#180 - January 2016 by CPI Financial

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JANUARY 2016 | ISSUE 180

JANUARY 2016 | ISSUE 180 View from the top Mashreq CEO AbdulAziz Al Ghurair

“In order to have a satisﬁed customer you need to have a satisﬁed employee.”

View from the top Get the next issue of Banker Middle East before it is published. Full details at: www.bankerme.com

Rate hike likely to impact the GCC

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UAE banking faces a tough road ahead

What does the lifting of sanctions really mean?

Dubai Technology and Media Free Zone Authority

Mashreq CEO AbdulAziz Al Ghurair

Knowing your customer is essential 28/01/2016 08:39

Some bonds are too strong to break.

As one of the most stable corporate banks in the UAE, Bank of Sharjah has built relationships with some of the region’s largest businesses, striving to offer the most solid, dependable and long-run banking solutions.

HEAD OFFICE: SHARJAH • BRANCHES: GARHOUD - DUBAI MEDIA CITY - ABU DHABI - AL AIN

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PRIVATE BANKING WEALTH MANAGEMENT: DUBAI MOTOR CITY

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CONTENTS

JANUARY 2016 | ISSUE 180

Editor’s Letter

18 6

News analysis Fed rate hike likely to impact GCC

News round up ____________________________________________________________

MARKET WATCH 8 A record-breaking year for M&A in 2015, but what will 2016 bring?

10 Governance and IPOs—the essential integration

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OUTLOOK 14 UAE banks face declining liquidity

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THE MARKETS 16 UAE banks preparing to implement IFRS 9

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FEATURES 18 Cover story

View from the top

24 UAE country report 26 Changing times 30 Kuwait: recent improvements but a story of decline overall 34 Iran country focus

View from the top Mashreq CEO AbdulAziz

Al Khalifa, GCEO, franchise Fahad

Kuwait

TALKING HEADS

A legacy of independent vision and stability

A day in the life

UNB CEO Mohammed Nasr Abdeen

PLUS:

COUNTRY REPORT Qatar

WEALTH MANAGEMENT

GCC

View from the top Mashreq CEO AbdulA

ziz Al Ghurair

Zone Authority

Get the next issue of Banker Middle East before it is published. Full details at: www.bankerme.com

Dubai Technology and Media Free Zone Authority

Zone Authority and Media Free

PERSONALITY of...Ahmed Aweidah

UNB looks to the future

Rate hike likely to impact the GCC

UAE banking faces a tough road ahead

What does the lifting of sanctions really mean?

Knowing your customer is essential

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Get the next issue Banker MiddleofEast before it is published. Full details at: www.bankerme.com

TALKING HEADS

UAE banks tighten their belts

and Media Free

Dubai Technology

al khaliji

COUNTRY REPORT

Get the next issue ofEast Banker Middle before it is published. Full details at: m www.bankerme.co

Dubai Technology

a strong customer

GCEO, al khaliji

“In order to have a satisﬁed customer you need a satisﬁed employ to have ee.”

Al Ghurair

al khaliji - building

Managing Editor

| ISSUE 180

UNB looks to the future UNB CEO Mohammed Nasr Abdeen

| ISSUE 178

Fahad Al Khalifa,

| ISSUE 180

JANUARY 2016

DECEMBER 2015 | ISSUE 179

NOVEMBER 2015

al khaliji -

ng building a strochise customer fran

JANUARY 2016

DECEMBER 2015 | ISSUE 179

| ISSUE 178 NOVEMBER 2015

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PLUS:

Georgina Enzer

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Banker

anuary saw the oil price sag to under $27 a barrel and then scuttled up to an inch over $32 at time of going to press. While this is nowhere near the heady days of $100 a barrel and more, it has given the markets a glimmer of hope, with Asian stocks rallying slightly and the UAE’s DFM General Index ticking up by 5.9 per cent on the back of the news, the biggest increase since December 2014. Saudi Arabia declared in December that ultra-low oil prices were ‘irrational’ as crude hit new 12-year lows under $27 in early January, on the back of the global supply glut. This month a lot of our features and analysis are based on the oil price as it stood in the beginning of January, as well as the prospect of Iran coming back into the hydrocarbons market with the lifting of secondary sanctions. On page 34 we look in depth at what the lifting of these sanctions actually mean for business, and on page 36 we go in-depth into the worries of Iran’s oil coming into the market. Our cover story this month, with AbdulAziz Al Ghurair dissects the outlook for the UAE banking sector in 2016. Al Ghurair believes that the much talked about SME skips have peaked, and there will be an adjustmenr period for the next six months. Another top story this month was the Fed rate hike (pg 6). The analysts we spoke to reckon that the first hike and the future planned hikes in the rate in 2016, will impact the GCC when coupled with the ‘new normal’ oil price of under $60 a barrel. According to experts, there is another global economic crisis waiting in the wings, it is just a question of how bad and when it will really hit. The UAE’s banking sector, according to various ratings agencies, is not going to fare very well in 2016 either, since much of the economy is still hydrocarbons-based. The UAE energy minister Suhail Al Mazrouei, told the World Economic Forum in Davos that the UAE government was scrapping its energy subsidies (pg 24). This comes shortly after Saudi slashed its fuel subsidies by 50 per cent. Speaking to various banking and finance experts this month, it seems that the regional and global outlook are somewhat depressed, however, if the oil price does continue to rise, regional economies will see an uptick. Let’s hope that happens sooner rather than later.

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CONTENTS

JANUARY 2016 | ISSUE 180

WIBC 40 Bahrain’s place in the global economy 44 Bahrain still has its crown

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IN-DEPTH 48 Knowing your customer is essential

PRODUCT FOCUS 50 Making document management easy

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56 The rise of mobile banking: secure your

customer’s preferred branch ____________________________________________________

58 Awards

Islamic Business & Finance Awards 2015

60 Personality

Pavani Reddy, Managing Partner, Zaiwalla & Co A Day in the Life of … Rajesh Pareek, CFO, DIFC Authority

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62 Last word

Chairman SALEH AL AKRABI Chief Executive Officer ROBIN AMLÔT robin@cpifinancial.net Tel: +971 4 391 4681

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BANKING TECHNOLOGY 52 Transforming lending with predictive insights

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NEWS ANALYSIS

Shankar. If the dollar appreciates, the Euro and other global currencies will depreciate, the UAE will become pricier for visitors, resulting in a fall in tourist traffic. This mix of low oil prices, an expensive dollar and tighter credit could be a major drag on the GCC economies. “In the midst of all this gloom, there is a bit of cheer. Depositors may benefit as local banks offer higher deposit rates to beef up their funding before the rate hike really kicks in. Also, if the US dollar strengthens, expats working in the GCC can save more in home currencies,” said` Shankar.

Rate hike likely to impact the GCC Regional economy hit by oil price woes as well as Fed hike

he US Fed rate hike is likely to adversely affect the GCC economy, hit as it already is by slashed hydrocarbons prices, the mainstay of many GCC countries’ budgets. Oil prices and the strength of the US dollar are inversely related and the region can expect more falls in energy prices, particularly if the US Congress passes the bill to sell its crude on the international markets for the first time in 20 years and Iran swamps the market with oil to raise much-needed capital. The Fed rate hike would further damage the budgets of governments in the GCC that have already been hit hard by dropping oil prices since 2014. All of this is more likely because of global monetary policy divergence

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where almost every major central bank (except the Fed) is loosening. “Another major impact [of the Fed rate hike] may be on interest rates. Most GCC currencies are pegged to the US dollar. Implication? The rate hike may result in a rise in GCC lending rates. Local banks are already bearing the brunt of higher funding costs due to tighter liquidity, again a result of the sharp fall in oil prices. Banks may now not only charge more for loans, they could get a lot more selective on whom they lend to. Some sectors, like construction and real estate, may be starved for funding,” said Binod Shankar, Managing Director of financial training company, Genesis Institute. Tourism in the UAE may also be adversely impacted, according to

The rate hike may result in a rise in GCC lending rates. Local banks are already bearing the brunt of higher funding costs due to tighter liquidity, again a result of the sharp fall in oil prices.

- Binod Shankar, Managing Director, Genesis Institute

Global business advisory firm AlixPartners states that although economists cannot predict the next recession or economic crisis, many indicators certainly point to what could be an upcoming difficult operating environment for GCC corporates. The signals for this downturn are both internal–the fall in hydrocarbons prices; and external–widespread drops in other commodity prices because of regional economic instability and weakness; China, Russia and Europe in decline; and the Fed rate hike. It is clear that GCC countries’ internal economics are currently highly vulnerable. Add to this recent news of some regional banks slashing staff numbers and the outlook does not seem positive for 2016.

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ONLINE HIGHLIGHTS Visit www.cpifinancial.net to read all these stories and more news, features, blogs and videos.

Doha Bank reports 1.1 per cent new profit growth

oha Bank’s net profit for the year 2015 recorded an impressive QAR 1,374 million which represents a growth of more than 1.1 per cent as compared to QAR 1,359 million for the year 2014. His Excellency Sheikh Fahad Bin Mohammad Bin Jabor Al-Thani, Chairman of the Board of Directors of Doha Bank, announced Doha Bank’s financial results for the year 2015. “This is another outstanding result and is clear demonstration that Doha Bank continues to perform consistently,” said HE Sheikh Fahad. The Bank increased its total assets by QAR 7.8 billion, a growth of 10.3

RATINGS REVIEW A.M. Best has downgraded the financial strength rating of Al Ittihad Al Watani to C++ (Marginal) from B (Fair) and the issuer credit rating to “b” from “bb” (L’Union Nationale) Société. Fitch Ratings has revised the Outlook on National Bank of Bahrain (NBB) and BBK B.S.C. (BBK) to Negative from Stable, while affirming their Long-term Issuer Default Ratings (IDRs) at ‘BBB-’. Fitch Ratings has changed Bahrain Telecommunications Company’s (Batelco) Outlook to Negative from Stable while affirming its Long-term Issuer Default Rating (IDR) at ‘BBB-’. Fitch Ratings has revised Bahrain Mumtalakat Holding Company’s (Mumtalakat) Outlook to Negative from Stable and affirmed the Long-term Issuer Default Raing (IDR) and senior unsecured rating at ‘BBB-’. Fitch Ratings has revised Bahrain’s Outlook to Negative from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BBB-’and ‘BBB’, respectively. Capital Intelligence (CI) has affirmed the Financial Strength Rating (FSR) and the Foreign Currency (FC) Ratings of the Samba Financial Group (SAMBA), based in Riyadh, Saudi Arabia at ‘AA-’, with a ‘Stable’ Outlook.

Doha Bank performed well in 2015, recording a 10.3 per cent increase in total assets year-on-year.

per cent, from QAR 75.5 billion as at 31 December 2014 to QAR 83.3 billion as at 31 December 2015. Net loans & advances increased to QAR 55.6 billion in 2015 from QAR 48.6 billion in 2014, registering a growth of 14.5 per cent.

Deposits showed a year on year increase of 14.8 per cent from QAR 45.9 billion in 2014 to QAR 52.8 billion as at 31 December 2015 which is evidence of the strong liquidity position of the Bank. “The Bank continues to perform well with total equity, as at December 2015, at QAR 13.3 billion, increase of 17.4 per cent during the last year. Through the efficient asset allocation model the return on average Shareholders’ equity is 16.1 per cent as at December 2015 one of the best in the industry. The Bank has achieved a very high return on average assets of 1.73 per cent as at December 2015.

A QUICK WORD Saudi slashes subsidies Saudi Arabia plans to slash spending and introduce finance reforms in 2016 in the face of declining hydrocarbons prices, which have hit the mainly oil-based economy hard. The country announced earlier in January that it was increasing fuel prices by 50 per cent after posting a record deficit of SAR 367 billion in 2015. According to the KSA Ministry of Finance’s annual budget report for 2016, actual expenditure for the 2015 fiscal year is expected to reach SAR 975 billion, representing an increase of 13 per cent of the estimated budgeted spending, and an expected deficit of SAR 367 billion. Moody’s not hopeful on oil-related activities Moody’s Investors Service (Moody’s) has placed the ratings of 32 integrated oil, exploration and production (E&P), and oilfield services companies in the EMEA region on review for downgrade. The ratings agency stated that a prolonged period of oversupply will keep oil prices lower for longer and continue to pressure issuers in the oil and gas industry in 2016, particularly those in the exploration & production (E&P) and drilling and oilfield services sectors (OFS. As a result, the rating agency maintains its negative outlook on the integrated oil & gas, E&P and OFS sectors. The negative outlooks reflect further threats that would compound the current oversupply, which include increased oil exports from Iran in 2016 and the prospect of lower demand from China, the world’s largest consumer of commodities, as its economy slows. DED and DIFC Dispute Resolution Authority sign MoU facilitating transfer of Dubai business shares during succession The DIFC Dispute Resolution Authority (DRA) with its ancillary body, the DIFC Wills and Probate Registry (WPR) has signed an MoU with the Department of Economic Development (DED) to ensure the rapid facilitation of probate court orders covering the Dubai assets of those who have registered their wills with WPR. The MoU marks an important step forward in the development of the DRA and WPR by officially outlining a process in conjunction with a major government department.

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THE MARKETS

A record-breaking year for M&A in 2015, but what will 2016 bring? Steve Allan, of Willis Towers Watson, looks at how global trends in M&A are playing out in the Middle East

lobal M&A figures for 2015 now confirm what many of us already suspected: it was a record-breaking year. The number of completed M&A deals reached an all-time high in 2015, according to Willis Towers Watson’s Quarterly Deal Performance Monitor (QDPM), with 1,041 deals. Activity was intense throughout all four quarters of the year, confounding some people’s expectations that Q4 would see a slow-down. Indeed, the final quarter saw 307 deals completed, the busiest quarter since the QDPM was launched in 2008. The research, carried out with Cass Business School, also showed that acquirers closing deals in 2015 outperformed their share price index by 10.1 percentage points. In other words, companies are not only clamouring to grow through M&A, but the markets are rewarding them for doing so. Investors are confident

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in acquirers’ ability to integrate their targets and realise longer-term growth through these deals.

THE REGIONAL PICTURE

Much of the global picture was replicated in the Middle East. Here too we saw flourishing M&A activity— not just among the publicly-traded companies tracked in the QDPM, but among privately-owned companies. However, the Middle East does not mirror the global picture in all respects. For example, we do not see the same high level of cross-sector or cross-regional M&A activity that was apparent in some regions, with Middle East deals currently more likely to be within the sector or region. Globally, the QDPM registered a record number of cross-sector deals, and the figures show that these cross-border details brought outstanding returns in 2015: acquirers who undertook cross-sector deals outperformed their index by

Steve Allan, says that M&A activity was intense throughout all four quarters of 2015.

23.8 percentage points. The success of these deals—which may involve the integration of very diverse business models and organisational cultures—is testament to the growing expertise in the M&A sector at handling the planning and integration execution required. Whilst we do not yet expect to see high volumes of cross-sector or crossregion M&A activity in the Middle East, we do anticipate cross-border deals gathering pace here in 2016. As the region’s economies develop, there are good opportunities for growth and consolidation in a number of sectors, especially healthcare, finance, construction and materials. Locally, we can expect both publiclylisted and family-owned companies to grow through acquisitions, both domestically and intra-regionally.

PREDICTIONS FOR 2016

What else can we expect to see in 2016? The dominant theme driving

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Whilst we do not yet expect to see high volumes of cross-sector or cross-region M&A activity in the Middle East, we do anticipate cross-border deals gathering pace here in 2016. - Steve Allan, of Willis Towers Watson

- deals in 2015 were worth $10 billion or more

and determining M&A activity globally and in the Middle East will be political and economic events. The news stories that could stir up winds of change in M&A, and affect the volumes and values of deals could include the health of the US economy, including interest rate rises; the outcome of the US election; and growth rates and demand in China. Which way these winds of change blow, and whether they depress or promote M&A activity, depends on if and when different political and economic events coincide. It should be remembered, however, economic uncertainty can create new M&A opportunities as well as shut them down.

OIL WILL DOMINATE THE 2016 NARRATIVE

Against that backdrop, the biggest single issue will be commodities prices. With new oil production due to come online in 2016, and prices set to remain weak, the extraction

and oil and gas sectors will be looking to rationalise and create new income streams. Acquirers in these sectors outperformed their industry indices in 2015, and we expect to see more intra-sector deals as stronger players look to maximise the opportunities. Much of this activity will be global, but the ramifications will be felt locally in the Middle East. First, even if the acquirers and targets in these deals are headquartered elsewhere, the energy companies are likely to have operations here, requiring integration. Secondly, the same process of rationalisation will take place within the smaller, regional players in the industry. And not to be forgotten when we are thinking about potential transformations in the energy market is the potential for state-owned enterprises, such as Saudi Aramco, to come to market. Clearly, the financial aspects of this would be marketchanging, but the transformation could also be cultural—setting in motion an agenda for more family or state-owned companies in the region to become publicly-traded. This is a longer-term shift that would take beyond 2016 to play out, but would certainly have implications for M&A activity in the region long-term.

MEGA-DEALS WILL ROLL ON

A global trend we expect for 2016 is the continuation of mega-deals. This was another area where we saw records smashed globally in 2015, with 22 deals worth $10 billion or more, the highest number since the launch of the QDPM. However, these deals are generally focused on the more mature M&A markets of North America, Asia Pacific and Europe. This unabated trend in mega-deals, probably most evident in sectors such as pharmaceuticals, will bolster up global deal volumes in monetary terms in 2016. However, the vast numbers involved in these relatively few details may mask a gradual slowdown in ‘smaller’ deals (for the purposes of the QDPM, deals worth between $100 million and under $10 billion). If this slowdown does occur—and it may well do in the second half of the year, if the confluence of economic and political news is unconducive to M&A—it will be most visible in those regions where the figures are not bulked up by the mega-deals. The Middle East, with its preponderance of ‘smaller’ deals, may be one such region.

BEYOND THE CHARTS

We will all be watching the commodities price charts, the macroeconomic indicators and the election polls in 2016—the scrutiny may be particularly vigilant in the Middle East, with its economies impacted by the US economy and commodities prices. But one story in M&A will roll out unchanged, whatever shows up in the charts and deal numbers: the key to realising the rewards of M&A will be careful planning, integration execution, and the importance of human capital in any deal. This prediction we know for certain will come true in 2016.

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MARKET WATCH

Governance and IPOsâ&#x20AC;&#x201D; the essential integration Richard Stockdale, CharteredÂ FCSI, Chief Executive, QCo Holdings (also President of CISI UAE Regional Committee) overviews governance and IPOs

Richard Stockdale says that a well-executed IPO needs governance permeating across the whole structure.

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ound governance is a well communicated, integrated series of work streams and processes, ideally and practically covering the entire activities of an entity, allowing all activities to be organised, understood and enabling dynamic oversight and management of the whole entity. A well-executed IPO is the outcome of an intricate, interlocking, role skilled and tightly choreographed dance of between seven and 10 specialist parties all with different roles, but all in the services of the one client: the company offering itself to the market. However brilliant the execution, the success of an IPO judged by the public uptake of the share offering, is subject to too many independent influences to ever be guaranteed. But without sound governance permeating all of the structure and its various moving parts, the chance of a successful outcome is exponentially lowered, with increased risks of attendant loss of opportunity, the wasted cost of the whole process and possibly a damaging loss of reputation. Put simply, an IPO executed in a governance vacuum is not a robust proposition. cont. on page 12

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MARKET WATCH

cont. from page 10

Why IPO at all?

1) Obtain additional capital for expansion. 2) Cash in an element of the owners investment, without endangering future growth and profits. 3) Capture the reputational credibility perceived for publicly quoted companies. 4) Use the public share structure as currency to facilitate potential future acquisitions. 5) Increase the attraction of the investment by providing ready access to liquidity via the market.

What should the company have to commit to as it commences its IPO preparations:

1) Management from top to bottom and throughout the various tiers of the company should have a crystal clear understanding as to the nature and impact of the additional responsibilities placed upon it as a publicly quoted company. 2) A realistic and self-critical assessment of the company’s internal governance policies, sustainable procedures, training, awareness, and compliance, to ensure that all is “fit for purpose”. 3) A commitment to foster deep integrity in its assessment and selection process as IPO mandates are selected and awarded.

The main external participants in an IPO process are diverse and must coordinate their actions. They are:

1) The investment banks selected from the beauty parade. 2) If the lead Investment bank is a partial rather than full underwriter, the possible Underwriting Syndicate. 3) The regulator 4) The lawyers, internal and external 5) The auditors, internal and external 6) The PR firm 7) The prospectus and regulatory printers 8) The Bank Note Company 9) The Transfer Agent The general organisation of the IPO dance and the core roles and choreography of its participants ensure that the process provides specific benefits to each of them.

They are:

1) The company’s management and its existing owners, for the above mentioned benefits. 2) The underwriters for the share discount. 3) The various professional practitioners for their fees. 5) The potential investors for the opportunity to achieve liquid investments in a valuable growing company. 6) The regulator for the enhanced public perception of the quality as a sound environment for doing business.

The global firm PwC highlights five critical and essential governance issues to be followed as IPO preparations commence, along the lines of:

1) Understanding and complying with the regulator’s requirement for the appropriate composition of the Board, various committees and its governance practises. 2) Evaluating the Board’s composition with regards to relevant experience, qualifications and where they are non-executive, independence of Directors. 3) Understanding other influencers in a public company environment, such as Proxy Advisory Firms and generally, the aspirations of new and diverse shareholders. 4) Reviewing, rehearsing and critically testing the company’s governance policies. 5) Securing the adequate skills and resources to execute the IPO and if found necessary due to a lack of appropriate skills in house, select in a transparent, meritocratic process, a quality outsource provider to supply the skills required to instil into the company the governance policies and models relevant for a public company.

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All must participate with a full commitment to the governance of the process as a whole. The exercise of sound, established and communicated governance policies sets the scene and bolts the whole process together. Then with a brilliantly executed IPO, markets conditions will largely decide the commercial success / subscription of the IPO. But if the IPO is brought to the market in a shoddy manner, without adequate governance or non-compliant, those failings will in the bright publicity lights, have adequate time to reveal themselves, to the detriment of the prospects for a successful IPO.

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We apply our steadfast vision, our entrepreneurial spirit and our investment expertise to add value to your wealth management strategies.

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THE MARKETS

UAE banks face declining liquidity Moody’s Investor Services Banking System Outlook for the United Arab Emirates is stable, reflecting the rating agency’s expectation of resilient capital and liquidity buffers

AE banks are facing a decline in liquidity metrics for the first time since the 2008 crisis, in line with tightening liquidity across the GCC region as a result of lower oil prices, according to Moody’s Investor Services (Moody’s). Liquid assets are expected to decline to a still solid 25 per cent from a peak of around 30 per cent of total assets as of December 2014 over the outlook period. ‘’Deposit growth will decelerate sharply to two to four per cent this year and into 2016 from 10 per cent for 2014. This is driving the banks to raise funding from increasingly expensive and confidence-sensitive debt and Sukuk markets to support growth,” said Khalid Howladar, Senior Credit Officer at Moody’s. “As such we expect market funding levels and loanto-deposit ratio to continue increasing throughout 2016,’’ he said. However, Moody’s expects the UAE banks’ credit profiles to broadly remain resilient despite the economic slowdown driven by low oil prices, owing to their strong capital and liquidity buffers coupled with resilient profitability. “While pressures in the small and mid-sized enterprise sector will increase, the UAE banks’ continued resolution of legacy problem loans

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Decline in deposit growth predicted for 2016 in UAE

2% to 4%

will moderate the new problem loan formation,” said Nitish Bhojnagarwala, an Assistant Vice President at Moody’s. The softening UAE economy will weaken operating conditions and result in subdued credit growth. The rating agency expects credit growth to slow down to three to five per cent annually for 2015 and 2016 from around nine per cent for 2014. Nevertheless, Moody’s expects asset quality to remain stable, with impairments at around per cent of total loans for 2016. “While pressures in the small and mid-sized enterprise sector will increase, the UAE banks’ continued resolution of legacy problem loans will moderate the new problem loan formation,” said Bhojnagarwala.

Moody’s forecasts that real GDP growth of around 3.1 per cent and 3.2 per cent for 2015 and 2016, down from 4.6 per cent in 2014. The UAE economy remains the most diversified in the region with continued, although moderating, public-sector spending by the emirate of Abu Dhabi complementing the continued growth in Dubai’s significantly more diversified private sector. Overall Moody’s expects a drop in non-hydrocarbon real GDP growth to around 3.2 per cent for 2015 and 3.4 per cent for 2016. This is positive but less than half the seven per cent peak growth rate observed in 2012. Additionally, the UAE’s hydrocarbon real GDP should also grow by around 2.8 per cent annually for 2015 and 2016 given the expected increase in oil production. Oil prices over the outlook period are expected to remain low in the $50$60 per barrel range for 2016-2017 and hence the rating agency expects banks’ domestic loan growth will also reduce to around three per cent to five per cent for the period, down from nine per cent during 2014. Moody’s expects asset quality to remain stable, with impairments at around five per cent of total loans for 2016. Profitability will remain stable, supported by solid margins, stable operating costs and provisioning charges, according to Moody’s. Although funding costs are increasing, the company expects that it will largely be offset by rising corporate yields, as US linked interest rates increase and the highly competitive lending pressures continues to ease into 2016.

While pressures in the small and mid-sized enterprise sector will increase, the UAE banks’ continued resolution of legacy problem loans will moderate the new problem loan formation.

- Nitish Bhojnagarwala, an Assistant Vice President at Moody’s

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27/01/2016 16:22

THE MARKETS

UAE Banks preparing to implement IFRS 9 Yusuf Hassan, Partner KPMG says the new regulation is going to be a challenge for banks due to higher provisioning

FRS 9: Financial Instruments was issued on 24 July 2014. The standard is a game changer for banks and other financial institutions. After long debate about this complex area in accounting, the implementation efforts have begun in earnest at banks. Financial instruments largely constitute loans, investments, debtors, receivables, creditors, payables and derivative instruments like forwards, swaps and options. With the increasing complexity in the nature of these instruments, financial instruments accounting has traditionally represented a maze that has baffled many auditors and accountants alike. The new standard provides revised guidance on the classification of financial assets, and supplements the new hedge accounting principles published in 2013 but the aspect that is a cause for concern is the new guidance on the impairment of financial assets, i.e., provisions for loan losses. In the past, concerns have been raised that the provisioning for loan losses was â&#x20AC;&#x2DC;too little, too lateâ&#x20AC;&#x2122;. The new expected credit loss model for the recognition and measurement of impairment aims to address these concerns, and accelerates the

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Yusuf Hassan, Partner KPMG

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recognition of losses by requiring provisions to cover both alreadyincurred losses and some losses expected in the future. When a bank provides a home loan to a person, there could be a number of events that would cause a loan loss for the bank. For example, loss of employment or serious injury to the customer could lead to a loan loss. Under the incurred credit loss model that is currently applied, the bank would provide for a loan loss when such an event occurred. However, under the expected credit loss model, the bank would need to anticipate that such an event could occur and therefore, would provide for such expected loan losses early. The new model requires banks to provide for lifetime expected credit losses on the date the loan is first recognised based on defaults expected over the next 12 months. In case of a significant increase in credit risk from the date of recognition, loan loss provisioning is recognised based on the defaults expected over the expected life of the loan. This is likely to see higher provisioning, more complexity and deeper involvement of risk management on account of use of credit models. Consequently, provisions for loan losses will be bigger and are likely to be more volatile and adopting the new rules will require a lot of time, effort and money. A major issue for banks and their investors will be how the new standard will effect regulatory capital ratios. Banks will need to factor this into their capital planning, and users of financial statements are likely to be looking for information on the expected capital impact. The new IFRS 9 presents a holistic challenge to a bank. This is not an issue that affects only finance or risk. The ripple effect of IFRS 9 will be felt across the organisation. Due to higher

The new model requires banks to provide for lifetime expected credit losses on the date the loan is first recognised based on defaults expected over the next 12 months. - Yusuf Hassan, Partner KPMG

provisioning, the bank would need to review its capital requirements. Product mix and business models will also need to be evaluated. On the operational side, changes would need to be made in systems, processes and other infrastructure. Since significant judgment and estimates are required, setting up an appropriate governance mechanism is of importance. All of this is likely to require an investment of cost and time.

Though the standard is applicable to accounting periods beginning after 1 January 2018, the changes are so perverse and far reaching that institutions need to act now to comply with its requirements. Many banks may require the whole two years to prepare for adoption of the expected credit loss requirements. Some of the global banks have been working on IFRS 9 implementation projects over the last couple of years and are now nearing completion. Most UAE banks have commenced their efforts to study the impact of IFRS 9. Others are further along and have commenced implementation. Banks in the UAE do not have portfolios or operations that are as complex but now with the limited amount of time, it is like walking through a minefield for the CFO and CRO. Any mistake will compromise a bankâ&#x20AC;&#x2122;s ability to comply with the standard in time. While banks and other financial institutions are most impacted, other corporates should not assume that the impact of the classification, measurement and impairment requirements of the new standard will be small, as this depends on the exposures they have and how they manage them. Planning for IFRS 9 adoptionâ&#x20AC;&#x201D;including implementation of the new hedge accounting requirementsâ&#x20AC;&#x201D;is likely to be an important issue for corporate treasurers and accountants as well. With IFRS 9, the standard setters have taken significant steps to address some of the concerns that were being raised by the users of financial statements. While the intentions are good and significant time and effort has been spent by the IASB during the standard setting phase, the verdict on the standard will be out soon.

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17 26/01/2016 11:53

COVER STORY

View from the top Mashreq CEO AbdulAziz Al Ghurair reveals his thoughts to Banker Middle East on the outlook for the UAE banking sector in 2016.

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l Ghurair is rightly proud of the fact his bank has won a Gallup Great Workplace Award two years running. But staying at the top of your game is just as challenging as getting there. In a wide-ranging discussion with Robin Amlôt, Al Ghurair outlined the challenges and opportunities facing the bank and its peers in 2016, beginning with the global and local economic issues raised by the slump in the oil price. “The oil price is way below what we were used to last year and the year before. It will certainly have an impact on the economy but luckily the UAE has also been able to diversify: 70 per cent of our economy is non-oil based. “What is impacting us most is what is happening in our neighbouring countries and our trading partners. Where they have a dependence on oil of 80-90 per cent, our trading partners in the Far East or in Africa have been hit by lower commodity prices. Since our economy is open to the rest of the world, the slowdown in our partners is having an impact on the UAE economy.”

Has the introduction of Al Etihad Credit Bureau had an impact on bank lending volumes and policies?

Al Etihad Credit Bureau is a great development for the economy, the banking sector and the customer as well. Now we have accurate data that we can base our lending on. It will reduce the amount of lending. Our rejection rate is higher because now we have accurate data but in the long run it is good for the economy, the customer and the banking system.

The background is a slower global economy and a slowdown in local lending, even if for the right reason; what impact will there be on the domestic SME sector?

The SME sector has been impacted, definitely, during 2015. It will be impacted in 2016 because our trading partners have slowed down. Some of our traders base their business on exporting to other countries. Now they may have a problem, so they have to find other markets or sell at a discount or loss which will impact their business. Some customers end up by skipping and running away from the UAE so as not to deal with the issue. [Speaking to reporters during the UAE Banks Federation’s Middle East Banking Forum in November 2015, HE Al Ghurair was quoted by Reuters as suggesting that the UAE banking sector’s losses in 2015 as a result of small business owners fleeing the country with unpaid debt, had already reached around AED 5 billion ($1.4 billion).]

Is that a problem you see growing in 2016?

I think it has peaked. Those who [are going to] skip have already skipped. There will always be higher losses in SME business but banks will price this in. With the credit bureau in operation we will do better lending to the customers that will help us for new loans. However, old loans that we have given will have to go through this teething issue and adjustment period for the next six months maybe.

A number of local banks have pulled back from SME lending. How important will SMEs be to Mashreq over the next 12 months?

SMEs are very important for the economy because they are the future corporates, the future large corporates, and we need to continue to support SMEs. Yes, banks have pulled out. Some overreacted but overall those banks will come back and do lending to the SMEs. However, the SME industry is not pure and not organised. For example, many don’t have balance sheets and don’t have a rated auditor or even any auditor on their balance sheet.

In order to have a satisfied customer you need to have a satisfied employee. For the last two years now we have won the Gallup Great Workplace Award. - Mashreq CEO AbdulAziz Al Ghurair

Realistically speaking it is very difficult to lend to an SME in the absence of a proper balance sheet audited by a good quality auditor. These are critical, fundamental infrastructure for an SME for banks to have better clarity in order to lend. We are encouraging that, talking to governments to really put in the discipline. If you want to be an SME, please ensure you have a balance sheet and you have it audited by an auditor. We are asking that audit firms should be rated, that we should have ‘A’, ‘B’, ‘C’ and ‘D’ auditing firms. If you are a large SME, don’t give me a ‘D’ rated audit firm, I need a ‘B’ or a ‘C’.

In the larger corporate sector Mashreq is active both in the UAE and elsewhere in the region. What are the prospects for this business? We are in Qatar with five branches. We are the only large cont. overleaf

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19 28/01/2016 08:44

COVER STORY

cont. from page 19

Mashreq has been in Qatar for 40 years.

scale foreign bank doing retail banking in Qatar, we have been there for 40 years. The Qatar economy is growing and we have enjoyed a fantastic ride, our Qatar operation has done extremely well. We are in Kuwait and we are in Bahrain. In both countries we have a single branch. Both branches are profitable, growing and taking market share. Basically we are following our clients, wherever they go they now see a Mashreq bank in Qatar, in Bahrain, in Kuwait, but we are also not forgetting to do business in these countries. [In Qatar, Mashreq was lead bank in the consortium providing finance for the Doha Metro’s Red Line North project worth some QAR 8.46 billion ($2.32 billion). The Red Line North Underground project includes two parallel 13km underground tunnels and seven underground stations. In Kuwait, Mashreq was exclusive arranger and bookrunner for a syndicated term loan of $100 million loan for Korean contractor, SK Engineering and Construction in support of projects for the Kuwait Oil Company and Kuwait National Petroleum Company.]

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In Egypt we have a network of 10 branches. That is a growth area for us, even during the last three years business has been growing quite nicely in Egypt. We also have branches in New York, London, Hong Kong and India offering correspondent banking services.

Turning to the UAE’s retail banking market. Mashreq now has a very good reputation but this is not something you can stand still on? Mashreq pioneered retail banking in the UAE so retail banking is really in our genes. It evolves with the banking system, with the economy and with customer sophistication. We have done many firsts and we continue to do many firsts and this is not the end of it. The end is to continue for the next five years to ensure that we will fulfil customer expectations in retail banking. The customer is getting more sophisticated, what we used to do three years ago is no longer acceptable. It is really a chase in innovation, moving the needle one step further and looking at what will satisfy the customer. Customer centricity was always

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27/01/2016 16:27

in our genes. We are driving customercentricity and, ultimately, customer satisfaction to get more business. In order to have a satisfied customer you need to have a satisfied employee. For the last two years now we have won the Gallup Great Workplace Award. [Mashreq was one of only 36 organisations around the world in 2014 and 40 in 2015 so honoured.] It’s an indication that we are doing something right for our employees. Hopefully, a satisfied employee will do something right for the customers—we don’t sell cameras, phones, cars, we sell our services. We run at a 93 percentile in the Gallup survey. This is very high, it is actually dangerously high! It can only come down. We cannot reach 100 per cent; you cannot have 100 per cent employee satisfaction, 93 per cent is a very high satisfaction rating.

Therefore, hopefully, we are working to ensure that the customer is also satisfied. We do many surveys with our clients, by product, by segment, by sector, to ensure we get genuine feedback from our customers. We have a focus group with our customers in retail banking to listen to them and get their feedback, to tweak our service, to tweak our products.

How concerned are you about issues around IT security, card privacy and protection?

It’s a race between us and the thieves! Because we are dealing with money, it is very attractive for people to invade our territory, but I think banks overall have spent enough money. The security system is in an advanced state to protect the bank, to protect our customers. You cannot stop it 100 per cent. There is

a cost to doing business and some security leakage is possible. Every single bank, Mashreq included, does their best to protect customer privacy, customer data. But also the customer has a responsibility. Generally customers are very loose and think it is the bank’s duty to protect them. No—it takes two to tango, customers also have a responsibility. If [a customer] sees a funny transaction on his statement he should tell us. Now, every single ATM or credit card or debit card transaction comes to your phone, telling you this transaction has happened. If you ignore it and don’t call us back and we ask customers if this was not your transaction, please call us back; if you don’t take action, it is your responsibility to protect your own money. cont. overleaf

Mashreq believes that to have a satisfied customer you need to have satisfied employees.

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COVER STORY

cont. from page 21

We are going through an education phase with our customers to explain that they also have a responsibility to protect their money the very same way we protect their money.

There’s a common theme here… the need for greater understanding of financial matters in both SMEs and retail customers. This is not a new issue but do you think financial literacy has improved in recent years? It has, definitely. It has come a long way but you should also remember that every day we have a new customer or a new SME coming into the banking system; a customer just opening his new current account, his new savings account and he’s not that sophisticated. We have to educate these new people coming to the bank. Even in corporate banking, Mashreq and other banks operate a call back system. It may be a bit annoying for a customer but if you ask for a remittance we will not release that remittance until we call you and verify, “Did you authorise this payment?” We have found sometimes even at a corporate level, leakages happen in finance departments without the CEO or CFOs knowledge. Operating like this gives them a signal that this transaction will be verified and the customer protected.

What’s the broader outlook, where is the biggest opportunity for Mashreq over the next one to five years? I think corporate will continue to grow. Mashreq will give unique services and experience to our corporate clients. We are a little bit different to most of the banks because we are segmented by industry not by turnover. So your Relationship Manager (RM) is expert in your industry. If you are mechanical, electrical subcontractors, our RM will only handle mechanical, electrical subcontractors. The way we serve the customer is by industry. It has many benefits. We become the industry experts; we add value when we discuss issues with the customer about his industry. We understand the risk associated with that industry, we can approve the risk because we understand it.

It is commonly said the UAE economy is overbanked. What’s your view?

This is how the UAE economy

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was built, as an open market allowing every sector to flourish. The banking sector has proven that, growing year after year. Today the banking sector is almost eight per cent of GDP, We have 52 banks working here in the UAE and it continues to flourish. If you look at 80 per cent of the market, it is probably handled by 20 per cent of the banking system. Some foreign banks are here as niche players, servicing their clients from elsewhere in the world—they don’t want to be the number five bank in the UAE, it serves their objective to have a service centre for their clients from elsewhere. Banks are still growing in the UAE. As long as that growth is there, people will hang on.

In your role as Chairman of the UAE Banks Federation (UBF), what are the policies and issues that the UBF is looking at that will impact the industry? In 2015 we had 50 different initiatives working with along with the Ministry of Finance, the Central Bank (CBUAE) and the Ministry of Justice. The partnership we have developed with the regulator, the CBUAE, has further improved, they take us seriously. Our interest is first to protect the UAE economy, then to give the customer a great experience, thirdly to make money for our industry. We have been able to ensure that we have a balance between banking, the customer and the regulator. We have initiated many ideas, regulations and laws for the banking system. We managed to convince the Central Bank and Ministry of Finance to have a netting law. The draft is now being prepared and will, hopefully, be enacted in 2016. [Within the international banking arena, guidelines on netting were introduced in Basel II. The practice effectively decreases credit exposure, reducing both risk and costs.] We have also done a c u s t o m e r s u r v e y, a s k i n g customers how satisfied are they with the banking system and we really ranked quite well! AbdulAziz Al Ghurair, CEO Mashreq

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28/01/2016 09:01

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COUNTRY REPORT UAE

UAE banking faces a tough road ahead Outlook on the UAE’s banking sector remains depressed in the face of sagging hydrocarbons prices

ran’s ability to oversupply the market with oil and further stomp on the oil price, worries about another Fed rate increase, plus bankers’ predictions that all sectors will see a softening in lending appetite in the UAE, has made the coming months somewhat uncertain. According to the 2015 Credit Sentiment Survey by the Central Bank of the UAE, results from the December quarter credit sentiment survey revealed a down-tick in credit appetite within the UAE overall. This follows several quarters of robust lending growth. The report showed that demand for credit across corporates and small businesses contracted across all emirates in December, with the net balance measure in aggregate dropping to -8.1 in the December quarter and stayed in negative territory for the first time. This may be in part due to tightening of credit standards, meaning that it is harder to get a business loan. Banks are also less interested in lending to SMEs, particularly with a forecast of AED six billion in skips in 2016. Demand for personal loans and housing loans also continues to contract across the UAE, with personal loans reflecting a negative net balance measure of -6.2. the first time since 2014 that this measure has been in the negative.

The report states that this softening across all sectors may be due to the uncertainty on the oil price and the lack of a clear direction of the global economy in 2016. Early January saw the oil price sag below $30 a barrel, with a noteworthy rebound to over $32 later in the month. In response to the ‘new normal’ oil price, the UAE Government has decided to scrap its remaining energy subsidies, hoping to add some more money into the government coffers. Suhail Al Mazrouei, the UAE’s Energy Minister, told the World Economic Forum in Davos that he was planning to scrap subsidies on electricity and gas sold to power generators. “We need to think about major reforms to make the budget less dependent on the oil price, and to build an economy that is vibrant but also taking advantage of the lower oil prices,” he told WEF attendees. This diversification away from oil is being repeated across hydrocarbon-

producing nations in the GCC, but the unanswerable question is whether the diversification that has already occurred is enough to sustain the various countries through what looks to be a tough period ahead. While some financial analysts are predicting a mere ‘correction’ for the regional economy, some are anticipating a long and drawn out economic thunderclap that will reverberate across the globe. Standard & Poor’s said it expects negative earnings growth for banks in the United Arab Emirates in 2016 and a lacklustre performance in 2017, in its report entitled UAE Banks: Earnings to Decline in 2016 as Operating Conditions Weaken. Investors are comparing today’s tougher conditions for banks in the UAE to those during the global financial crisis starting in 2009. However, Standard & Poor’s believes that this time is different. Standard & Poor’s Credit Analyst Timucin Engin said that while it’s true that during the 2008 financial crisis, oil prices sagged, as they have recently, there was also a steep decline in prices for real estate and a liquidity squeeze, which revealed excess leverage and weak funding structures for certain government-related entities - as well as a lack of proper underwriting practices at some UAE banks. “After an initial shock to banks that led to a visible deterioration in performance in 2009 and 2010, liquidity began to flow back into the financial system in 2010 on the back of stronger

Given the role of such a commodity in the economy of this major oil producer, domestic economic growth is slowing, accompanied by continued volatility on the UAE equity markets and a correction on the residential real estate market.

- Standard & Poor’s Credit Analyst Timucin Engin

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oil prices. The credit cycle turned as early as 2012, and declining credit losses made way for a recovery in bank earnings. What’s different this time is that the oil prices are now markedly lower. Whereas at that time oil prices began to rebound after a few months of weakness, this time we expect them to remain low for a longer period of time. Given the role of such a commodity in the economy of this major oil producer, domestic economic growth is slowing, accompanied by continued volatility on the UAE equity markets and a correction on the residential real estate market,” said Engin. In addition, Standard & Poor’s believes that the uncertainty about how long oil prices will remain weak will force businesses and governments to adopt a more conservative stance, which, in turn will weaken spending on infrastructure and private-sector investments, and rein in bank lending. “We are likely to see a gradual but longer deterioration in operating conditions for banks over the next several quarters or years,” said Engin. Standard & Poor’s expects a slowdown in credit growth and continued weaker deposit growth, with a renewed but manageable deterioration in asset quality. However, Standard & Poor’s believes that the top five banks in the UAE will be able to withstand the tough times ahead through 2018 due to their healthy liquidity, good loan loss coverage and strong capitalisation levels. Ratings agency Moody’s is slightly more optimistic on the banking sector’s overall ability to withstand another credit crunch. “We expect UAE banks’ credit profiles to broadly remain resilient despite the economic slowdown driven by low oil prices, owing to their strong capital and liquidity buffers coupled with resilient profitability,” said Nitish Bhojnagarwala, an Assistant Vice President at Moody’s.

Moody’s does agree with Standard & Poor’s that the softening economy will weaken operating conditions and result in subdued credit growth. The rating agency expects credit growth to slow down to between three per cent and five per cent annually for 2015 and 2016, from around nine per cent for 2014. Moody’s expects asset quality to remain stable, with impairments at around five per cent of total loans for 2016. “While pressures in the small and mid-sized enterprise sector will increase, the UAE banks’ continued resolution of legacy problem loans will moderate the new problem loan formation,” said Bhojnagarwala. Moody’s expects banks’ return on assets to remain at around two per cent over the outlook period.

The ratings agency predicted that profitability will remain stable, supported by solid margins, stable operating costs and provisioning charges. Although funding costs are increasing, the company expects that it will largely be offset by rising corporate yields, as US linked interest rates increase and the highly competitive lending pressures continues to ease into 2016. In line with tightening liquidity across the GCC region as a result of lower oil prices, liquidity metrics for UAE banks will decline for the first time since the 2008 crisis, according to Moody’s. Liquid assets are expected to decline to a still solid 25 per cent from a peak of around 30 per cent of total assets as of December 2014 over the outlook period.

UAE tops M&A deal values According to Baker & McKenzie Habib Al Mulla, 2015 saw record breaking cross-border deals by value in the Middle East, despite a backdrop of political and economic change. “Looking ahead to 2016 and beyond, notwithstanding low oil prices and macroeconomic uncertainty, we expect our clients to be opportunistic, particularly in relation to cross-border deals, and for continued deal activity in the UAE,” said Will Seivewright, Corporate/M&A partner at Baker & McKenzie Habib Al Mulla, UAE. Cross-regional deals targeting the Middle East totaled 80 deals valued at $9.73 billion in 2015, with the UAE featuring as the target country for three out of the top five M&A deals into the region. In terms of 2015 as a whole, the UAE was the most valuable country of the year, having been targeted in deals worth $15.19 billion, 29 per cent higher than the $11.81 billion recorded in 2014. The figure is almost four times larger than that of second-placed Egypt, which was targeted in deals worth $3,92 billion. The largest deal targeting the MENA region was an asset sale by OCI worth $8 billion. CF Industries, through its nitrogen fertiliser holding company Darwin Holdings, agreed to acquire OCI’s global distribution business in Dubai, among other European and North American assets, in August. This deal accounted for 71 per cent of all investment in the MENA region in Q3 and 26 per cent of total value for the year. Source: Baker & McKenzie Habib Al Mulla

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25 27/01/2016 16:29

FEATURE

Changing times Philippe Ithurbide, the Global Head of Research, Analysis and Strategy from Amundi, says that he is positive on the outlook for the region despite the oil price slump, and the increased Fed rate

The future growth of regional and global economies relies heavily on an improving oil price. (Credit: Rob Pitman/Shutterstock.com).

CC countries are facing a grim future in the face of an oil price that has sagged below $30 per barrel, meaning that the barrel the oil goes into costs more than the oil it contains. If the oil price continues to drop, oil producing nations will face increasingly large budget deficits. There are two

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main drivers for the overall economy in the GCC: first is the Fed policy and the second is the oil price. If the Fed tightens the interest rate too much, too quickly, economic activity will decline not just regionally, but globally, according to Philippe Ithurbide, the Global Head of Research, Analysis and Strategy from asset management firm Amundi.

“The oil price is important, particularly for Saudi Arabia. We are expecting oil prices to rise gently and softly, but to stop declining. The reason why the oil price went down so massively in the past two or three years is because we had huge changes in supply from the US in particular. Some countries also decided to produce oil where they had not before, to contribute to state funds,” said Ithurbide. This, coupled with a slowdown in oil demand due to China’s contracting economy, meant the oil price slumped. According to Ithurbide, what the oil price has faced over the last two years is similar to the period over 1985 to 1986 where there were new discoveries of oil and OPEC gave up in its capacity to manage the oil price. “Something is changing; we understand that Saudi Arabia wanted to hurt the US they wanted to hurt Russia, they wanted to hurt Syria, Iran, and other OPEC countries, but they hurt themselves. There is a good chance for the US and Saudi Arabia to try to stabilise the oil price and we think that is pointing to $60 a barrel in one year. At the moment it is sub $30,” he said. For GCC countries, the outlook on the economy is dependent on the Fed rate and Amundi does not expect the Fed to tighten interest rates too much going forward, but is expecting two increases in rates at this stage. This may very well be a plus for the region and if, at the same time there is a recovery of commodity prices including oil, the outlook for regional economies will be positive. cont. on page 28

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26/01/2016 13:31

FEATURE

cont. from page 26

Amundi does not believe the widely held notion that Iran will flood the market with oil as sanctions are lifted but for the first time in a long time, Iran is again on the map. “Iran is resurfacing, there will probably be a lot of infrastructure deals. I wouldn’t say Iran will flood the market with oil, it is not in their interest. The answer for the oil market will mainly come from Saudi Arabia and the US,” said Ithurbide. Amundi believes that the US and Saudi Arabia have the cards in their hands to stabilise the oil price, but there are some risks going forward; Iran, but also the US because there is a good chance that the US Senate may give authorisation to sell raw oil. It will be the first time this has happened in 45 years. This is a pending issue on the market, which is another reason why the oil price is down, according to Ithurbide.

2016 OUTLOOK

The GCC will not decline further, according to Amundi, and there should be some kind of stabilisation of the economies, but it is massively linked to three prerequisites. “Number one is China. If China slows down more seriously than we think, then there is a possibility for the emerging group of countries to suffer more; the second prerequisite is the Fed, if it tightens a lot or the markets do not understand what they do, there is another risk; and the third is the oil price,” said Ithurbide. If the oil price goes down, the Fed tightens too much and China slows down further, then the economic picture will deteriorate even more for plenty of countries including those in the GCC region. World trade is no longer that important, the focus is now on internal demand, particularly in the US, China and Europe. According to Amundi, globalisation is retreating.

28 page 26-28 Amundi.indd 28

“If you look at world trade it is stable at best in volume and is declining significantly in value, which is pretty new. You have countries where the in-country risk is much more important because growth everywhere is much more driven by internal demand and for the countries based on commodities and on one commodity, the risk is maximum,” said Ithurbide.

which means that growth is much better. However, Europe still has a huge excess of capacity, but the situation is getting better, which is highly positive. “The deflationary fears we had two years ago were purely internal, while today deflationary fears are mostly external; it is China, commodity prices, world trade etc.,” said Ithurbide. There is one prerequisite that is important to an improving global

There is a good chance for the US and Saudi Arabia to try to stabilise the oil price and we think that is pointing to $60 a barrel in one year.

- Philippe Ithurbide, Global Head of Research, Analysis and Strategy, Amundi At the moment the economic picture is not that good globally for all countries producing commodities. Countries such as Australia, Brazil, and Saudi Arabia are suffering. Amundi is not expecting China to slow down further or the Fed to tighten the rate too much going forward. Some countries have their currencies pegged to the dollar, which is the case in China (and the GCC) and that is one of the reasons why the US has to be very careful in the way it manages the monetary policy. “In a nutshell what we see in Europe is not very strong acceleration in growth, but the situation is getting better. For example, five years ago we just had one engine for growth and that was big expenditures. Today we have exports and concessions, so even if growth is not expanding that much, there are a few countries in a better situation: Portugal and Italy are now in good shape. In Portugal politics is so-so, but economically speaking the situation is much better, growth is driven by internal demand and of course it gives a plus for the equity markets,” said Ithurbide. Europe is now trading a lot within Europe; internal demand is stronger,

economy; the emerging markets including China. However China is another matter of concern for Amundi’s portfolios. The company does not share the view that China has to experience a hard landing, but it is clear it is slowing down. “China has been slowing down for years, it has to. China is developing and when a country is developing, the savings rate goes down, potential growth goes down, and growth goes down. If you look at the US, Korea, Japan, Germany, France, it is a fact. So the question is how far, how quickly, when?” said Ithurbide. If China’s growth is calculated using productivity gains and the demography of the country it shows the devolution of people at age to work. Ten years ago it was 10 per cent, today it is around five per cent. But the question is: is it possible for it to fall to two to three per cent now? “Our answer to this question is no. China will have growth around six per cent, but the most important element is not the figure, it is the breakdown. Growth in China is switching from exported growth to internal demanded growth at the moment and it is far more positive for the world economy,” said Ithurbide.

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27/01/2016 16:34

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02/04/2015 02/04/2015 08:50 31/01/201608:50 15:19

COUNTRY REPORT Kuwait

Kuwait: recent improvements but a story of decline overall Greg Rung–Partner, Financial Services, TICG and Ibrahim Ghoul–Principal, Oliver Wyman identify the pain points and future of the country’s economy

uwait’s assets have led to its financial sector regularly placing at the forefront of the GCC in the second half of the 20th century. Kuwait has the oldest sovereign wealth fund in the world (established 1953), the first stock exchange in the region (initiated 1977), and a financial sector which accounted for a significant 14 per cent of GDP in 2007 (second highest in GCC after Bahrain). However, multiple factors, including global and regional developments and increased competition, have eroded Kuwait’s financial sector’s positioning compared to other GCC centres. Today, Kuwait ranks low across many economic and financial sector indicators. It ranks 86th in ease of doing business, 68th in availability of financial services, and 45th in ease of access to commercial loans. Kuwait is excluded from the Global Financial Centres Index, which ranks competitiveness of financial centres around the world. Its stock exchange (KSE) has been in decline since the 2008 crisis: value of traded shares dropped by 84 per cent between 2008 and 2014, while market capitalisation dropped by 49 per cent. These elements, along with a lack of transparency (ranked 67th globally in the 2014 Transparency International Index, lowest in GCC), have contributed to KSE remaining on MSCI’s Frontier

Greg Rung

Ibrahim Ghoul

Markets Index. By contrast, UAE and Qatar Exchanges were promoted to Emerging Markets in 2013, and KSA’s is expected to join them in 2017. In addition, FDI outflows from Kuwait are highest among GCC countries, while inflows rank in the lower half. Finally, anecdotal evidence from interviews puts the per cent of Kuwait’s private wealth located in foreign markets at 60 to 80 per cent, an indication of the confidence Kuwaitis have in their own financial sector. The goal of the 2020 Kuwait vision for the financial services sector, drafted in 2007, was for Kuwait to become a niche regional financial centre focused on wealth management and capital markets. However, leaders within this sector now doubt that Kuwait will successfully compete for investors

with KSA, Dubai, Abu Dhabi, or Qatar. Nonetheless, Kuwait has strong fundamentals (#11 in GDP per capita, #6 in oil reserves, 96 per cent literacy rate, 41 per cent of population under 25). And the leaders we interviewed believe that the financial services sector has a responsibility to further support the real economy. There is therefore an essential need to assess Kuwait’s financial services sector and identify means by which to address key pain points and impediments to growth.

AN URGENCY FOR CHANGE

Kuwait stands at an inflection point today. Oil prices are down and Kuwait’s revenues from oil have shrunk. Its young demography will lead to ~230,000 Kuwaitis entering the workforce over the next 10 years (net increase in Kuwaiti

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workforce of ~175,000). TICG, a joint venture between KIA, KFAED and Oliver Wyman, has conducted research for the Kuwait National Vision and has identified an urgent need for change. Forecasts suggest that the current approach of absorbing 80 per cent of the labour market into public service is not sustainable and could lead to a budget deficit as early as this year. Indeed, in January 2015 the cabinet approved the budget for the 2015-2016 fiscal year, projecting a $23 billion deficit; the government’s wage bill comprised the single largest expenditure component, projected to account for 52 per cent of total government expenditure. Furthermore, based on publicly available data, and assuming an oil price of $45/barrel and a growth in public expenditures of two per cent per annum (in contrast to the nine per cent average over the past three years), our forecasts indicate that the General Reserve will be depleted by 2025. We asked leaders of 30 major financial institutions in Kuwait to identify and rank the pain points in their sector. Regulation was identified as one of those pain points. All interviewees acknowledged the instrumental role that regulators played in protecting the economy through multiple financial crises (e.g., NPL ratio has decreased

from 8.9 per cent in 2010 to 3.8 per cent in 2014) as well as various improvements that are taking place (e.g., higher provisioning levels, corporate governance frameworks, Basel III, and launch of automated cheque clearing). However, most interviewees identified an exceedingly risk-averse approach of control over incentives as stifling the sector, leading to a lack of competition and innovation. The regulatory environment has made access to financing a challenge for the private sector, especially SMEs. Another key challenge identified by most interviewees is the availability of human capital. A high Kuwaitisation ratio requirement coupled with a small pool of talent has made employee acquisition and retention a major challenge within the financial sector. The fact that the private sector must compete for talent against comparably high-paying, but significantly lower pressure, public sector jobs, provides the wrong incentives for job seekers.

beneficial to evolve the FS sector so that it works better for the real economy. We estimate that doing so would create tangible value, leading to an increase of $10 billion in Kuwait’s 2025 GDP and $55 billion cumulatively over the 10-year period 2016-2025. This could lead to an additional 65,000-110,000 private sector jobs cumulatively, both FS and non-FS, by 2025 (15 per cent of total cumulative job creation in the base case). These new jobs would accommodate an estimated 30 to 50 per cent of all Kuwaitis entering the workforce for the first time over the next decade. This translates into a 10 to 20 percentage point increase in the share of employed Kuwaitis working in the private sector, compared with the 2025 base case. It has the potential to reduce the government’s wage bill by $5 billion and increase government non-oil revenues by $1 billion in the year 2025 (for these two metrics, a cumulative addition of $20 billion and $5 billion to the national account by 2025).

THE $10 BILLION OPPORTUNITY

THE OPPORTUNITIES FOR GROWTH

The dominant conviction that emerges is this: instead of categorising Kuwait as another regional or international financial centre, it would be more

In addition to the direct impact on GDP growth, a competitive FS sector would better position Kuwait’s private sector to capture several indirect

Exhibit 1: GCC Country Global Rankings – Select Indicators Ease of doing business, WB 2015 Bahrain

Qatar

Saudi Arabia

49 22

Oman

Ease of access to commercial Transparency International loans, WEF 2014 Index, TI 2014

Kuwait

UAE

Availability of financial services, WEF 2014

47 13

1 48

26 27

55 25

Note: World Bank ranking out of a total of 189 countries. WEF rankings out of a total of 144 countries. CPI ranking out of a total of 174 countries. Source: World Bank (WB), World Economic Forum (WEF), Transparency International (TI)

cont. overleaf

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COUNTRY REPORT Kuwait

cont. from page 31

opportunities: a significant share of the $116 billion planned expenditure for Kuwait’s National Development Plan (NDP) is expected to be financed by the private sector through PPP and BOT agreements; this can be facilitated with a broader set of financial instruments; A reformed FS sector would allow Kuwaiti businesses to leverage their strategic location between larger regional economies, e.g. KSA and Iraq; Other potential opportunities have been identified in insurance, SME, Islamic banking and asset management. To ensure success of a reform programme, it should focus on practical steps consisting of incremental and digestible improvements. It should be led by a taskforce that is governed through a model based on best practices from other jurisdictions and adapted to the unique specificities of Kuwait. In some areas Kuwait has already begun the difficult work; recently launching multiple initiatives aimed at improving the financial sector.

In addition, the NDP identifies and outlines many FS sector policies that will affect the banking and insurance sectors, the stock exchange, and the regulatory role of the Central Bank. The market is aware of these initiatives, and many expect that they will soon be implemented. However, several have not been prioritised for implementation projects over the next two years. This misalignment of expectations could lead to market frustration and further erode confidence. In fact, part of TICG’s work for the National Vision entails optimizing implementation by revising the NDP to ensure it is driven by the national vision and achieves its objectives in the most effective and efficient manner. From dozens of improvement initiatives discussed during interviews with FS industry leaders, we heard consistent themes: regulatory effectiveness, access to human capital, and private sector reform. However, how to achieve these goals has not been clearly articulated. Now is the

time to do so; Kuwait’s financial sector has long been over-analysed, but fixes have been grossly under-implemented. We believe Kuwait can start seeing benefits from reforms in less than two years, thus positioning itself on a path to realise the returns outlined in this report. According to the Oliver Wyman—Zogby Research 10th GCC Business Confidence and Government Reform Survey 2015 (which surveys over 200 C-level executives), general business confidence in Kuwait increased by 55 points between 2014 and 2015, the highest increase in the GCC. On the heels of that survey, and given the significance of the potential upside of these reforms, we believe that the time for Kuwait to invest in change is now. Making incremental but meaningful improvements to key areas of the financial sector benefit, not only the FS sector, but the broader economy. The starting point in our view is the establishment of a joint task force to take ownership of this issue and lead change.

Exhibit 2: Potential Impact of FS Sector Enhancement on Kuwait’s National Accounts $ BN Government revenues and expenditure forecast (USD BN) Reduce government wage bill by up to ~$20 BN over 10 years

120

Impact of reforms on government national accounts

Surplus

Deficit

30 2011A

Increase government non-oil revenues by up to ~$5 BN over 10 years Assumed oil price drop to $45/barrel results in potential deficit starting in 2015

2015E Revenues

5 2020E

Expenditure

2025E

• These reforms could increase government non-oil revenues1 by ~$5 BN over coming 10 years... • ...while translating into 10-20% migration2 of jobs from public to private sector, reducing government wage bill by up to ~$20 BN by 2025 • Combined impact of reforms could be additional ~$25 BN to the national account by 2025

2015-2025

Forecasts

1. Taxes on profits, taxes and fees on international trade and transactions, etc. 2. Increase in share of employed Kuwaitis working in the private sector. Source: International Monetary Fund, Department for International Development (UK), Journal of Economic Cooperation and Development, Chr. Michelsen Institute (Norway), Journal of Monetary Economics, International Labor Organisation, Kuwait Ministry of Finance, Kuwait Central Statistical Bureau, OPEC, KPC, Oliver Wyman analysis. Assumes a USD/KWD exchange rate of 3.31.

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COUNTRY FOCUS Iran

What does the lifting of sanctions really mean? Jim Knight, Partner at the Dubai office of global law firm Morgan Lewis investigates the lifting of secondary sanctions on Iran

lobal corporates have been keeping a close eye on Iran since the announcement of Implementation Day in July 2015. After all, Iran is a fresh new market with crumbling infrastructure and a need for capital, investment and development on a massive scale. But, has the lifting of sanctions really opened the doors to investment? “Most international corporates operating in the Middle East have been tracking the progress of the Iranian-sanctions status for a while, and keeping apprised internally, but we have definitely seen a significant uptick in inquiries from clients over the last week since the actual announcement of Implementation Day,” said Jim Knight, Corporate Partner in Dubai for the international law firm Morgan Lewis & Bockius. According to the US Department of the Treasury, the 16th January 2016 marked Implementation Day, marks the day on which the International Atomic Energy Agency (IAEA) verified that

Iran implemented its nuclear-related commitments described in the Joint Comprehensive Plan of Action, i.e. it is the day that sanctions were lifted in some sectors, for some countries in their dealings with Iran. Since the sanctions were lifted, there has been some confusion on what exactly that means. According to global experts, the lifting of sanctions is very casespecific and a large number of the long-term sanctions on US persons and companies still remain. “Each organisation is in a different situation, as the applicability of the sanctions relief can be very fact-specific for each company and will vary based on a number of factors, including the status of owners, status of key personnel, and the sectors in which the services or goods offered relate. For entities that have some US nexus—either personnel, ownership or content—they need to appreciate that only certain sanctions are being lifted and that many of the long-standing restrictions on US persons remain,” said Knight.

According to Morgan Lewis, there have been two types of sanctions from the US—the ‘primary sanctions’ that were imposed mainly for anti-terrorism or other non-nuclear reasons, and the ‘secondary sanctions’, that were imposed mainly for nuclear-related reasons and were intended to deter non-US persons from engaging in activities involving certain specified sectors of the Iranian economy, including energy, petrochemical, automotive, financial, banking, mining, shipbuilding, and shipping. On Implementation Day, the US government relaxed the secondary sanctions related to these sectors of the Iranian economy and effectively removed US-imposed restraints on dealings by foreign persons with these selected Iranian business sectors. But with only limited exceptions, the primary Iran sanctions applying to US persons remain largely in place even after Implementation Day. “Our OFAC specialists are advising clients that there are three general baskets under which the US sanctions relief generally fall,” Knight said. “The first is that for US persons—individuals or corporations—there are very few changes. The second group are the foreign companies that are owned or controlled by US persons, and these entities have received greater relief and there have been some modest liberalisations to enable US shareholders of foreign companies wanting to do business in Iran to alter their policies and procedures to enable such business to go forward which in the past would have been problematic. But again, the relief available is very fact-specific for each organisation. And then the last basket is companies that have no US person ownership that are involved in Iranian transactions with no US nexus, and these companies will benefit from rather significant changes and additional freedom to deal with Iranian counterparties,” said Knight.

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COUNTRY FOCUS Iran

Iran: a catalyst for change? The country’s economy coming back onto the world stage can be a positive, a force for change in oil producing nations’ economies, according to Steen Jakobsen, Chief Economist from Saxo Bank

he start to 2016 has been tough for the oil producing countries, especially in the Middle East where oil is a high proportion of both trade and revenue. Oil hit $26 per barrel this week (20 January) and budget deficits are exploding across the region–but how will Iran change this equation and outlook? The consensus view on Iran’s impact on the region is entirely focused on the new net supply of oil and the geopolitical risk and less on the positive impact of engaging Iran more openly. Maybe the bigger impact on the region is not Iran’s new supply of oil but the overall combined dynamics of US falling production combined with non-OPEC drop in supply plus the net positive impact from opening the borders of Iran for business?

SUPPLY AND DEMAND

Iran will likely add 500,000 barrels a day (b/d) right away and in addition unload the roughly 30 million barrels it has floating in oil tankers, but Iran also by their own estimation need about $200 billion in new oil and gas investment by 2020 to maintain and expand their production. In other words Iran will add to supply, but only to the tune of the expected drop-off from the US producers. IEA in its Monthly Energy Review database reports that world crude production was up 1.5 million barrels a day in 2015, of which 440,000 was from the US, 550,000

Iran needs $200 billion investment by 2020 to maintain its oil and gas production.

from Saudi-Arabia and 900,000 from Iraq–if these three countries had not increased the net supply would have fallen by 400,000 barrels! The net change in 2016 comes from the US. The number of active rigs in the US is down by one third from the 2014 level and IEA expects production from US to be down by at least 500,000 barrels by September 2016–the Iran increase and the US decrease is a wash! Hence we need to look for other forces driving the demand and supply. This does not stop Iran and lower oil prices from having a major impact

on the finances of the oil producing countries overall, and it will mean considerable and far reaching changes to both the social fabric, and the design of these economies. There is now an almost desperate need for a ‘mandate for change’–a thing I have been missing when visiting the region over the last decade. This is good news–changes ONLY come when needed, not before not after…. But it will mean an uphill struggle and a hand over from the energy sector to productive alternatives combined with increased focus on tourism and trade. cont. on page 38

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COUNTRY FOCUS

cont. from page 36

IMF sees the main risk as much slower growth; three per cent average in 2015/16, current accounts moving into negative and most importantly a significant short fall on the fiscal balances. The region’s main issue will throughout the year be to counteract and balance the need for consolidation the finances and at the same time do it only gradually in order to protect the social fabric. This balance will be difficult but it’s possible also because I see two major positives for the region in 2016.

THE POSITIVE IMPACT GLOBALLY FROM LOWER ENERGY PRICES

IMF has recently reduced their global growth to 3.4 per cent in 2016 from 3.6 per cent from October–IMF is notoriously wrong and late in their assessment. I think global growth by end of 2016 will be ‘better than expected’ based on two main drivers: lower energy prices massively improve disposable income for Europe, US, China and India, the main trading partners for the region. Europe, being net importer of energy will see increase demand driven by better corporate and consumer demand. Likewise in the US, gasoline consumption is still rising and the US consumer’s remains relatively bullish spending money. Although energy prices fell in 2015 the full economic impact will come in 2016, as the consumers and businesses in 2015 took the savings on energy and paid back debt expecting a Fed hike throughout the year. 2016 will see more money spent from this saving.

500,000

barrels of Iranian oil will be added to the market immediately

30 million

barrels of Iranian oil are stockpiled

500,000 the amount that the IEA expects US oil production to decrease by September 2016

IS 2016 THE MIDDLE EAST’S VERSION OF THE BERLIN WALL COMING DOWN IN EUROPE IN 1989?

I will not get involved in religious and geo-political risk associated with Iran getting their sanctions lowered, but merely talk about the economic impact. Iran is a massive and populous country with a rich culture and an educated population but it has been ‘sealed off’ for business and engagements with rest of world pretty much since the Iranian Revolution in 1979. US imposed sanctions

The Middle East is heading towards better time but through a laborious process of redefining its role and how it will move forward. - Steen Jakobsen, Chief Economist from Saxo Bank

immediately expanded them in 1995 to include firms dealing with the Iranian government and in 2006 UN Security Council passed Resolution 1696 and imposed further far reaching sanction based on Iran’s non-compliance with its uranium enrichment program effectively making it illegal to deal with any Iranian entity. It was the Middle East version of the Berlin Wall. Now 78 million people are coming ‘online’–78 million people hungry for travel, foreign goods and culture. This is a net positive for the region irrespective of the earlier mentioned potential conflicts. Never in history have walls and isolation brought better economic and living conditions. It has always meant the opposite hence bringing Iran’s wall down will over time mean more trade more tourism and a more balanced economy. The conclusion for me is clear. Iran neither alters the challenges and the need for fiscal reform in the Middle East, nor does it change the need for productive business outside the energy and tourism sector, it only accelerated the need for change. Iran will be a net positive demand pull on the economies in the region going forward and I think when history is written on 2016 in future history books it’s very likely that Iran getting back online will have the same impact for this region as the Berlin Wall had for Eastern Europe in 1989. It’s not all going to be good or easy, but the alternative is clearly worse. The world needs less isolation and more cooperation as the growth cyclically is coming lower based on ageing populations. Iran’s sanctions being dropped is a catalyst not the momentum of what has and will happen to the region. The Middle East is heading towards better time but through a laborious process of redefining its role and how it will move forward.

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26/01/2016 13:30

WIBC 2015

Bahrainâ&#x20AC;&#x2122;s place in the global economy Dr Jarmo Kotilaine, Chief Economist, Bahrain Economic Development Board, spoke with William Mullally on the sidelines of the World Islamic Banking Conference in Bahrain about Bahrainâ&#x20AC;&#x2122;s position in the current economic climate

he latest global economic downturn is showing no signs of ending even though we have been in this malaise for eight years. I remember back in the day writing a piece about what was coming compared to the challenges that Japan was facing during its big downturn. People looked at me and said, there is no way the world is going to have a lost decade, and here we are, eight years into it, with no obvious bright shining light at the end of the tunnel. The problem is the global economy remains broken in many fundamental ways; it is fragile, very reliant on artificial stimulus measures, and as a result, more volatile than it used to be. Obviously for any economy, this is a challenge. This is a particular challenge for an economy that historically has been primarily a commodity exporter because, as we know, this volatility has hit and will continue to influence commodity prices in different ways. How does Bahrain fit into this? The interesting thing is that even though Bahrain is a small, highly open economy, its performance during this challenging period has been marked by a very high degree of resilience and continuity, I would argue. Not only

40 page 40-42 Will.indd 40

Dr Jarmo Kotilaine

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has the economy continued to perform reasonably well, and particularly well by global standards in today’s world, as I realise those global standards keep getting revised, but at the same time it has in fact continued to undergo what of the past ten years has really amounted to a transformative change. In the 2000, 44 per cent of this country’s real GDP at that time came from hydrocarbons. Today that figure has come down to 20 per cent. I am not saying that Bahrain is a post-oil economy, the oil sector is still important, but the reality is that the non-oil economy has not only grown at a brisk pace over the past 10 years, the non-oil economy has grown at an average pace of more than seven per cent a year. This has transformed the growth of the economy. When we try to account for the resilience of Bahrain in the stormy waters of the global economy, I think that economic growth has become a lot more diversified, and

20%

of Bahrain’s real GDP is hydrocarbons based now compared to 44% in 2000 this is very important. This is no longer an economy that goes up and down purely as a result of what happens in oil. Oil clearly influences activities and influences Government spending, influences confidence and has an impact on the level of liquidity, but this is not nearly as significant as it was at the turn of the millennium. As is the case across the GCC, the population growth rate in Bahrain has remained very impressive over the past ten years, a growth of three-plus per cent year on year. Some of that is natural fertility; a lot of it is an influx of people from other parts of the world. This is not a new thing in Bahrain—it is something that has been going on for thousands of years because of the

openness and inclusiveness of this country as a trading hub. But what is important in the GCC context is the competitiveness, the value proposition of this economy, is increasingly unique.

WHAT MAKES BAHRAIN A PLACE TO BANK ON?

If we look at the GCC from the perspective of somebody sitting in New York, London, Malaysia or somewhere else, what they see is a region largely characterised by its hydrocarbons wealth, a lot of money in this part of the world, and the connectedness of these two things. But, contrary to what others may surmise, the Bahraini economy competes, above all, with its human capital. That is not to say just that the country attracts people, but the Bahraini population is economically active in a broad-based way. Two-thirds of Bahrainis are active in the private sector, not the public sector. It is a highly educated, and cultured population, as the ethos of studying and working is deeply engrained. Bahrain has had a formal system of education that has been around longer than the rest of the region, for many generations in fact, and is embedded in the DNA of the people. cont. overleaf

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WIBC 2015

cont. from page 41

What this gives to companies and investors who come to this country is a pool of qualified local talent that is willing to work. That is a significant competitiveness driver, certainly in the GCC context as people in the region would appreciate, and the Bahraini Government at the same time have created various mechanisms that can keep refreshing and upgrading this human capital. So for instance, there is a Government labour fund called Tamkeen, which helps Bahrainis set up and grow their own companies. This is really at the heart of what makes Bahrain significant in the region, and gives it a lot of value opportunities. Beyond that, Bahrain’s regulatory system keeps it competitive. Bahrain has been recognised for a long time as a liberal business environment, and that is coupled with quality regulation that is not achieved through purely jurisdictional fragmentation. Bahrain does not create a physical area for a particular activity—Bahrain has a whole economy where the same liberal rules apply. Therefore, what you have as a foreign investor is the opportunity to fully control your company and your intellectual property, which makes 100 per cent ownership the norm, not the exception. Your company is then a Bahraini company, treated as a Bahraini company, and a GCC company. You create in legal terms a bridge to the rest of the GCC. When people say Bahrain is a gateway to the GCC, this is how it happens in practice. I think this is what has led to a situation where even during these current global economic situation, the Bahraini economy has continued to grow year after year. The lowest real growth rate achieved during the global crisis is 2.1 per cent in 2011. 2.1 per cent is not a fantastic figure but in today’s world, a lot of countries would probably be happy to have that kind of growth story. Of course, the

42 page 40-42 Will.indd 42

When we try to account for the resilience of Bahrain in the stormy waters of the global economy, I think that economic growth has become a lot more diversified, and this is very important.

- Dr Jarmo Kotilaine, Chief Economist, Bahrain Economic Development Board average growth rate has been much higher, over the last year the growth rate was 4.5 per cent, and the year before it was 5.3 per cent. Even during this current climate, we expect this growth rate to be maintained and, hopefully, we are working towards making it even higher with a new push for regulatory reforms in different areas and efforts to support private investment projects. I think our view is that this is an economy with very solid and, in the regional context, unique fundamentals which are ideally suited for long-term value creation. But let’s be honest, the countries that make it in today’s world sustainably are countries that get it right in the human capital space. We live in a knowledge-based global economy. This is the way to create sustainable value. This is something that is recognised here in Bahrain, along with recognition of its fundamentals—regulatory and price stability, as well as reasonable operating costs. Do I see elements in place that will allow the global economy to emerge from this crisis? Do I see the necessary healing and mending happening? The honest answer is no, I don’t. I think this crisis has been misunderstood by many, and continues to be misunderstood by many. I think it was seen initially as a cyclical downturn, and governments responded to it through fiscal easing, and above all, through monetary easing. The problem was that it was a structural downturn, and cyclical remedies cannot fix a structural downturn, only structural reform can fix a structural downturn. And the reality in today’s

world is that structural crises of the global economy continue to manifest themselves in many ways. We are still addicted to leverage, we are seeing stagnant or declining productivity throughout the global economy, and at the end of the day, what gives you growth is either increases in the factors of production—labour, land and capital—or in increased productivity. If you are not seeing increases in these things, then how can you be expected to see growth? The reality is what growth we have seen was through various kinds of stimulus measures, and I think part of the reason that people now worry, for instance, about emerging markets is that stimulus measures do not last forever and real structural reform has not taken its place in many countries. The risk in today’s world is that unless people somehow muster the will to tackle the root causes of this crisis and to endure a little bit of pain and deprivation in the process, all we can look forward to really is something along the lines of secular stagnation. In the GCC, because of the fact that countries have extensive growth potential from the population growth and the connectivity of the GCC countries, one unequivocal and very impressive success story of this region is over the past 15 years it has really done a phenomenal job of capitalising on its potential—there is more trade, travel, tourism, capital, you name it. These things will support this region, but for the world as whole, the next big thing is to get the productivity narrative back on track.

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27/01/2016 16:41

The region’s most transparent awards

The BME100, a list of the region’s top-performing banks, is not only a benchmark in bank performance, but the judging process is unequivocally transparent. Each bank is ranked according to its financial performance relative to other regional banks, there are no grey areas. Every bank’s financial data is carefully scrutinised by our in-house analytics team and each bank is ranked in our BME100 list according to that financial data. Our analysts use the Data Envelopment Analysis (DEA) method for analysing the efficiency of the banks in the BME 100. The analytical framework of our BME100 reports is based on secondary data drawn from the annual reports of the major financial institutions and Islamic windows around the MENA region. In our analysis we measure the performance of the whole banking sector of the countries against each other and compare the best banks of each country against each other. Where annual reports are not publically available on the institution’s website for the year in question, the institution is not included in the analysis.

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Results are collated in the currency in which they are originally published and are then converted into US dollars and normalised before the institutional rankings are calculated. The currency conversions are carried out using the prevailing exchange rate at the end of each year and as published by the relevant Central Bank. The institutions are ranked according to both the absolute size of and the dollar value increase in size of the following: Assets Liabilities Income Net profit The rankings obtained within these areas are then combined to create an overall ranking.

CHECK OUT OUR LATEST BME100 HERE:

http://www.cpifinancial.net/flipbooks/SUPPLEMENTS/ 2015/BME1002015/

28/01/2016 11:17

WIBC 2015

Bahrain still has its crown Abdulrahman Al Baker, Executive Director, Financial Institutions Supervision – Central Bank of Bahrain sat down with William Mullally at the World Islamic Banking Conference 2015 to discuss Bahrain’s place in the region, what is driving growth, the importance of regulation, and key initiatives planned for 2016

W Abdulrahman Al Baker

44 page 44-46 will.indd 44

hat is driving growth in the conventional sector?

With regards to conventional banking, the area of growth consists of retail business. There is quite a good growth in the retail business, with various types of services offers, be it loans, investment products and more. Wholesale banking, too, as well as investment banking and certain types of funds, also are showing growth. For sure, the conventional play an important part in the loan syndication and that is quite a big area, taking into consideration infrastructure projects that need to be financed. Obviously, loan syndication is a big market for these infrastructure projects to be financed through. These are the areas of growth. Wholesale banking plays an active role in the private placement market, as well as in financing the regional projects. In spite of budget challenges,

most of the governments in the GCC are keeping the spending on these projects the same. All of these projects need to be financed through loans, through Sukuk, or through both. And that’s already started to happen. The volume of these infrastructure projects is around $100 billion. Today there are a huge number of projects that need to be placed, and at the end of the day it’s the kind of capital expenditure that’s going to produce income. Spending should also remain the same on projects related to roads, certain announced events, such as Expo 2020, and Qatar’s World Cup, which have already been budgeted for. If I speak about these projects happening in the region, there is a stake for all the players in the financial services sector as they cannot be financed by just one bank.

Do you think that cutting subsidies is the right call?

Cutting subsidies allows governments

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10 billion

The amount the GCC will subsidise Bahrain by 400 banks and financial institutions operate in Bahrain

to reallocate spending to other, more fruitful, initiatives. Subsidies need to be addressed. All the governments wished to keep these subsidies, but it’s important to make sure that those receiving the subsidies are the ones who deserve it. They are good now to clearly differentiate what should be subsidised and what should not. The Government is handling this situation right. But it’s fair as well, to look at how you are going to spend your money, and making sure you are subsidising the right people. That’s fair for anyone to do.

What’s happening with GCC support of Bahrain?

That’s continuing as usual. The GCC has already decided they are going to subsidise Bahrain by $10 billion, and that’s continuing as usual every year from those GCC countries clearly indicating that they will have their contribution to that fund. I believe that

fund is already starting to contribute to certain infrastructure projects.

Where do you see Bahrain relative to other financial centres in the GCC? What are Bahrain’s strengths in hoping to compete? I believe that Bahrain still has its crown as the key financial centre in the region. That’s due to the number of institutions here. Frankly, I don’t see any place in the Middle East that has this number. Around 400 banks and financial institutions operate in Bahrain, the number of banks operating is around 113. We have around 25 Islamic banks, and I’m not seeing any other place that has that number. Today, we have 91 Islamic funds. I hope that some other Middle East countries have that many in place. The major contributor to the GDP is the financial services sector, at

almost one-fifth. For other Middle Eastern nations, this is not as big a contributor to the overall economy. One of our main resources is our people. In the financial services, talent is important. Bahrain has the local and human resources. These are our jewels. This is our main wealth. More than 14,000 individuals are working the financial services sector. The Bahrainis represent, in the whole sector, around 68 per cent. We don’t have a law saying we need to recruit Bahrainis into the financial services sector, where there are other countries that do. In Bahrain, there is no need for intervention. In just banking, Bahrainis reached 79 per cent of the workforce, and now, I believe, rests at 77 per cent.

What is your opinion regarding greater cooperation and unity between the GCC nations? Frankly, Bahrain is a great believer in the GCC. Why? Because we think cont. overleaf

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45 26/01/2016 11:07

WIBC 2015

cont. from page 45

this is the way forward. This is a great way to create a bigger market. And with the existing overall economies of the GCC, the features of these economies are almost the same. Some are more advanced in certain sectors than others, but more or less, the economic features are almost identical, and there is a great opportunity for a greater union to happen. We in Bahrain support a GCC union, and we have said this for years. Today, any GCC national that sets up anything in Bahrain is treated like a local.

What lessons has Bahrain learned from the 2008 financial crisis?

We are a great believer that you need to be in line with regulation, specifically in the financial services sector. Why? It’s very simple. It’s like a traffic signal. If you do not abide by traffic signals, stop signs, and so on, maybe you will pass it once or twice, but eventually, you will get in an accident. This is why we always ask our financial institutions to abide by these rules—for their own safety. At the time of the booming real estate market in the Gulf, we introduced regulation saying you cannot invest in any one sector above 25 per cent. At that time a lot of financial institutions made a fuss about this, saying that it restricted their moves, but this was the best move. Concentration of whatever type of risk is dangerous.

What are the implications for Bahrain on sanctions being lifted in Iran?

In Bahrain, it’s business as usual. We are not concentrating on one country or another. We understand that usually securities are coming before any type of financial services. We hope that Iran and other players in the region hope that it’s important to maintain good relations with all

46 page 44-46 will.indd 46

I believe that Bahrain still has its crown as the key financial centre in the region. That’s due to the fact that the number of institutions here. Frankly, I don’t see any place in the Middle East that has this number.

- Abdulrahman Al Baker, Executive Director, Financial Institutions Supervision – Central Bank of Bahrain

GCC countries. Today, we are largely in the same boat. But for us in the financial services sector, it is business as usual—we are not affected by anyone lifting sanctions. This is for sure good for them, and if this leads to more investment for financial institutions here, then great. We already have Iranian banks here. This is not something new. We already have an insurance company in place as well.

There are a large number of banks and financial institutions. How does the Central Bank deal with violators of the system? We have enforcement regulation. When there is a violation, we go to the financial institution and say what it is not in line with regulation, and give them a formal warning, telling them that something needs to be corrected, and usually giving them 30 days to do something about it. Let’s assume that they do not. We then increase that warning into a formal direction. If they do not do that, then they have to pay a penalty, and also make the correction. Then we could appoint an auditor just to look at exactly what is happening. If all of these things do not happen, then the action is obvious. But we have never had to cancel someone’s licence.

What’s the progress with the Shari’ah board?

The main purpose with the Shari’ah

board is to have more standardisation. This is to create consistency across the board. It is going to be implemented soon, possibly in 2016. They have started to appoint members, and their mandate is to create consistency. Whatever practices they have planned should begin in early 2016.

What other initiatives do you have planned for 2016?

We have several initiatives in planning. We just finished the initiative to create a new capital adequacy ratio for Takaful, which I think is going to attract several international players in the Takaful business. It is a new initiative that will end up, I think, with a better treatment of the policyholders funds, which at the end of the day is going to end up with certain dividends that is going to be distributed to these policy holders in the Takaful business. We are working on some Islamic banking initiatives with respect to money markets, with respect to certain activities and certain products that will be announced in 2016. We are also looking to implement some new initiatives in the insurance sector. Beyond that, we are working on introducing a new type of structure for investment products that include limited partnership protected-sell companies, which is in its final stages, and should be introduced as a law in 2016 and be ratified by other branches of the Government.

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27/01/2016 16:42

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18/10/2015 09:34

IN-DEPTH

Knowing your customer is essential Andrew Davidson, Director KPMG UK and Luke Ellyard – Partner – KPMG Lower Gulf discuss how being customer-centric is now an essential bank operating requirement

hat are the regulatory pressures on banks towards acquiring new customers and deposits due to KYC?

Andrew Davidson: Banks have long recognised that knowing your customer (KYC) is sound business practice. Effective KYC policies and control frameworks are now essential in discharging the growing number of legal and regulatory obligations designed to prevent identity theft, financial fraud, money laundering and terrorist financing. Seventy four per cent of respondents from the 2014 KPMG Global AML Survey predict further increases in AML investment over the next three years and of these KYC are a significant proportion of the costs. This is encouraging firms to think more about how to solve this issue and as a result firms are looking at smarter solutions such as managed services and leveraging the digital agenda. On-boarding new customers, including other banks, is becoming increasingly expensive as due diligence requirements grow along with the need to manage—and possibly mitigate— the legal and reputational risks of non-compliance. Global regulatory bodies such as the Financial Stability

48 page 48-49 In-Depth.indd 48

Board have recognised the scale of the challenge for banks in this fast moving area, calling for additional clarity over expectations, including more guidance on the application of standards for antimoney laundering and combating the financing of terrorism (AML/CFT). The strategic thinking behind on-boarding new customers and accepting new deposits is also evolving as bank business models adapt to the impact of global regulatory reforms. These include higher quantitative and qualitative standards for capital, risk weighted asset reforms, leverage ratios, stress testing, macro-prudential measures designed to tackle systemic risks and interconnectedness and new liquidity standards. Ultimately better KYC can mean a more productive relationship with customers. As this should be a noncompetitive issue, we are also beginning to see opportunities for outsource providers to reduce costs and to improve consistency and information sharing.

What are the regulatory pressures on banks in terms of investments to meet Basel III compliance?

Davidson: As banks adjust to the changing economic and commercial environment, the regulatory pressure

Andrew Davidson

is also mounting, placing demands on management time, resources and, in some cases, the business model itself. Additional financial stability comes with a cost at a time when margins are compressing. Therefore, some of that cost may need to be passed onto consumers. Investors may also need to adjust to lower returns. Gulf states have been busy digesting the package of regulatory reforms currently referred to as Basel III to determine which elements are most relevant in their local market and how best to implement these into their existing regulatory frameworks. This is a delicate balance between continuing to adopt leading global practice while implementing reforms in a way that is sensitive to local market dynamics and the objective of continued economic growth. Banks are already strengthening the quantity and quality of their capital base and creating larger short term liquid asset buffers with a cautious

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that strikes the right balance between the needs of the customer, the regulator and investors. Moreover, while adjusting to the new regulatory rules, the industry, rather than becoming inwardly focussed, must continue to embrace innovation and harness new technology.

What is the macro economic impact on the retail and real estate sectors that are limiting liquidity for banks?

Luke Ellyard

eye on longer-term structural funding. These core measures are being complimented by leverage restrictions and the possibility of systemic and macro-prudential buffers that could be deployed across the banking system, or at an industry sector level, to build up additional capital against banking exposures. However, the full global regulatory reform agenda is much wider than just Basel III and will continue to raise the bar. Additional investment in areas like stress testing, refining the current risk weighted asset frameworks, more intensive supervision, an improved focus on IT risks (including cyberrisk)—while also factoring in recovery and resolution objectives— will be required. Accounting reforms like IFRS 9 will run alongside the regulatory change programme, possibly increasing impairments and introducing additional volatility into CET1 ratios. The scale of these reforms emphasises the continued importance of effective risk governance and a business model

Luke Ellyard: If, as many regional commentators now suggest, the oil price remains well below the long-term average price for a prolonged period, there will be increasing pressure on national budgets and growth prospects across the region. In retail, a number of banks have noted the effects on sales and profits of a strong, sanctions and anti-corruption moves within certain large emerging market economies, high rental pressures at large malls, and falling regional demand. Banks appear to be focused on managing risks, rather than increasing loan books in this sector—although we have noted the banks are still open for strong credits and alternative finance providers are working with a range of other retailers. On the real estate side, pre-sales and pre-leases are increasingly critical for projects looking for funding. Sale and leaseback, REITs and Sukuk financing are becoming increasingly popular options for funding as banks remain cautious.

How is a squeeze on liquidity in the market affecting banks’ personal and corporate loans?

Davidson: The region should benefit from learning points from recent pilot initiatives within European countries to boost liquidity which could make it easier for banks to lend to personal and corporate customers. Asset quality reviews across Europe have led to changes to monetary frameworks at the

Bank of England and the ECB which have enabled banks to pledge a wider range of assets in return for funding, or longer term re-financing operations that provide cheap three year funding to banks. Other European initiatives to boost liquidity, which could be copied here, include the British Business Bank that was launched in 2013 to boost lending to small and medium sized enterprises, many of which have struggled to obtain credit since the financial crisis. The bank’s pilot ‘wholesale guarantee’ scheme offers a UK government-backed guarantee to lenders that covers a portion of the net credit losses they incur on their SME-lending portfolios. This should reduce the amount of capital banks have to hold against their SME loans, making it easier and cheaper for them to lend.

How is this affecting the consumer?

Ellyard: Banks are looking to reduce their exposures to riskier segments, although there is continued interest in growing secured portfolios. Increasing competition amongst lenders for quality, secured assets should, interest rate rises withstanding, lead to continued competitive options for consumers. The recent (2015 Q3) Credit Sentiment Survey from the Central Bank of the UAE commented on changes in credit standards, driven by the economic outlook, the quality of their institution’s asset portfolio, the change in risk tolerance, and current—and anticipated —regulatory changes. Regulatory changes were highlighted recently by KPMG in Bank Structure: The Search for a Viable Strategy where we detailed how regulatory and commercial pressures have changed the rules of the game in banking. We also highlighted the dimensions where banks need to adapt accordingly, including the potential re-pricing of loans.

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49 27/01/2016 16:44

PRODUCT FOCUS

Making document management easy Masahiko Murata, General Manager, KYOCERA Document Solutions Middle East describes in detail the company’s offerings for the corporate and banking sector

hat are KYOCERA’s offerings for the large corporate sector?

We enable corporations and enterprises to streamline their document management, allowing them to increase the cost-effectiveness, efficiency, security and sustainability of their document workflow. This is a service we provide together with our authorised partners in the Middle East. We refer to these services as KYOCERA Managed Document Services (MDS). KYOCERA MDS enables businesses to streamline their entire document workflow—cutting document-related expenses, reducing their IT departments’ workload, increasing productivity and security, and improving compliance with environmental regulations. Our partners offer in-depth knowledge of our products as well as complex networks, software suites and customer workflows, helping businesses keep their document processes up and running while keeping cost and carbon footprint to a minimum.

How does KYOCERA build security (both cyber and physical) into its machines?

Masahiko Murata said that KYOCERA’s devices support various authentication protocols.

Our printers and MFPs offer many ways of controlling and limiting their usage. Access to our printers and MFPs can be controlled and limited by making use of the functionalities that have been built into our devices, such as the interface

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27/01/2016 16:46

block function or the IP filter, just to mention two examples. Our devices also support various authentication protocols. One of them is the IEEE802.1x protocol, which ensures that only authenticated devices can connect to the network. People can also equip their KYOCERA devices with an optional Card Authentication Kit, which will require users to log in to the printer or MFP before they can use any of its functions. For MFPs that are equipped with a hard disk, we offer the sanitation feature. This is particularly relevant for organisations that deal with sensitive client data, such as banks. Whenever a copy, print, scan or fax is made, it leaves data of the original document on the MFP’s hard disk. When the MFP leaves the user’s premises, there is a risk of third parties accessing the data left on its hard disk. Using the sanitation feature will prevent this risk by completely erasing all the data recorded on the MFP’s hard disk. If the sanitation feature is not available, people can buy our Data Security Kit, which offers the same functionality. Our latest Data Security Kits not only overwrites the data on the MFP’s hard disk, but also those in the fax memory. Another possibility to ensure data security is our software solution KYOCERA Net Manager. KYOCERA Net Manager prevents data theft by requiring users to identify themselves at the printer or MFP before they can use it to print, copy and scan. Authentication can be done through a PIN code, an identification card or a Windows login, or a two-phase combination such as ID-card and PIN.

How can this benefit / ensure security for banking clients?

The sanitation feature and the Data Security Kit will help banks remove any sensitive data from the hard disks of their MFPs before they return or dispose of their machines. The risk of confidential data being exposed due to

The sanitation feature and the Data Security Kit will help banks remove any sensitive data from the hard disks of their MFPs before they return or dispose of their machines. - Masahiko Murata

hard disk data leakage should not be underestimated. Research has shown how surprisingly easy it is to access the data left on the hard disk of a used MFP. Bank account data, mortgage details, police records, tax forms, divorce papers, salary slips, medical records, contracts … these are just a few examples of the vast amount of confidential documents that are copied and scanned on copiers and MFPs, leaving images on their hard disks. If these data are not erased before machines are disposed of, unauthorised persons will be able to access them. Second-hand copier / MFP business is thriving, and it only takes one person with bad intentions to make the lives of the document owners very miserable indeed.

How do KYOCERA’s printers compare in terms of cost-efficiency to competitors products?

The Cost per Page (CPP) and Total Cost of Ownership (TCO) of our printers and MFPs is among the lowest in the market. This is because their only consumable is toner, thanks to the extreme durability of our amorphous silicon drum and the usage of other long-life components in our printers and MFPs. Instead of throwing away the entire toner cartridge or imaging unit every time their printer runs out of toner, users simply replace the toner container. We at KYOCERA are on a continuous mission of making

people aware of the importance of investigating a device’s TCO before making any purchases, because it can end up being five or even ten times the device’s purchasing price. TCO and CPP include all the direct and indirect costs related to a device. Direct costs include the machine’s purchasing price and the component and operating costs per page. Indirect costs consist of maintenance, consumable replacements, print media, training, administration and electricity. The initial cost of a product is usually what concerns people most. What most people tend to ignore is that running costs can soar to incredibly high levels over a device’s lifetime. The costs of consumables can rise dramatically, particularly if relatively expensive cartridges have to be replaced and disposed of frequently. The toner-only concept of our printers and MFPs is called ECOSYS, which is an acronym of economy, ecology and system solutions. ECOSYS was first introduced in 1992 and has been our core product concept ever since.

What is your company history in the Middle East?

We have been doing business in the Middle East since the early 1970s, working through a wide network of authorised partners. We started out under our original company name Mita, selling copiers. In 2000, our company merged with printer manufacturer Kyocera. That’s when we started selling printers as well under the company name KYOCERA MITA. In October 2008 we opened our office in Dubai. In 2012, our company name changed to KYOCERA Document Solutions to do credit to the fact that our portfolio not only includes MFPs and printers, but also software solutions aimed at helping companies improve the efficiency, security, compliance and sustainability of their document and information management.

www.bankerme.com

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51 27/01/2016 16:47

BANKING TECHNOLOGY

Transforming lending with predictive insights Ravi Pratap Singh, Executive Director & President – Products, Nucleus Software says that lenders need to improve their offerings utilising analytics

DETERIORATING CREDIT QUALITY: RINGING THE BELL FOR CHANGE?

ustomers are redefining the way they discover, explore and engage with financial institutions for their lending needs. By using the information available at their fingertips, customers can now demand what they want and decide who they want to do business with. The 2015 World Retail Banking Report by Capgemini and Efma stated that more than 40 per cent of people did not choose their primary bank while availing a personal loan. Financial institutions, on the other hand, are seeking to not only retain their best customers and provide them with an enhanced customer experience, but also to make their collection processes more effective and improve their overall credit quality. While they are wary of turning down potential clients which reduces their profits and may also smudge the bank’s reputation, they are equally concerned about making the wrong decision—accepting business that will result in future non-performing loans. The rate of change of technology, competitive offerings and economic conditions also makes matters more challenging. While improving their reach and retaining existing customers, lenders need to improve their operations

www.bankerme.com

Ravi Pratap Singh

across the entire loan lifecycle. How do they do that? Operating on real-time data rather than historical data would be a good place to start.

TRANSFORMING LENDING WITH PREDICTIVE INSIGHTS

Lending decisions have been proven to be more effective when they are made based on predictive insights powered by real time data. With the exponential

growth and availability of data, both structured and unstructured, big data can be combined with historical, transactional data to uncover new opportunities and bring down costs. For example, by leveraging big data at the underwriter decision making stage, decisions for refer/on hold applications can be made after analysing the current behavioural and risk patterns of the customer. The number of investigations for on-hold applications is reduced thereby bringing down time and cost while also freeing people to focus on more important activities. In addition, fraudulent customers can be detected more easily. Risk managers across the globe are looking to use structured and unstructured data to make more accurate risk predictions along with improving their understanding of the potential impact of a range of risks. They also seek to link them better to the organisation’s strategy. Customer relationship managers are actively looking at analytics to improve customer service while the collection departments want to use analytics to drive down costs and at the same time increase collections. In fact, every major decision in a bank to drive revenue, control costs or mitigate risks in their lending process can be improved by using real-time data and analytics. cont. on page 54

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BANKING TECHNOLOGY

cont. from page 52

Financial institutions can gain a competitive edge with the ability to make data-driven decisions seamlessly throughout the lending value chain. In a recent survey of global financial institutions, 55 per cent of the respondents said they were using predictive analytics to create new revenue opportunities, 45 per cent said they were leveraging predictive analytics for customer services and 43 per cent of respondents were using the results of predictive analytics for product recommendations and offers.

SO HOW DO FINANCIAL INSTITUTIONS LEVERAGE ANALYTICS TO DELIVER VALUE AT EACH STAGE OF CUSTOMER AND LOAN LIFECYCLE?

1. Meet Mark, Dave and Caroline. Three different people with different preferences, different banking needs, different credit histories, and different purchasing patterns. Mark is looking for a personal loan while Caroline has a housing loan requirement. Dave does not have a loan requirement currently. The bank wants to reach the right customers with the right products: Financial institutions can reach the right customers at a lower cost with accurate customer segmentation which helps improve targeted marketing efforts. Marketing campaigns can be launched through the right channels for improved reach and enhanced business impact. Historical multi-channel customer data can also be analysed to offer best-fit products for each segment

based on customer propensity. 2. After applying for loans, Mark and Caroline come to the bank to submit their documents. The bank wants to ensure a fast and hasslefree onboarding process for them: by automating complex tasks, analytics can help reduce the loan origination time and support faster credit decisions based on the segment’s risk profile. The loan processing time is reduced through auto credit decisions driven by scorecards and strategy maps resulting in enhanced customer experience. This results in the bank significantly improving the customer acquisition process and the loan book quality. 3. Mark is now a highly valued customer of the bank. The bank is happy and wants to make him a customer for life: CRM data and loan repayment patterns are analysed enabling lenders to identify the causes of customer churn, and gain insights as to how to retain profitable customers. Relevant products can then be bundled to increase customer lifetime value and portfolio diversification. 4. Caroline has, however, defaulted on her loan repayment. The bank wants to recover the overdue amount as cost effectively as possible, ideally while creating the minimum upset. Predictive insights help the bank develop optimum collection strategies across all the stages of loan delinquency, reducing operational expenditures and increasing recovery rates. They can be used to customise the strategy for each client profile. Collection activities are intensified based upon the type and

Lending decisions have been proven to be more effective when they are made based on predictive insights powered by real time data. Ravi Pratap Singh, Executive Director & President – Products, Nucleus Software

www.bankerme.com

Financial institutions worldwide are increasingly leveraging analytics to:  Reach the right customers with the right products  Deliver a superior customer experience through faster on-boarding  Identify, target and retain the most profitable customers  Drive up recovery rates while driving down collection costs

level of client relationship, as well as the probability of debt recovery. Improved predictions result in a significant decrease in non-performing loans.

THE WAY AHEAD: ANALYTICS TO PLAY A PIVOTAL ROLE IN DRIVING EFFICIENCIES IN THE LENDING INDUSTRY

While some financial institutions have begun to see real benefits of using realtime data to gain insights, many are still working in isolation and hence are not able to leverage predictive analytics at the optimal level. However there is a gradual shift in the mindset with more and more financial institutions looking at analytics to improve their loan lifecycle management. With the huge growth of data, financial institutions can gain a strategic advantage by using predictive insights to make improved lending decisions that are better aligned to current and future economic conditions. They can use predictive analytics to rapidly adjust to fast changing market conditions and steer their portfolios through uncertain times.

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BANKING TECHNOLOGY

The rise of mobile banking: secure your customer’s preferred branch

François Chaffard, Banking Solutions & Services Director for AME at Gemalto looks at the sea change in customer’s banking habits

o you remember those frequent trips down to your traditional ‘brickand-mortar’ bank branch office? Squeezed right in between ‘buy groceries’ and ‘dentist appointment’ on your to-do list would feature the inevitable ‘go to bank’. But banking has come a long way in the last few decades, and talk of the death of the branch has now pervaded banking circles—the branch is a relic, they say; in fact, there is an entire section of the burgeoning, digitally savvy generation that has never even set foot in their local branch office—27 per cent, as it turns out, according to Gemalto’s Generation m-Banking global study on the attitudes of youth to mobile banking services. Unsurprisingly, major industry players are now shutting down branches rendered superfluous by the

56 page 56-57 Tech.indd 56

digitisation of banking services, and are reducing overheads in the process. In developing markets, meanwhile, bank penetration is often limited due to the high cost of building and maintaining a branch-based infrastructure in lowincome communities.

THE CHANGING LANDSCAPE OF BANKING

ATMs did away with long queues at the bank to withdraw and deposit cash in the 1960s, online banking brought bill payments and money transfers to the convenience of homes in the 1990s, and now, mobile banking is allowing users to carry their banks in their pockets. Interestingly, these changes are not only driven by the natural progression and uptake of technology, but also by the consumer demand to be better connected to their money. Mobile banking solutions are convenient, yes,

but they also help customers maintain better control of their finances; 36 per cent from the aforementioned study agree with this wholly. This makes sense: simply consider the benefits of being able to call up your balance when impulse buying those new clothes or that nifty new gadget on the tech-sphere. And let’s not forget, the convenience of using a mobile device as the single method of payment is driving users away from the traditional wallet packed with prepaid cards, loyalty cards and traditional debit or credit cards. The single wallet on the device —that is, the mobile wallet—allows consumers to manage their finances through a single interface. Then, there is the steadily climbing rate of smartphone penetration to consider—at 78 per cent, the UAE sees one of the highest rates of smartphone penetration in the world,

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and one of the fastest growing, as per a report published by information and measurement firm Nielsen. The Generation m-Banking study further reveals that 1.2 billion people around the world use their smartphones to get online, 25 per cent of which are young adults (an unsurprising 92 per cent of young adults own smartphones). Notably, this is a breed of tech savvy users that want every convenience, including banking services, available on their smartphones. Globally, mobile banking users are set to exceed 1.75 billion by 2019— that’s 32 per cent of the world’s adult population—as per a report published by Juniper Research. The firm also projects the number of mobile users in the Middle East and Africa are expected to grow to 82.1 million users by 2017. By harnessing the extensive reach of mobile networks and the rapid penetration of mobile phones, banks have a new way to deliver banking services at a significantly lower cost, without bank branches or Internet coverage. The transition of mobile banking from a niche service for the technologically elite to a mass-market service, figures in perfectly with these rates. Essentially, mobile banking is here to stay.

KEEP UP, OR KEEP OUT

To keep pace, banks clearly need to recalibrate their growth strategies to align with this rising trend; an increasingly digitally driven world equals customers who expect increasingly digitally driven banks. Digital bank transactions are growing as much as five times faster than those at physical branches, and the battle for new customers is now moving from the streets to smartphones. Given this, a lag in digital banking infrastructure could prove costly. The growing ubiquity of mobile devices, the proliferation of mobile endpoints and the rapid evolution of

mobile technology challenge banks to revisit old assumptions about the mobile’s role in customer interactions. Essentially, a bank’s ultimate goal should be to improve customer experience and ensure a seamless encounter, be it at an ATM, via online banking or on a mobile device. Such a differentiation will boost customer loyalty. Otherwise, a bank may be left vulnerable to a particularly aggressive competitor. When thinking mobile banking, ensuring a seamless encounter goes hand-in-hand with ensuring a secure transaction environment. Banks need

The idea is to ensure the customer’s mobile phone serves as a secure banking channel. Every service users avail of when online banking, they expect to avail of on their mobile as well, without compromising on security. Fortunately, the features in today’s mobile devices can actually make mobile banking secure; features such as mobile OTP token and high end software such as Ezio SDK which secure m-Banking applications, turning mobile phones into a strong authentication device with transaction signing functionality, can enhance the way customers are

The Generation m-Banking study further reveals that 1.2 billion people around the world use their smartphones to get online, 25 per cent of which are young adults.

- François Chaffard, Banking Solutions & Services Director for AME at Gemalto to, of course, educate customers to be vigilant about information protection, particularly on public Wi-Fi networks. And, on their side, banks need to strengthen authentication methods.

SECURE THAT SMARTPHONE

A corollary of the growth of mobile banking has been an increase in security threats; as mobile banking has scaled new heights, hackers and mobile fraud have swiftly followed. For instance, mobile malware, like mobile banking, is on an upward trajectory in the Middle East: Saudi Arabia and the UAE together posted the highest levels of mobile malware detections in the region between 2013 and 2014. In the face of this, banks are being advised to implement security measures. Customers expect ease-ofuse and seamless operation, and these factors have to be combined with effective security practices.

authenticated to their banking sites and applications while counter even the most advanced attacks, such as man-inthe-middle/browser, using sign-whatyou-see functionality. Meanwhile, banks’ back-end systems have to be prepared to detect anomalies and fraudulent activity in the event that a front-end channel has been compromised. For this, solutions such as fraud management systems help detect and prevent fraud with predictive analysis and offer a proactive response to fraud. Maintaining a seamless experience within the mobile ecosystem should be a priority for banks stepping into or offering mobile banking; customer trust is the key to any bank’s business success. Traditional banks really have no choice left: they need to offer security measures as good as or better than any in the market—and use this to earn customer loyalty, as the world makes the shift to mobile banking.

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AWARDS

Islamic Business & Finance Awards 2015: The highlights! In-depth video interviews from some of our high-profile Islamic Business & Finance Awards 2015 winners are available online

Awards like this are very important to support the industry at large and incentivise the key players. - Abdulla Mohammad Al Awar, CEO, Dubai Islamic Economy Development Centre

For me Islamic finance is a norm of banking and I personally take it upon myself to carry this mantle forward. - Dr. Adnan Chilwan, Group CEO, Dubai Islamic Bank

In 2016 we have many issues to do including opening new branches and better serving our people.

- Imad Al-Sadi, Assistant General Managerâ&#x20AC;&#x201D;Distribution Network, Palestine Islamic Bank

We have focused [Emirates Islamic] on the domestic market. Focused on real products - SME, commerical and retail banking..

- Jamal Saeed Bin Ghalaita, CEO, Emirates Islamic

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See all the videos online at http://cpifinancial.net/multimedia

We have introduced some fantastic Islamic finance products which meet the expectations of our customers worldwide. - Mohamed Al Mutaweh, CEO, Al Baraka Bahrain

Our initiative for 2016 is to increase automation in HH Sheikh Mohammed bin Rashid Al Maktoum’s vision to make a smart government for the UAE. - Mujtaba Naseem, CFO - DCEO, aafaq islamic finance

A large part of Africa is Islamic, in fact it’s the continent probably with the highest proportion of Muslims in the world, and therefore something that’s compliant with Shari’ah law… for this large market was waiting to be provided. So it was quite easy for Islamic banking to take root in Africa.

- Munir Sheikh Ahmed, Managing Director & CEO, National Bank of Kenya

ITS made big progress over the year by coming closer to the market, understanding requirements more—especially in Islamic banking. We are pioneers in this area.

- Nasr Albikawi, CEO, ITS

The major issue of [Islamic banking in Africa] are regulatory. We find a lot of obstacles. - Shaykh Dr. Yunoos Osman, Member of Shari’ah Advisory Board, Barclays Africa

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PERSONALITY

Pavani Reddy Managing Partner, Zaiwalla & Co

I start my day at 6:30 am with a two minute meditation and then go down to kitchen for a fresh cup of Lassa tea. My husband and I have tea together. I normally then have a look through my emails which have arrived overnight on my phone. Since we are a law firm with a largely international client base, my inbox is generally filled with emails from clients around the world: India, Dubai, Singapore, Iran, Russia, Kazakhstan, I quickly scroll through the emails and mentally schedule the day ahead. I then get ready and pray by lighting incense. To balance the different obligations in life can be challenging and stressful and having a routine daily schedule will enable tasks to be managed in an organised manner. I also feel that designing a routine schedule will keep you focused on your short-term and long-term goals. So I like to stick to the same routine at work as it helps me remain organised and calm. I travel internally on work often or attend court hearings but knowing that I have some routine to my day means that I don’t miss deadlines and important tasks. My most important conversation in the day is with my eight year old son in the morning. I spend some time with him, including briefly running through his schedule for the day and getting him ready for school, with the help of my husband. My family are so important to me, and having this time with my son each morning is a great way to start the day. Work-life balance is important for any role, but especially in the busy legal industry. I actually use my time whilst commuting to work which takes about 50 minutes. I read a book, listen to music or, if there is a court hearing or deadline, I read case documents. I also use this time to message my friends. Taking this time out means that once I get to the office, my mind then completely turns off from worldly things to focus on cases and office work. Knowing that I’ve put in a lot of hard work during the day means that when I get home, I try not to concentrate on work and this helps me to switch off. The best advice I have had in my career has come from Sarosh Zaiwalla, who’s my boss but also my mentor. It’s to always keep aiming to improve in your career and find the strength to keep working hard during difficult times.

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LAST WORD

A day in the life of … Rajesh Pareek CFO, DIFC Authority

lets Banker Middle East into his working life

How do you prepare for the working day ahead?

I get up early to meditate and practice Pranayama yoga, to stay healthy and focussed. By 8.30, I am at my desk and for the first 45 minutes, I think of the key areas I need to focus on that day.

What’s on your play list? I wish I had more time to listen to music. I enjoy listening to my girls playing piano and one of them loves singing, so that is highly entertaining.

What’s the best advice you’ve followed in your career?

Are you a creature of habit, how so? Not particularly, as I have learned in life especially from my consulting days that my role requires me to make decisions on a real-time basis and I prefer to remain flexible so that I can accommodate others and reprioritise, as the need arises.

What’s the most important conversation you have in the day and why?

The best advice I have followed is to ‘take risks’. To be able to listen to my instinct has helped me put in 16-17 hour days, teaching me that hard work in taking on the challenge is all about learning how to be successful.

How are you skilling up at work? I need to get feedback from my team on our financial performance and stay informed of any financial implications that may impact the organisation.

How do you create a work-life balance? How is that going? horse riding I try to put aside a couple of times a week to go I also play ends. week on girls my with and ing early morn ugh to altho s, friend and gues football with my work collea cancel I as , front this on well very doing not am I be honest, ty. priori take that s event sometimes to attend work ends week on home work take don’t I rule, a as However, and dedicate my time to my family.

What are you currently reading?

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The last book I read was Outliers by Malcolm Gladwell and I have also recently purchased Gladwell’s Blink. I do mostly enjoy books on management principles.

I make concerted efforts to learn from peers and partners as well and never to get complacent. For example, when I joined we had a Sukuk that had to be paid and I dealt with investors and rating agencies and had decided not to come back to capital markets. There’s always a new way to look at things strategically and in 2014 I worked on a very successful Sukuk issuance for DIFC.

What career path would you choose, if not this? Fashion designing would have been of great interest. I love clothes and would have liked to design men’s formal wear or even business-casual.

What’s a life motto you stand by? one Live and let live. Its best to be happy and content in what of terms in lead r’s mothe my follow I and lf has achieved onese clear her patience. It’s good to take a view on things and steer of taking on added stress.

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