on sustainability measures usually perform well in terms of the risk-reward trade-off. So sustainable investments make sense for them both ethically and financially.

“INVESTORS ARE VERY FAMILIAR WITH THE LONG-TERM FACTORS AT PLAY, AND THESE CONSIDERATIONS ARE ALREADY EMBEDDED INTO THEIR DECISION-MAKING. AND PERHAPS MOST IMPORTANTLY, LONG-TERM WEALTH CREATION IN THE REGION HAS NOT SLOWED DOWN.” — Masroor Batin

What are your growth plans for the region? I was appointed the CEO for BNP Paribas Wealth Management in this region in 2018 with a clear mandate to accelerate a regional growth strategy based on global expertise and deep client understanding. As I see it, the core challenge lies in providing a truly exceptional client experience. We want to achieve this by simplifying the clients’ interactions with the bank and providing them easy access to the full breadth of our global and regional capabilities. Another step we have taken to get closer to our clients is to switch from a ‘location-based’ approach to a ‘marketbased’ approach. Today, our four key markets in this region are Saudi Arabia, the rest of the GCC, non-resident Indians, and Middle Eastern families who live in Europe and the UK. Our strategy is defined by how we can serve these groups best, not where we serve them from.

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COUNTRY FOCUS

A balancing act Bahrainâ&#x20AC;&#x2122;s credit strength is supported by a very high per capita income, a well-diversified economy and a positive international investment position

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WALK THE TALK Bahrain’s 2019 state budget projected a narrow deficit from 6.2 per cent in 2018 to 4.7 per cent in 2019 and subsequently 3.9 per cent this year. According to the World Bank, Bahrain had a $1.07 billion budget deficit in Q1 2019, down from $1.7 billion a year earlier, indicating that deficit-reduction programme is on track or even ahead of schedule. Fitch Ratings said that the narrow budget deficit marks an improvement in fiscal policymaking. However, Fitch does not

“THE GOVERNMENT UNDERTOOK TWO SIGNIFICANT REFORMS IN 2019, THE IMPLEMENTATION OF VAT AND A VOLUNTARY RETIREMENT SCHEME, UNDER WHICH MORE THAN 8,000 CIVIL SERVANTS HAVE RETIRED IN EXCHANGE FOR A PACKAGE OF BENEFITS.” — Fitch Ratings

expect the state budget to reach balance by 2020 as envisaged by the FBP due to further declines in oil prices, the impact of Covid-19 on the Kingdom’s economy and the difficulty of extensive subsidy reform and revenue mobilisation. As with other GCC states, the availability of secure, wellpaid, public sector jobs has come to be regarded as part of the social contract between the state and its citizens. The Oxford Business Group also stated that the centrality of this tacit understanding was demonstrated in 2011 when the unrest of the Arab Spring movement was felt in Bahrain. Under the FBP, Bahrain plans to boost non-oil revenue, trim the public sector, slash expenditures and increasing water and electricity tariffs. The government undertook two significant reforms in 2019, the implementation of value-added tax (VAT) and a voluntary retirement scheme (VRS), under which more than 8,000 civil servants have retired in exchange for a package of benefits, said Fitch Ratings. The Kingdom plans to shrink its public sector workforce by around 15 per cent through VRS. Under the FBP the government noted that the VRS encompasses various incentives, key among which is granting up to five years

PHOTO CREDIT: Phil Weymouth/Bloomberg

espite the oil sector contributing less than 20 per cent to GDP, fiscal revenues are heavily dependent on oil, and the fall in prices nearly brought the economy to its knees in 2014. Bahrain has a relatively diversified economy, a well-regulated financial sector and generous wealthy Gulf neighbours. The International Monetary Fund (IMF) said that lower oil prices since 2014 had intensified macroeconomic vulnerabilities but Bahrain responded with a Fiscal Balance Programme (FBP) in October 2018. The programme provided a roadmap for addressing the country’s fiscal challenges and it also seeks to balance the budget by 2022. At the core of FBP is a five-year financial aid worth $10 billion that Bahrain secured from Saudi Arabia, the UAE and Kuwait to relieve pressure in currency and debt markets as well as adjust its finances, which are still reeling from the 2014 oil slump. Bahrain’s credit strength is supported by a very high per capita income, a diversified economy compared with fellow GCC states and a positive net international investment position, together these factors provide some shock-absorption capacity. According to Moody’s, “Bahrain’s credit profile is also backed by the Gulf financial support package which was equivalent to more than 25 per cent of GDP.”

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COUNTRY FOCUS

of service, a one-off direct cash compensation equal to the cost of purchasing five additional years of service an end-of-service promotion for those eligible, plus an end-of-service indemnity. Similarly, Bahrain introduced a five per cent VAT in January 2019 which is applicable on non-essential goods and services in line with the GCC’s Unified Agreement for VAT. S&P Global stated that the introduction of VAT and VRS is projected to help the budget by around 1.6 and 0.8 per cent of GDP, respectively. Bahrain’s subsidy reform has been ongoing since 2015, with yearly utility price increments. The government aims to save around BHD 145 million by balancing the spending and revenue of the Electricity and Water Authority. Fitch Ratings stated that the final scheduled increases for water, electricity and fuel was implemented in 2019 and future plans remain unclear. The country’s scheduled gas price increases run until 2021 and the government is also expecting to add BHD 150 million to gas sales revenue in 2019-2021. Bahrain’s structural reform measures also include setting up new units which will monitor spending, streamline processes and improve transparency across government departments. Internal audit and central government procurement units within the Ministry of Finance together with the newly established debt management office are also part of this initiative.

“WE EXPECT BAHRAINI BANKS TO MAINTAIN STRONG CAPITAL, AS SOLID PROFITS WILL GENERATE SUFFICIENT CAPITAL TO BALANCE RISING RISK-WEIGHTED ASSETS CAUSED BY LOAN GROWTH. AND THEIR PROFITABILITY WILL REMAIN SOUND, FUELLED BY RISING LENDING VOLUMES AND STABLE PROFIT MARGINS.” — Ashraf Madani, VP-Senior Analyst, Moody’s

“A more rapid fiscal consolidation than expected that stabilises and eventually decreases the government’s debt burden would be positive for the sovereign credit profile,” said Moody’s. The IMF commended Bahrain’s ongoing efforts to strengthen debt management and institutionalise the fiscal framework, urging the authorities to promote greater data transparency to enhance the credibility of their fiscal reform plans. Bahrain received around $2.3 billion from a five-year financial support package provided by its Gulf Arab allies last year and the Kingdom is set to receive $1.76 billion in 2020, $1.85 billion in 2021, $1.42 billion in 2022 and $650 millionin 2023. According to Fitch Ratings, the $10 billion Gulf support package of long-term interest-free loans to be disbursed in 2018-2023 is further evidence of the strength of Gulf backing for Bahrain, which is key support for the rating.

A SOUND FINANCIAL SYSTEM A powerful driver of economic and non-oil growth, Bahrain’s banking sector plays an important role in ongoing diversification and development efforts. The Oxford Business Group suggests that Bahrain has managed to maintain its status as a regional financial centre even despite growing competition from the UAE and Saudi Arabia.

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In October 2019, Moody’s revised its outlook for the country’s banking sector to stable from negative following months of economic recovery and the $10 billion support package from Bahrain’s Gulf neighbours which is expected to support liquidity and stabilises operating conditions for banks. “We expect Bahraini banks to maintain strong capital, as solid profits will generate sufficient capital to balance rising risk-weighted assets caused by loan growth. And their profitability will remain sound, fuelled by rising lending volumes and stable profit margins,” said Ashraf Madani, VP-Senior Analyst at Moody’s. A substantial and sustained rebuilding of the central bank’s foreign-currency buffers that materially decreases external vulnerability would also be positive. In a report, Gulf Economic Report Issue 5, the World Bank said that the Central Bank of Bahrain (CBB) has an extensive record of fintech regulatory innovation across the Gulf region. The central bank launched a regulatory sandbox in May 2017, introduced crowdfunding regulations in August and launched an internal fintech and innovation unit in October the same year.

PHOTO CREDIT: Mlenny/iStock

Under the Fiscal Balance Programme, Bahrain plans to boost non-oil revenue, trim the public sector, slash expenditures and increasing water and electricity tariffs.

Last year, the regulator drafted an electronic knowyour-customer (e-KYC) in May 2018, issued final rules on open banking in December 2018 and issued final rules on cryptoassets as well as piloting cross-border testing of fintech firms a year later. The National Bank of Bahrain (NBB) launched openbanking services in May 2019, allowing account holders to share their account information and payment histories externally with other lenders. Almoayed Technologies, a Bahraini digital-infrastructure provider, is working with banks to support open-banking system, said the World Bank. With a large number of small-sized banks serving a small bankable population, there is no escaping the fact that Bahrain is overbanked, driving consolidation among local lenders and in some cases opening opportunities for cross border mergers. NBB acquired a 78.8 per cent controlling stake in Bahrain Islamic Bank in January 2020. Kuwait Finance House’s shareholders also approved the acquisition of Bahrain's Ahli United Bank in January, a step closer to the completion of the region’s first cross-border merger in recent years.

“BAHRAIN’S CREDIT PROFILE IS ALSO BACKED BY THE GULF FINANCIAL SUPPORT PACKAGE WHICH WAS EQUIVALENT TO MORE THAN 25 PER CENT OF GDP.” — Moody’s

The government also launched the Global Islamic and Sustainable Fintech Centre to spur the development of the national fintech industry and accelerate the growth of Islamic finance in Bahrain. The centre’s international partners include the Islamic Corporation for the Development of the Private Sector, the Accounting and Auditing Organisation for Islamic Financial Institutions, Al Baraka Banking Group, Islamic Fintech Alliance and Ethis Ventures.

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COUNTRY FOCUS

Bahrain’s banking system remains stable with large capital buffers and central bank’s continued efforts at supervisory and regulatory vigilance, said the IMF. With financial technology developing rapidly, and profits, soundness indicators and asset growth remaining healthy, the banking sector is well-positioned to continue leading non-oil growth and diversification in Bahrain. Bahrain returned to the debt market after receiving financial aid from its oil-rich Gulf allies. Bahrain issued $2 billion of bonds in late September 2019, $1 billion Sukuk, due in 2027 with a yield of 4.5 per cent and $1 billion of conventional bonds due in 2031 with a yield of 5.6 per cent. The country’s external amortisation schedule was limited last year but is expected to increase, with $4.9 billion of external medium-and long-term debt maturing in 20202022, the remaining GCC financial aid package will go towards funding maturing debt. Bahrain is expected to tap international markets soon given other FX needs and its low level of FX reserves, said S&P Global.

“THE COUNTRY’S HAD A $1.07 BILLION BUDGET DEFICIT IN Q1 2019, DOWN FROM $1.7 BILLION A YEAR EARLIER, INDICATING THAT DEFICITREDUCTION PROGRAMME IS ON TRACK OR EVEN AHEAD OF SCHEDULE.” — The World Bank

AN ENABLING ENVIRONMENT Bahrain is expected to record moderate growth at an average of 2.2 per cent over 2020-2021 as the economy continues to rely on its limited oil revenues to underpin the safety net for citizens while furthering diversification, said the World Bank. Moreover, the Kingdom’s non-hydrocarbon economy is also projected to grow three per cent over the same period thanks to high levels of infrastructure spending and an increase in manufacturing output. The IMF urged the government to implement additional fiscal and structural reform efforts to strengthen Bahrain’s fiscal and external positions. “Additional fiscal and structural reforms will also promote inclusive and sustainable growth while preserving financial stability,” said the IMF. The country’s construction sector—one of the main contributors of employment and GDP—has continued to expand in recent years, despite slower regional growth. The hospitality industry is performing well, and construction continues to grow robustly, supported by a raft of infrastructure projects. According to the Bahrain’s Economic Development Board (EDB), the country’s industrial and logistics development is being driven by key infrastructure projects worth around $33 billion. Construction has long been a stalwart of Bahrain’s economy and with a raft of new megaprojects on the horizon, it is likely to play an even more prominent role. Overall, construction increased by 6.2 per cent in the first three quarters of 2018. Large projects such as the commissioning of the Alba Line 6 which will boost the firm’s annual production by 540,000 tonnes to 1.5 million tonnes per year will potentially make Alba the world’s largest aluminium smelter outside of China.

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The Bapco Modernisation Programme (BMP) which is slated to be commissioned in 2022 and the Bahrain International Airport’s $1.1 billion expansion are just some of the many large-scale infrastructure developments underway in the Kingdom. The construction sector is receiving support from projects being run by government-related entities or linked to the GCC Development Fund, alongside substantial privatesector developments. The GCC Development Fund, a $20 billion aid package for Bahrain and Oman, was launched in March 2011 by other GCC countries to support the two countries’ economies, create jobs and improve housing and infrastructure projects. The government expects annual disbursements from the GCC Development Fund to average $1 billion between 2019 and 2022.

STAYING COMPETITIVE Bahrain has one of the most liberalised foreign investment frameworks in the region. EDB stated that there are no free zone restrictions in Bahrain and 100 per cent foreign ownership is allowed for most activities. Bahrain also requires an average of 30 per cent lower operating costs than its wealthy GCC allies. Moreover, the Kingdom’s bankruptcy law is significant in luring foreign investment and it supports the growing community of SMEs. Bahrain’s bankruptcy law is based on Chapter 11 insolvency legislation in the US, which provides companies in financial difficulty with an opportunity to restructure under court supervision, said EDB. The country has seen a rapid increase in foreign investment over the past years and wants to cement gains by boosting its corporate legislation and making it more business friendly. According to the World Bank’s Doing Business 2020 report, Bahrain was ranked among the top 10 most improved economies in the world, up 19 places to 43rd in an assessment of 190 countries, that is based on the number of economic programmes and legislative reforms each country has enacted. Bahrain implemented the highest number of regulatory reforms (nine), improving in almost every area measured by the World Bank. The policymakers reformed enforcement of contracts, dealing with construction permits, registering property, protecting minority investors, receiving credit, resolving insolvency, trading across borders, getting electricity, and paying taxes.

OUTLOOK Bahrain’s fiscal breakeven oil price is estimated at around $92 per barrel in 2020. With current oil prices hovering between $31-55 per barrel, Bahrain’s fiscal revenues will be dragged down—as hydrocarbons account for around 60 per cent of fiscal revenues—its deficit will persist, and debt increase further. “Bahrain’s public finances are highly sensitive to oil price fluctuations because of a very high share of oil-related revenues in government revenue and a very high fiscal breakeven oil price,” said Alexander Perjessy, a Moody’s Vice President – Senior Analyst and the report’s co-author. While Bahrain continues to enhance its investment ecosystem, its economy is likely to feel the impact of Covid19, geopolitical tensions, a global economic slowdown and the recent oil price war. Bahrain’s central bank slashed its key interest rate following a full percentage point rate cut by the US Federal Reserve as an emergency monetary policy response to the coronavirus impact on growth.

BAHRAIN in numbers POPULATION

MEDIAN AGE

1.7 million

32.5 years

3.9% (2020 – projected)

Source: Worldometers (2020)

Source: IMF

UNEMPLOYMENT RATE

Source: Worldometers (2020)

FISCAL INDICATORS

GDP

CURRENT ACCOUNT BALANCE

NOMINAL GDP

$35.4 billion (2017) $38.3 billion (2018) $39.0 billion (2019) $40.7 billion (2020 – projected) Source: IMF

REAL GDP GROWTH

3.8% (2017) 1.8% (2018) 1.8% (2019) 2.1% (2020 – projected) Source: IMF

REAL NON-OIL GDP (as percentage of GDP)

4.9% (2017) 2.5% (2018) 2.2% (2019) 2.5% (2020 – projected) Source: The World Bank

-$1.6 billion (2017) -$0.9 billion (2018) -$0.9 billion (2019) -$1.7 billion (2020 – projected) Source: The World Bank

OVERALL FISCAL BALANCE (per cent of GDP)

-17.6% (2016) -14.3% (2017) -8.9% (2018) -8.4% (2019) Source: IMF

DEBT/GDP

70.3% (2016) 78.1% (2017) 81.8% (2018) 83.3% (2019) 106.9% (2020 – projected) Source: IMF

OIL AND GAS SECTOR

GDP PER CAPITA (000s)

CRUDE OIL AND GAS EXPORTS (millions of bpd)

23.5 (2017) 24.9 (2018) 25.4 (2019) 25.5 (2020 – projected)

0.15 (2017) 0.15 (2018) 0.15 (2019) 0.15 (2020 – projected)

Source: IMF

Source: S&P Platts

GDP PER CAPITA GROWTH

BREAKEVEN OIL PRICES (US$/barrel)

-1.6% (2017) -0.9% (2018) -0.5% (2019) -4.4% (2020 – projected)

112.6 (2017) 118.4 (2018) 94.9 (2019) 93.0 (2020 – projected)

Source: IMF

Source: S&P Platts

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COUNTRY FOCUS

Economic diversification in Bahrain Roberto Flammia, Local Partner, Dubai and Mostafa Elfar, Associate, Milan at BonelliErede, breaks down Bahrain’s current fiscal situation

he Kingdom of Bahrain has long been dependent on its oil revenues to fund its budget and its public services. This is why the Bahraini government started intensifying efforts to diversify away from oil and gas back in the early 2010s, but this resulted in only a minimal increase in non-oil revenues. From 2014–2015, on the heels of a significant decline in oil prices, Bahrain’s oil-dependent economy started facing fiscal difficulties that hindered the balancing of its annual budgets and increased its debt-to-GDP ratio. The year 2016 onwards, the government implemented several reforms to adjust these fiscal imbalances. In particular, the economy appears to struggle to align non-oil government revenues with the economic growth of non-oil business relative to GDP. In other words, the diversification sought by government has indeed increased the contribution of non-oil business to GDP, but the non-oil revenues from that diversification have not increased at a similar rate.

“SIGNS STILL INDICATE THAT A BALANCED BUDGET BY 2022 MIGHT BE A LITTLE TOO OPTIMISTIC, UNLESS THE GOVERNMENT INTRODUCES ADDITIONAL MEASURES TO THOSE PROPOSED BY THE IMF.” Roberto Flammia

— Roberto Flammia, Local Partner, Dubai, BonelliErede

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

In the first six months of 2019 Bahrain reduced its budget deficit by

37.8% 47%

increased its non-oil revenues by

cut governmental administrative costs by

14% 18%

and seen

After revising upwards its budget deficit forecasts for 2019 and 2020, and following the successful Aramco IPO, the Bahraini government is considering transferring some of its stakes in state-owned oil and gas companies to a sovereign fund that can sell these stakes to private sector investors. Available data and reports suggest that the Bahraini government might not meet its target of balancing the budget by 2022. This was underlined by the International Monetary Fund (IMF) in the report it issued following Art. IV consultation with the Bahraini government: the IMF recommends additional measures to ensure that Bahrain can balance its budget in the target time frame. These include: (a) introducing direct taxes; (b) reducing VAT exemptions; and (c) phasing out untargeted subsidies. Bahrain reduced its deficit-to-GDP ratio from 15 per cent in 2015 to 4.7 per cent in 2019 and is thus making good strides towards completing its FBP reform plan. However, signs still indicate that a balanced budget by 2022 might be a little too optimistic, unless the government introduces additional measures to those proposed by the IMF.

of government employees accept voluntary retirement packages

The situation was clearly not sustainable, so the Bahraini government took measures to respond to this discrepancy and put in motion the much-needed fiscal adjustment. In October 2018, Bahrain—backed by $10 billion in promised funding from Saudi Arabia, Kuwait, and the UAE—publicly announced an ambitious package of reforms known as the Fiscal Balance programme (FBP). The FBP’s principal target is to eliminate the budget deficit by 2022. The FBP includes measures to: (a) cut public expenditure; (b) introduce a voluntary retirement scheme for government employees; (c) reduce cash subsidies; and (d) simplify government procedures and increase non-oil revenues. The government recognised how fundamental these measures are to attract investment and better manage its budget deficit, as is to adopt the latest technologies to streamline administrative procedures and enhance the business climate. But it first had to increase its non-oil revenues and did so by following the example of the UAE and Saudi Arabia: it introduced a five per cent VAT on the sale and purchase of goods and services. This was first mentioned at the time the FBP was announced, in Law No. 48/2018 (VAT Law), which came into effect on 1 January 2019 and was followed by the executive regulations issued by Minister of Finance Decree No. 12/2018. The five per cent VAT applies to the sale and purchase of all goods and services unless the transaction is expressly exempt from it or subject to VAT at a different rate under the VAT Law. The provision of financial services is a clear example of a transaction that is exempt. According to the latest figures, in 2019 the Bahraini government collected approximately $663 million in revenues from applying the VAT, which proved crucial in cutting the government deficit. The Bahraini Minister of Finance broke this down further in a statement released in October 2019, in which he shed light on a series of fiscal indicators relating to the FBP’s targets. Among other things, he reported that Bahrain, in the first six months of 2019, had: (a) reduced its budget deficit by 37.8 per cent; (b) increased its non-oil revenues by 47 per cent; (c) cut governmental administrative costs by 14 per cent; and (d) seen 18 per cent of government employees accept voluntary retirement packages.

“THE IMF RECOMMENDS ADDITIONAL MEASURES TO ENSURE THAT BAHRAIN CAN BALANCE ITS BUDGET IN THE TARGET TIME FRAME. THESE INCLUDE: (A) INTRODUCING DIRECT TAXES; (B) REDUCING VAT EXEMPTIONS; AND (C) PHASING OUT UNTARGETED SUBSIDIES.” — Mostafa Elfar, Associate, Milan, BonelliErede

Mostafa Elfar

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Digital and analytics—the next horizon in Middle East corporate banking Denis Francis Partner at McKinsey in Cologne and Hesham Elmais Associate Principal at MkKinsey in Dubai, paint a picture of impending structural shifts that will demand changes in how corporate banks in the region operate

orporate banking plays a major role in the Middle East banking sector, accounting for nearly 75 per cent of total banking assets and contributing some 60 per cent of total revenues. The sector is also riding a wave of healthy returns as national economic diversification efforts create a wealth of new investment opportunities. Corporate banks in the region are generating average returns on equity of over 12 per cent, far outstripping their European counterparts, which average just seven per cent, according to McKinsey Panorama Global Banking Pools. But impending structural shifts may threaten this comfortable position. To navigate them, Middle East corporate banks must significantly transform the way they operate, and potentially at a much faster pace than their global peers. As is often the case, major structural changes will likely present exciting opportunities as well. The drive by several governments in the region to diversify their economies away from oil is one such change. For example, the Saudi Arabian Monetary Authority recently created a regulatory ‘sandbox’ to help transform the Kingdom into an ‘intelligent financial centre’. The sandbox aims to attract local and international financial technology companies to provide innovative financial services to Saudi markets, opening the Kingdom to a whole new type of investor. But structural changes also bring challenges, which are exacerbated by the fact that many banks in the region have only limited capabilities—especially in transaction banking—and outdated infrastructures, which make it harder to adapt. Many are also behind in terms of automation and digitisation— which makes serving smaller customers increasingly difficult at a time when regulators are pushing for a higher share of lending to the segment. Established banks are also under threat from the evolution of their customer base. ‘Internationalisation’ and the increasing sophistication of domestic corporates is translating into a demand for a wider range of products, and to expectations for more strategic advice from their financial partners. The April 2019 tapping of public markets by Saudi Aramco (raising roughly $12 billion in bonds) indicates that banking clients can—and will—find alternative sources of funding. Meanwhile, the ongoing wave of banking consolidation is creating a new bracket of GCC ‘wholesale banks’. This may

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

increase competition for the traditional client base of large corporates and state-owned enterprises, and further reduce lending and cross-sell margins. These new wholesale banks are joining international banks in offering treasury and transaction banking offerings and could potentially dominate these highly profitable businesses. To remain relevant, corporate banks need to change their business models to effectively serve all customer segments, including medium and small corporates. Retail banks in the region have already made bold and aggressive moves in digitisation and analytics; some have been effective enough to serve as global examples of successful digital transformations. To succeed, we believe Middle East corporate banks need to be as ambitious as their retail counterparts in pursuing holistic transformations. They need to be, because radical transformation is required. Corporate banks in the region must be able to offer their customers more sophisticated advice on their daily business operations and meet their increasingly complex banking product and service needs. To do so, they need to step up in two key areas: first, by developing analytics capabilities at scale to achieve a new level of customer understanding and targeting; second, by applying digitisation at scale to deliver an almost seamless integration of banking services into corporate clients’ daily business routines. These efforts will require significant operating model changes, and the development of a whole new set of capabilities. Complicating the challenge, banks need to make these transformations in a difficult context characterised by uneven data quality and availability; scarcity of local top-level digital and analytics talent (for example, agile coaches, UX designers); and a lack of well-developed fintech ecosystems. Consider that European banks with similar challenges have their pick of willing fintechs they can partner with to create new digital solutions for clients (for example, RBS’s partnership with Taulia to offer dynamic discounting and ING with Kabbage for SME loans). By comparison, the Middle East fintech ecosystem is still nascent. Transformations of the kind that Middle East corporate banks must make can be multi-year journeys and require stamina. There are initial signs that the region’s corporate banks are ready to commit significant time and manpower to the challenge. The rewards for those that make this commitment now will be significant.

PHOTO CREDIT: Asia-Pacific Images Studio/iStock

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TRADING & BROKERAGE

The future of trading and brokerage Wael Salem, CEO of Tradescoio, share with Banker Middle East, how the trading and brokerage business is changing

rom your point of view, what are the current trends in trading and brokerage?

The current trends in trading and brokerage are focused on automation using digital technology that will make transactions easy, transparent, accessible anywhere and cost-effective. Increasingly, there is a demand from retail bank account holders for brokerage and wealth management tools to be accessible for all levels of investors. It will no longer be a service available only for high net worth individuals and it should be available to retail investors. Thus, the barrier to entry is lowered and more low-mid income investors will enter the market. Accordingly, brokerages must be able to understand the investors needs and preferences and based on that insight, brokers can provide an appropriate product or service for their customers. Transactions will become easier with the use of mobile and digital solutions that allow investors to have access to capital markets and a full view and report on net asset value in real time. Aside from real time updates and comprehensive reports, wealth management tools must have fee transparency to eliminate client’s doubts on the issue of hidden charges.

“THE CURRENT TRENDS IN TRADING AND BROKERAGE ARE FOCUSED ON AUTOMATION USING DIGITAL TECHNOLOGY THAT WILL MAKE TRANSACTIONS EASY, TRANSPARENT, ACCESSIBLE ANYWHERE AND COST-EFFECTIVE.” — Wael Salem

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

Another trend is that through digital technology, an investor can be onboarded very quickly. Through digital onboarding and digital compliance verification technology, it allows the customer to be accepted in less than 30 seconds. Behavioural economics will also play a larger role where financial institutions reward their investors and traders based on their day to day spending and saving practises. Investors will also have access to aggregator systems that will allow a holistic wealth tracking across multiple assets such as liabilities, return on assets including property, physical assets. The digital experience of the employee is just as important as customer digital experience. Companies need to invest in digital employee experience for the middle and back office operations to ensure effective and productive day to day operation which has been proven to be a success factor in operating a successful brokerage. AI solutions will also play a key part in brokerages and help to streamline banking operations so that the bank can process higher volumes efficiently. Lastly, the increase in social trading technology has aided banking and brokerage customers to come closer and review and mirror each other trading and investment ideas easily. By bringing the trading ecosystem closer and enabling them to discuss strategies and share ideas this will result in an increased confidence level.

We will also prioritise the MENA and African markets, as in these regions the fintech industry is still in its growing stages and we expect an increased demand for our products and services in MENA. Secondly, Tradesocio will also be expanding business development on its satellite offices in Singapore and London to better cater to our clients effectively in the region. The Singapore office will target the APAC region, specifically Hong Kong. We also have a new product release this year, the Investment Suite and launch our AI component. Tradesocio will work closely with our strategic partners and fintech accelerators globally and engage with our potential customers across multiple conferences and roadshows targeting financial centres globally.

What challenges do you expect the market to face this year? This year will be very busy and we expect a lot of risks and challenges ahead. We must be very cautious in dealing with these challenges so that we can create solutions that not only solve problems now but can be applied to other challenges that may lie ahead.

Tell us more about Tradesocio and what the company does? Tradesocio was established last 2015, we started as a small group of professionals with backgrounds in technology and financial services. All of us were driven by a common vision: to transform the way financial services are offered and accessed, by making it easier for financial service providers to attract a wider clientele, ranging from retail investors to high-networth institutional investors. Tradesocio, provides a cutting-edge software as service (SaaS), that enables our banking and brokerage customers to offer investment management and brokerage solutions to their customers accessible on any device. We also develop customised solutions for financial institutions operating in multiple ancillary fields such as prime brokerage, provident funds and wealth management. We aim to be the technology of choice that supports financial institutions to keep pace with the digital transformation and fintech innovation. Our team placement is an extension of both of our customerâ&#x20AC;&#x2122;s IT and product teams. We are involved in the day to day basis operations, planning, building products with our customers and delivering these products efficiently. In addition, Tradesocio also does the research and studies the customerâ&#x20AC;&#x2122;s journey in real-time to ensure their KPIs are met. We play an active role in product management and ensure that we deliver the highest effective return of investment towards our customers that invest in our innovative technology solutions.

What is your focus on this year? What are your plans for the company? This year Tradesocio will focus on our newly set-up headquarter located in Dubai at the Dubai International Financial centre (DIFC). We aim to hire 30 top management people in our DIFC office over the next two years, which will play a vital role in Tradesocio's expansion in the MENA region.

"THERE IS A RISK IN THE BANK WHO TRY TO CREATE THEIR IN-HOUSE TECHNOLOGY AND HAVE FAILED DUE TO LENGTHY TIMELINES, LARGE BUDGETS PROJECTS AND CHALLENGES IN GOING TO MARKET." â&#x20AC;&#x201D; Wael Salem

The first challenge is that financial institutions are in a race to launch new products and services to remain competitive. There is a risk in the bank who try to create their in-house technology and have failed due to lengthy timelines, large budgets projects and challenges in going to market. Thus, they are switching to sponsoring fintech accelerators and acquiring technology that can be deployed quickly to introduce the latest services for their customers while they remain focused on their core business. This sector also faces new entrants to the market which are not traditional financial companies but have expanded their offering to include fintech and financial services. Thus, smaller specialised companies face a threat from large corporations such as telcos and super apps that have added financial services to their existing offerings. This year also will mark a significant rise of other fintech companies who want to have a share of this growing market. Due to the significant increase of new entrants providing banking and brokerage as a service, financial institutions will be increasingly exposed to lowering their margins in order to stay competitive.

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TAXATION

Corporation tax does exist in the UAE banking sector, but only foreign banks can be taxed. Bahrain remains a corporate tax-free environment.

Tackling taxes Wadih AbouNasr, Head of Tax for Saudi - Levant region at KPMG Saudi Arabia and Rhys Penning, Partner - Indirect Tax at KPMG Lower Gulf, speaks exclusively on taxation regimes around the world and where GCC countries stand

ell us about your position at KPMG KSA and your views on taxation in the GCC.

Wadih AbouNasr (WA): I am the Head of Tax for KPMG in KSA. My role involves managing all service lines within the tax function including domestic, international tax or direct tax. There has been a tremendous transformation in the last 15 years. Previously, governments in the GCC region were not inclined to introduce taxes. Oil and gas contributed to their countries’ financing needs and economic growth, especially for fairly small populations. However, as they progressed, tax became a pillar for social and infrastructure spending and the new economic diversification agenda, particularly to counter the effects of hydrocarbon price volatility. Furthermore, the GCC landscape is changing because governments and their respective economies are maturing; indirectly, the taxation process matures as well.

The maturing in the taxation, is it because of developing economies or the need for more revenues in their countries? WA: It is a result of both. Money raised via taxation is used to sustain the needs of citizens. Another factor to be considered

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

would be the alignment with the global economy—and with growing international pressure for tax transparency there is likely to be a need for economic integration. The Organisation for Economic Co-operation and Development (OECD) is also ensuring that the member states are aligned to certain tax standards and a number of countries have to align their economies to these standards.

How has taxation impacted the banking sector in Saudi Arabia and the UAE? Rhys Penning (RP): Banks in both countries are subject to taxes in multiple ways. On the one hand, both countries tax banks on their profits (even in UAE where certain foreign banks are taxed); on the other hand, they have become agents for foreign governments to monitor and report on their clients’ affairs. These challenges go back to know-your-client (KYC) and anti-money laundering (AML) regulations, as well as reporting on US residents (part of FATCA and the common reporting standards). The banks carry a heavy responsibility and duty towards their respective governments to ensure compliance with the regulations since they are at the forefront of the exchange of the dollar or currencies.

Similarly, some governments in the region have comparatively new rules called economic substance rules, such as those in the UAE. The laws seek to ascertain that for a company that is based in the country its profits should be reflected there for tax purposes. The international community requires that if a company wants to reflect its profit in a particular jurisdiction, then that company needs to establish that it has substance in the jurisdiction. For banks, this plays out in two ways; their economic substances which are not in doubt because of the regulatory environment, as well as customs and, to some extent, their lending for projects. Regional banks are required to be aware of the tax profiles of their customers and regulate the compatibility of lending to certain projects. Thus banks should strive to build tax expertise to assess what they are lending into, as well as the risks associated with the industry.

PHOTO CREDIT: alexeys/iStock

What will be your solution to these challenges that banks are facing? RP: Banks have been able to manage the challenges, but only by expanding significant resources. Technology plays a big role; however, it is not the magic solution to implement any fact checking reporting and identification of an account or common reporting standard (CRS). Banks need to go through a complete transformation not only of KYCs and their systems but also in educating their staff. Technology, systems, and data are crucial. One of the important steps, however, is to ascertain that people are doing the right things in the right way, as well as understanding what those things are, so that information gets captured, recorded and reported accordingly.

“FOR BANKS, THIS PLAYS OUT IN TWO WAYS; THEIR ECONOMIC SUBSTANCES WHICH ARE NOT IN DOUBT BECAUSE OF THE REGULATORY ENVIRONMENT, AS WELL AS CUSTOMS AND, TO SOME EXTENT, THEIR LENDING FOR PROJECTS.” — Wadih AbouNasr

The banking sector is responsible for how their customers use money and whether certain individuals should be reported to the authorities. This is not an easy task and it can be onerous for banks to do so. However, currently we have not yet seen major fallouts around anti-money laundering (AML), at least not on the tax side. As far as the issue of taxation is concerned, this is one of the social licences that banks perform in their capacity as intermediary between the economy and society.

When do you think Oman, Qatar, and Kuwait will introduce tax and how is it going to impact their economies? WA: The six-nation GCC bloc signed a document to introduce VAT, which has been implemented in the UAE, Saudi Arabia, and Bahrain to date; the Kuwaiti, Omani and

“IN THE REGION, CLIENTS, TAXPAYERS, AS WELL AS BANKS AND OTHER COMMUNITIES, HAVE THE OPPORTUNITY TO LEAPFROG TO THE FIRST STAGE AND MOVE TO THE DIGITAL AGE. TECHNOLOGY SHOULD NOT BE REGARDED AS AN OPTION, BUT A SUCCESS FACTOR FOR IMPLEMENTATION—WHETHER YOU ARE A TAX PAYER OR TAX COLLECTOR.” — Wadih AbouNasr

Qatari governments have given indications that they aim to implement tax between 2021-2022. The delay in implementing tax can be attributed to the readiness of their economies and socio-political drivers. We need to differentiate between corporate tax and indirect tax/VAT. While VAT is supposed to be borne by the users of products and services, usually it does not impact the banking sector compared with individuals. That is not necessarily the case for the banking sector given that many products/services are exempt from VAT, but do not allow for full recovery of VAT on related costs. VAT is therefore a cost to the banking sector, to be factored into pricing. Similarly, corporation tax does exist in the UAE banking sector—only foreign banks can be taxed. Bahrain is still a corporate tax-free environment.

Three countries in the region are yet to implement taxes, what sort of lessons can be taken from the UAE, Saudi Arabia and Bahrain for them to introduce VAT smoothly? RP: Any law should give taxpayers enough time to understand the law and react to it, fix their systems and then implement it. Fortunately, the countries that are yet to implement VAT have the chance to learn before they comply with the new norm. Companies need to be responsive to regulatory updates and take action to adapt their internal processes, knowledge management and IT systems. Given the complexity of VAT for the banking sector, the prudent in the industry should start taking preliminary steps.

How important is technology in implementing and executing tax reforms for banks? WA: Technology is likely to be a key element to build a seamless experience for taxpayers. Any government or entity should aim to rely on technology to run its business, so governments are not excluded from using proper technology platforms and portals that customers can access. In other jurisdictions taxation has been practised for a long time, but the authorities have generally used manual processes until technology was implemented to maximise efficiency, optimise outcome and use data for insights. In the region, clients, taxpayers, as well as banks and other communities, have the opportunity to leapfrog to the first stage and move to the digital age. Technology should not be regarded as an option, but a success factor for implementation—whether you are a tax payer or tax collector.

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ISSUE 11

LEVERAGING A NEW LANDSCAPE

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

COVER INTERVIEW

LEVERAGING A NEW LANDSCAPE Onur Ozan, Head of Middle East, North Africa and Turkey at SWIFT, speaks to Banker Middle East about the rapid evolution of the payments landscape in this region and the wider implications of new technologies

hat are your views on the current payments landscape in the region?

The payments business is undergoing unprecedented change. New payment providers are challenging incumbents for market share and using technology to disrupt traditional networks and business models across retail and wholesale payments. Regulation is increasing; payments platforms and market infrastructures are consolidating, renewing and re-designing. Customer expectations and behaviour are changing—the shift to digital is driving expectations of on-demand delivery and the growth in volume of non-cash related transactions. Today's banking customers are also customers of the bigtech companies that dominate the ecommerce space. Their real-time expectations have transitioned through to B2B. Consumers and businesses alike expect payment providers to ensure that their money follows goods and services at the same speed. Corporate clients specifically demand faster payments that are transparent, predictable and lower in cost. For those in the Middle East—a strategic trading, business and financial hub—this is critical. In response to these trends, domestic payment infrastructures are renewing their systems to deliver the services that customers have come to expect. Real-time gross settlement systems are being modernised and instant, 24/7 payments are now a reality in a growing number of countries across the world, including many in the Middle East such as the UAE, Jordan and Kuwait, which have already or are set to launch payments system modernisation, Bahrain, which is already running instant payments and Saudi Arabia which is expected to launch its instant payments scheme later this year. Additionally, many regions across the world, including the Middle East, have decided to embark on regional harmonisation and integration projects. Forging regional ties through integration and cooperation can eliminate obstacles to trade and make the region more competitive in the global marketplace. For example, The Arab Monetary Fund has launched ‘Buna’, a regional payment platform that enables regional financial institutions to send and receive cross-border payments across the Arab region and beyond. SWIFT is pleased to be supporting this

transformation, using our expertise in innovative technologies, messaging and standards to deliver secure, reliable, efficient and cost-effective payment clearing and settlement. Incumbent institutions are also reinventing their payment businesses, renewing IT infrastructures and re-evaluating traditional business models with the aim of delivering the effortless payment experience that the market needs. However, firms know that they cannot transform their businesses in isolation. Institutions are partnering and collaborating with a wide range of parties to deliver the financial services of the future—from bigtech to fintech, corporates, end-clients, market infrastructures and even competitors. Rapid change is also happening in the cross-border payments space. In this day and age, customers expect their cross-border payments to be as fast, frictionless and transparent as their domestic payments.

Onur Ozan

cpifinancial.net

COVER INTERVIEW

In response to this need, SWIFT and its community have dramatically improved the customer experience in crossborder payments through SWIFT global payments innovation (gpi) which has increased the speed, transparency and traceability of international payments. As a service provider for the financial services sector, based on your conversations with banks, what are their main concerns when it comes to implementing emerging technologies into their businesses? The face of financial services has changed considerably over the last decade. Customer expectations continue to dictate the scope and speed of technological evolution in the world of financial services and beyond, with technologies such as artificial intelligence (AI) and application programming interfaces (APIs) offering financial institutions both opportunities and challenges. In recent years, the industry has faced increasing competition from fintech companies and as lines continue to blur between banking and non-banking institutions, more new entrants are coming into the market. These new competitors are known for employing a mix of customer insights and digital technology to create customer-centric solutions across product lines. For traditional players in the payments industry, adopting new technologies is not always straightforward. Unlike newer challengers, the IT infrastructure of these players has evolved incrementally as various different systems have been added over time. As a consequence, they often have highly complex legacy infrastructure. While such issues do not directly hamper innovation, they can reduce an institution’s ability to implement new technologies and business models as quickly and cheaply as newer players. A number of factors have enabled challengers to compete in financial services markets – not least a significant reduction in the cost of technology ownership offered by cloud computing and APIs, alongside a drive from regulators to open up financial markets to new players deploying these technologies. Even as technology continues to disrupt and present challenges for the banking industry, it offers numerous opportunities. In some instances, artificial intelligence and cloud technology are combining to reduce cost and enhance performance, for example, in compliance and customer service. When employed in a strategic manner, these technologies offer incumbents an opportunity to reinvent and redefine their business models, to address both customer and regulatory expectations.

SWIFT introduced gpi in 2017, how has that fared thus far? Since its launch three years ago, SWIFT’s global payments innovation (gpi) service has been widely adopted as the new norm in cross-border payments by the financial community, enabling thousands of banks on the SWIFT network to execute smooth, safe, secure and friction-free value transfers. SWIFT gpi has dramatically improved the customer experience in cross-border payments, increasing the speed, transparency and traceability of international payments. We transferred nearly $77 trillion in cross-border payments via SWIFT gpi in 2019, almost doubling the $40 trillion sent by SWIFT members in 2018. Over 200 financial institutions in the Middle East and North Africa have already signed up to SWIFT gpi, and nearly 80 are already live on the service. This remarkable growth is the result of the trust and recognition gpi is gathering within our community.

BANKER MIDDLE EAST | APRIL 2020 | ISSUE 229

New market entrants in the payments landscape are typically fintech companies that employ a mix of customer insights and digital technology to create customer-centric solutions across product lines.

We continue to work together with our community to extend the coverage of gpi and increase its value even more. SWIFT is driving the introduction of new functionality on top of gpi to make real-time, 24/7 cross-border payments as seamless, convenient, cost-efficient and accessible as domestic payments. For example, at the end of last year we introduced a case resolution function, which enables banks to improve their customers’ experience for enquiries and investigations related to gpi payments. We are also looking at how to connect SWIFT gpi with domestic instant payments systems around the world to deliver global real-time payments. Through a combination of gpi and domestic real-time payments networks, SWIFT, together with gpi banks, will facilitate real-time international payments with up-front fee and FX transparency for senders, while also ensuring ubiquitous availability of real-time cross-border payments globally.

“THE FACE OF FINANCIAL SERVICES HAS CHANGED CONSIDERABLY OVER THE LAST DECADE. CUSTOMER EXPECTATIONS CONTINUE TO DICTATE THE SCOPE AND SPEED OF TECHNOLOGICAL EVOLUTION IN THE WORLD OF FINANCIAL SERVICES AND BEYOND, WITH TECHNOLOGIES SUCH AS ARTIFICIAL INTELLIGENCE (AI) AND APPLICATION PROGRAMMING INTERFACES (APIs) OFFERING FINANCIAL INSTITUTIONS BOTH OPPORTUNITIES AND CHALLENGES.” — Onur Ozan, Head of Middle East, North Africa and Turkey, SWIFT

To manage risk across our industry, collaboration is paramount as we are only ever as strong as the weakest link. This is why the members of the SWIFT community work together to manage cyberthreats, meet compliance obligations and strengthen security.

PHOTO CREDIT: Chinnapong/iStock

Looking at what we have in the market at the moment, what emerging technologies do you think would revolutionise the banking industry?

How are financial institutions tackling the challenges posed by cyberthreats and financial crime? As cyberattacks continue to evolve and increase in frequency and sophistication, cybersecurity has become a major area of attention and investment. Simultaneously, complying with the large number of global regulations that aim to combat money laundering and terrorist financing is also a challenge for the industry, both in terms of costs and resources. The integrity of the entire banking ecosystem depends on trust. There are many aspects to establishing and maintaining trust, but robust operational processes are key. These include defining and implementing KYC processes and due diligence, ensuring cyberdefences are in place, sharing information to help others in the community combat crime. In addition, demonstrating transparency and a willingness to adhere to industry best practises and conform to community rules is essential to build confidence in the financial system overall.

Technologies such as APIs, AI and cloud computing offer many opportunities for incumbents and challengers alike to transform financial services. As such, financial institutions are accelerating their digital transformations, combining these technologies with the right business models to deliver a seamless experience to their customers. APIs, for example, are transforming the way business is done. They make it easy for applications to speak to each other, facilitate the creation of new services and drastically reduce time to market. As the industry embraces API technology, SWIFT believes that an ongoing effort will be required to avoid fragmentation and isolation, needless complexities that will frustrate attempts to build the value-added services customers want. Similar to the instrumental role that SWIFT has played in standardisation in financial messaging, SWIFT is actively fostering API standardisation for the financial services industry using ISO 20022 specifications. We are also using APIs to simplify access to SWIFT content and shared services: SWIFT gpi, Sanctions Screening and SWIFTRef, among others, are already available via APIs. Future phases in our API roadmap will involve the availability of additional SWIFT content and services via API. The use of AI is on the rise due to the huge growth in data and computing power in recent years. AI is already quickly changing the financial industry landscape. SWIFT has found that an obstacle to the deployment of AI in financial services is the limited availability of structured, rich data. This is a major hurdle for the development of analytics capabilities. SWIFT sees that it has a key role to play in improving the quality of data so that our members can use AI effectively. Our ISO 20022 initiative is one such example where we are supporting the community to improve data quality. The adoption of cloud computing has also been increasing rapidly over the past few years with more and more organisations embracing cloud-based solutions. We are doing the same at SWIFT to further support our community, with two distinct cloud initiatives. The first one is Alliance Cloud, a private cloudbased connection to SWIFT services providing a robust option for institutions of all sizes that wish to host their messaging operations on a SWIFT-managed infrastructure. The second helps customers smoothly migrate to large cloud providers such as Microsoft and Google Cloud.

cpifinancial.net

CYBERSECURITY

A CONCERTED EFFORT The Dubai Financial Services Authority (DFSA) has recently launched a Cyber Threat Intelligence Platform to help firms in the Dubai International Financial Centre (DIFC) implement appropriate safeguards to mitigate against cyber risks. We sit down with Bryan Stirewalt, CEO of DFSA and Nicolai Solling, Chief Technology Officer at Help AG, for more information on this new platform

an you tell us more about the cyberthreat intelligence platform? What role does DIFC play in the day to day operations of this platform and how does Help AG contribute to that?

There is a number of risks that the financial services industry and regulators face right now which are not traditional risks. Cyberthreat is one of them and so is climate changeâ&#x20AC;&#x201D;these new risks being the third non-traditional also mean that the approach regulators take to address them should also be non-traditional. Currently, what we are seeing in both cyberthreat and climate change is that the best way to tackle these issues is through a private-public partnership (PPP). A single rule or regulation change in our laws does not address the problem. There is no real silver bullet to these issues, there are a lot of bullets that you can throw at the problem but not one of them works by itself.

The PPP we have with HELP AG and the financial services industry itself is the best solution in dealing with cyberthreats in a holistic fashion. There is a number of elements to this solution if you approach it from a high perspective, think of it as an exchange platform. The solution operates in the same way you exchange stocks and bonds in an environment, we exchange threat intelligence for example if a member company knows about a potential threat in their environment we would be able to exchange that data with other participants on that specific system. The DFSA has been negotiating with the industry so that the platform is able to deliver value to the participants immediately otherwise you will only be seeing what is happening for these 500 organisations but there is a number of vendors such as Kaspersky, Palo Alto Networks, Cofense and Recorded Future they are participants on the platform.

What kind of data do DIFC companies provide on this platform?

The PPP between the DFSA, Help AG and the industry is an attempt to create a holistic approach in dealing with cyberthreats.

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Financial institutions in the DIFC face the same cyberthreats as those that are faced around the world. The future of finance and other industries revolve around data. How you obtain data, how you store data, how you protect data, how you use data and how you delete data. Cybercriminals know that some companies are rich in data especially those within the financial services industry

PHOTO CREDIT: Florante Magsakay/CPI Financial

L-R: Nicolai Solling, Chief Technology Officer, Help AG, Brian Stirewalt, CEO, DFSA and Nabilah Annuar, Editor, Banker Middle East.

and that makes them more vulnerable just by the fact of they are financial insitutions. So, the threat evolves around how this data can be breached. The companies already in the DIFC will be able to tell us about specific cyberattacks that they encountered. Some of these companies have the capabilities to detect these attacks but others do not. Thus, smaller companies without structured security practise will typically become more of the consumers of this platform. We therefore ensure that we have high fidelity data which allows them to identify certain kinds of attacks.

Is there any reason why you have decided to set up this platform on your own? There are number of choices that we had to make to make this work. The DFSA decided earlier on that the PPP was the best way to approach this. We joined in with the fact that we know cyberthreat is one of our top five risks in the financial centre right now, and that risk is growing. Cyberthreats are continuously increasing, so this is one element we are using to mitigate those risks. The DFSAâ&#x20AC;&#x2122;s Cyber Threat Intelligence Platform can be joined with other platforms to make this a global effort. Many of the firms among the 500 companies that are regulated in the centre have a global network and this doesnâ&#x20AC;&#x2122;t stop at the 500 firms now. We have opened this project to non-financial firms as well that brings the number up to around 2400 firms that can join the platform.

What type of technology is involved in this cyberthreat intelligence platform and what function do they serve? Artificial Intelligence (AI) is utilised in multiple areas. The commercial feeds that we use in the platformâ&#x20AC;&#x201D;a lot of those are generated and a lot of the curation happening in those specific feeds will use AI and machine learning (ML) in it. Additionally, from our perspective we stick together those specific feeds with the information that get here in DFSA and that is more a question of automation and making sure that the stitching works together in DFSA itself. Hence if we see one event in one feed, we can attribute it to an event in another feed if there are overlaps between the environments. AI and ML is one of the areas where the service develops overtime and an area that makes curation of events more efficient.

How do you learn to filter credible cyberthreats on this platform? We have a threat intelligence team and the DFSA has asked us to utilise our team in order to curate specific kind of events. Curating specific events is similar to how you ensure that the specific data is in the right format, try to identify if a specific threat is known by multiple sources that is how you can build credibility of an event. The process of curation takes place through automation and we try to make the process as seamless as possible.

cpifinancial.net

PAYMENTS

FOUR INNOVATIONS FINANCIAL INSTITUTIONS IN THE MIDDLE EAST SHOULD EXPECT TO IMPLEMENT By Nassir Ghrous, SVP Banking & Payment Services for Middle East, Africa & Eurasia region at Thales

echnological advances and changes in customer expectations over recent years have made a huge impact on the banking and financial services sectors. In many cases, the transformation has been dramatic, with digital technologies enabling new services and totally resetting consumer expectations. The pace of disruption and innovation in finance is unlike anything we’ve seen before, but the industry has shown that it’s become much more comfortable with the shift to digital processes, whether internal or customer-facing. With further innovation arriving almost daily—from opening an account with a selfie to social-media led cryptocurrencies—there are several developments that have had a real impact on businesses and consumers alike. Here are four innovations that financial innovations in the Middle East should expect to implement if they have not already.

MAKING BANKING, MOBILE, DIGITAL AND SECURE WITH BIOMETRICS Digital banking is fast becoming the preferred method for customers to manage their financial needs, with data from McKinsey showing that over 80 per cent of urban consumers in the UAE and Saudi Arabia plan to use their phones or other devices to fulfil their banking needs. But imagine a digital banking experience where we can identify ourselves with absolute certainty, simply by being… ourselves. While the smartphone industry kick-started the mainstream use of fingerprint authentication a few years ago, we are now seeing other biometric factors become part of our everyday lives, especially in payments. From fingerprints, facial and voice recognition or even by analysing the way you type or walk—what we call behavioural biometrics. These technologies are offering new and exciting

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ways to ensure secure and innovative services, while also providing a personalised, secure and convenient experience for customers. In fact, our digital banking survey revealed that over half of UAE consumers are willing to use biometric measures for mobile banking, of which 75 per cent believe they are more secure. Almost half also believe that they are more convenient than traditional methods—after all, your unique biometric data is an intrinsic part of who you are, not something you have to remember like a password. As digital banking starts to completely replace physical branches in the UAE, as already seen with the introduction of digital only propositions such as Liv, biometrics will become key for the future of financial institutions in the country.

ROLLING-OUT INTELLIGENT AND ADAPTIVE FRAUD PREVENTION Authenticating users in any number of given scenarios is a challenge for every bank. But as the number of services that require authentication gets larger, managing them has become an increasing burden. Support in this endeavour is here in the form of cloud-based solutions for user authentication management. These systems use multiple layers of real-time risk management algorithms to set an appropriate level of authentication for any use case, by leveraging contextual analysis and historical data. For example, it could determine how much authentication is required by analysing things like time, location, device type and even biometrical behavioural factors such as the user’s typing pace. This invisible contextual verification results in a secure and frictionless user experience for consumers, as well as reductions in operational and fraud management costs for the bank. With banks adding new services frequently, a cloudbased management platform can allow them to flexibly

However, in the Middle East there is still a reluctance to rely on digital wallets, and this is where biometric cards, which allow the user to benefit from unlimited spend per transaction, are becoming increasingly popular.

INTRODUCING BIOMETRIC CARDS

integrate their own risk assessment solutions, or best-inclass solutions from third parties. This means they can try several solutions quickly to find out which suits their needs best or change their solutions as new types of fraud emerge. This way banks can maintain the best possible user experience, combined with low fraud rates, over time.

ACCELERATING USAGE OF DIGITAL PAYMENTS AND MOBILE WALLETS According to a report by ResearchAndMarkets.com, the mobile wallet market in the UAE is projected to surpass $2.3 billion by 2022. This is hardly surprising given the increasing youth and tech-savvy population that supports the natural progression of creating a cashless society and more digitalised economy. Following the launch of Apple Pay, first in the UAE and most recently in the Kingdom of Saudi Arabia in 2019, it is expected that the number of retailers accepting mobile wallet payments will continue to grow as will the support of the financial industry which will boost the region’s mobile wallet market in this new decade. This technology is widely deployed across the world, used every day by millions of customers. So, if you’re using a mobile wallet for ecommerce and contactless payments, it’s likely that it’s based on this technology. Worldwide, more than 500 million credit and debit cards in close to 50 countries have now been converted to digital format in payment apps. To ensure robust security and privacy, physical card details are converted by our tokenisation solution (TSH) into a digital token that is embedded in the customer’s smartphone, wearable or other connected device. This token facilitates seamless interaction with the user’s chosen merchants yet contains nothing of value to a fraudster. As a result, strong protection against threats such as card skimming is assured.

Financial Institutions in the region are increasingly investing in innovative card bodies to position their services as a cut above the rest. More often than not, metal cards come with a whole host of services and benefits that add more value than simply a customised look and feel. Card and personalisation products and services are just a few ways payment service providers are striving to deliver not only an eye-catching payment offering, but a robust one, for today’s demanding consumer. With metal cards strongly associated with top-of-the-line, high-value Nassir Ghrous services and perceived as a reflection of financial and even social success, it is no surprise that they have exploded in popularity even amongst millennials. The biometric EMV payment card, for example, combines the convenience of contactless with the trust that is associated with biometrics, and with no spending limit. These cards have proved highly popular among consumers in the Middle East region, with the number of EMV cards in circulation expected to grow by 20 per cent to reach 502 million in 2020, according to an ABI Research report. The financial technology company, areeba, was in fact the first to introduce the Visa biometric contactless EMV bank card in the Middle East or Africa, allowing cardholders to authorise transactions by using its built-in fingerprint scanner rather than entering a PIN. The enrolment process for the card is very simple, secure and mindful of data privacy. Whether you’re activating your card at home via a secure sleeve or at the bank branch, there is no biometric data handling outside of these premises. Your fingerprint is only stored on the card, and your bank has no access to this information. It’s a hugely exciting time to be part of the financial industry due to the sheer pace and scale of technological innovation taking place. These shifts have brought countless benefits with regards to streamlining services and operations, fraud management, customer experience and satisfaction—and in many cases it’s already hard to imagine life without them.

The mobile wallet market in the UAE is projected to surpass

$2.3

billion by 2022

Source: ResearchAndMarkets.com

cpifinancial.net

INSURTECH

TECH FOR A GOOD CAUSE In an exclusive, Michele Grosso, CO-Founder and CEO of Democrance, sheds light on the potential of technology in the insurance market

ell us more about the insurance landscape in the Middle East.

Insurance in the Middle East remains a very conservative industry, covering only the higher income, banked population. However, competition remains high, particularly so in a country like the UAE, where the population is small. In the UAE alone, we have 65 insurance companies and intermediaries, all fighting for the same share of the customerâ&#x20AC;&#x2122;s business with the same traditional products and offline distribution channels (agents, Michele Grosso brokers and banks). This leaves a whole segment that is untapped and not targeted by insurers today: digital- and mobile-first clients and an uninsured population that until recently, were beyond the purview of insurance. Today, both segments can be targeted by a fully digitalised and automated solution.

What do you see as the challenges and risks affecting insurance firms in this market? With so many competitors fighting for the same pie, it goes without saying that consolidation must happen. However, innovation is equally critical to spread out the existing pie and offer customers more pertinent solutions to their present-day insurance challenges. Regulators are also trying to establish minimum capital requirements to push for consolidation. On the microinsurance front, Egypt is the only country in the MENA region today that offers microinsurance solutions. Here is an opportunity for us to introduce microinsurance and related solutions to the rest of the MENA market. When you founded Democrance, where was the gap you saw that needed filling? Tell us more about your journey. 99 per cent of the low-income population does not have access to insurance, although they are the ones that need insurance cover the most. This remains my biggest driver, to democratise insurance. Insurers in the region are yet to fully achieve technology integration and change the traditional outlook for customer acquisition. At Democrance, we hope to fill this gap. It provides us an opportunity to partner with insurers and enable their digital transformation to become relevant to their existing clients and accessible to new customer segments.

Are there more opportunities for insurtech companies in the GCC and wider Middle East? Yes, today there exist ample opportunities in the region to help insurers expand their own serviceable addressable market,

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through increasing access to new segments of the population and through providing a mobile-first insurance experience to the same customers that expect similar digital journeys when they shop online for other products. This is exactly what we do at Democrance: we help insurers increase their digital sales and reach out to new customer segments via the Democrance platform that automates and digitises the whole insurance value chain. We cover the front-end by allowing customers to buy, pay for, use and make their insurance claims via any digital or mobile devices. At the back end, we automate all the insurance processes that conventionally require manual and paperwork. Insurers are already using our platform in eight markets in the MENA region, two in Asia and one in Latin America, for distribution and service via their own channels, banks, mobile operators, remittance houses and other distribution partners. We are currently in talks with banks to offer solutions to customer segments that may have already been contacted by other channels, such as outbound telemarketing, face to face interactions, follow-up and up-selling via mobile and digital channels. We believe we can be more effective in offering the right insurance top-up to new and existing insurance clients.

What is your outlook on this space? We remain very optimistic. There is a lot of potential for disruption. The marketplace in the MENA region is now fully online and ready for digital insurance solutions. In the last decade, the wider adoption of well tested and understood technologies across industries that enable electronic and mobile transactions, particularly conservative sectors such as banking, insurance and government, is helping to reduce barriers and friction across the board. The key drivers are faster internet speeds across the UAE and higher mobile internet penetration. The UAE has also witnessed the opening of Alibaba and Microsoft datacentres in the region that are spurring cloud adoption. We believe the major growth catalysts of this decade will include the traditional industries, with banks and insurance companies reducing their operating costs and improving ease of access to customers through sophisticated mobile and web-based experiences. The opening of WhatsAppâ&#x20AC;&#x2122;s API and business accounts is another facet that is already leading to substantially improved services across all platforms.

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Structured Commodity Finance

#229 - April 2020

Articles inside

A concerted effort

Four innovations financial institutions in the Middle East should expect to implement

Leveraging a new landscape

Tech for a good cause

Economic diversification in Bahrain

The future of trading and brokerage

Building a contingency plan

News Highlights

The shape of things to come

Reciprocating territories: Bridging the gap

A quick chat with the WHO

Volatility and downward pressure

Foreseeable pain points for banks

A new north on the investment compass