#185 - June 2016 by CPI Financial

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JUNE 2016 | ISSUE 185

Achievement of a lifetime

Patrice Couvegnes, Group CEO of Banque Saudi Fransi Get the next issue of Banker Middle East before it is published. Full details at: www.bankerme.com

GCC bond markets akin to Latin America

Braving uncertainties in the Lebanese market

Financial centres: the gatekeepers of untapped opportunities

ATM Channel Payments Roundtable

Dubai Technology and Media Free Zone Authority

â&#x20AC;&#x153;I believe that BSF is in a unique position to leverage on the new Saudi economic context.â&#x20AC;?

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CONTENTS

JUNE 2016 | ISSUE 185

Editor’s Letter

n the back of sluggish growth in advance economies, low commodity prices, weak global trade, and diminishing capital flows, the World Bank in its Global Economic Prospects June 2016 report has reduced its global forecast down to 2.4 per cent from the 2.9 per cent pace it projected in January. 2016 has thus far undoubtedly been challenging for many economies. As we inch towards the end of the first half, with the World Bank’s latest findings, the rest of 2016 appears to continue carrying on these tough sentiments. In dealing with such expected conditions, financial institutions have started to gather their resources, restructure their balance sheets and realign their goals. This month’s issue of Banker Middle East covers an array of topics and holding both an institution and an economy together. Providing an aerial view of global markets, the magazine explores GCC bond markets (pg. 10) and the state of foreign exchange in the UAE (pg. 12). Moving on, the cover interview provides an exclusive insight into the Best Corporate Bank in Saudi Arabia, Banque Saudi Fransi (pg. 18). Following which, we have features addressing the Lebanese market, cybersecurity issues, the insurance and pensions sector as well as trade finance. Our In Depth interview meets with heads of various financial institutions in Australia, Jersey and Luxembourg–all of which have vested interests in the Middle East. In an exclusive roundtable session, we are proud to present you with a discussion on ATM Channel Payments, featuring senior executives from Saudi Arabian banks (pg. 48). Not missing out on the core driver of every economy–human capital–the development of this sector in the region is further deliberated in one of the last segments of this issue (pg. 56). Covering various aspects of a thriving economy, I wish you a productive read. Ramadan Kareem.

18 6

News analysis The ups and downs of Saudi Arabia

News bites

THE MARKETS 10 GCC bond markets akin to Latin America 12 The strength of foreign exchange in the UAE LEGAL FOCUS 14 To sue or not to sue? That is the question COVER INTERVIEW 18 Achievement of a lifetime COUNTRY REPORT 24 Braving uncertainties in the Lebanese market CYBERSECURITY 28 Cybersecurity–a growing challenge in the Middle East INSURANCE 32 GCC insurance market contributes to the economy

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ISSUE 183 APRIL 2016 |

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Achievement of a lifetime Patrice Couvegnes, Saudi Fransi

BankerMENA

Egypt: an uphill battle

Bank Audi aligns with business

Collaboration—the to getting ahead

and Media Free

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

key

Post sanctions—a cautious market

Maintaining resilience

UAE: key to GCC’s wealth

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

Preparing for the future

GCC bond markets akin to Latin America

Braving uncertainti in the Lebanese es market

Financial centres: the gatekeepers of untapped opportuniti es

ATM Channel Payments Roundtable

Get the next issue of Banker Middle East before it is published. CPI Financial

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CEO of Banque Saudi Fransi Zone Authority

Zone Authority

Achievement of a lifetim e

Patrice Couvegnes , Group

and Media Free

A promising market Gulf segment in the

Dubai Technology

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

First

Dr. Adnan Chilwan

Dubai Technology

Editor

y st lad Fir ani Hana Al Rostam Chairman of Dubai

DIB— moving DIB—moving markets

Dubai Technology and Media Free Zone Authority

the needs of “Understanding of bespoke each market segment, and cautious product oﬀering, ensured the ending, have of successful performance these products.”

Nabilah Annuar

“I believe that BSF position to leverageis in a unique on the new Saudi economic context. ”

Group CEO of Banque

“The question the market is asking now is not ‘can we do more?’ but ‘how much more can we do?’ and ‘for how long?’”

3 14/06/2016 09:02

CONTENTS

JUNE 2016 | ISSUE 185

PENSIONS 34 Pensions in the Middle East TRADE FINANCE 38 Stimulating trade activity

IN DEPTH 42 Tapping into Australia’s property sector 44 Financial centres: the gatekeepers of untapped opportunities

EVENT 54 Making payments a breeze 55 Increasing oil prices to pose risks HUMAN CAPITAL 56 Nurturing talent in the Gulf

PERSONALITY 60 Ramesh Shivakumaran, Group Business Services Director, Gulftainer

LAST WORD 62 Mathieu Vasseux, Practise Head—Financial Services (Middle East and Africa) and Office Leader—Saudi Arabia at Oliver Wyman

48 Log on to www.cpifinancial.net for news, polls, events, analysis, blogs, features, commentary and more.

Caring for your career

Looking for a new position in financial services in the Middle East?

Checkt CPI Financial’s Jobs page

4 page 3-4 contents.indd 4

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

46 A bullish outlook in spite economic headwinds TECH FOCUS 48 ATM Channel Payments Roundtable 52 Core banking transformations

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The ups and downs of Saudi Arabia In spite of rating downgrades, the country stands to triumph as an emerging market

he past month has been a turbulent one for Saudi Arabia with the announcement of its Vision 2030, a rating downgrade on its banks, a possible inclusion into the MSCI Emerging Markets Index and the elephant in the room—the OPEC fiasco. The Kingdom is among the few countries that has seen its sovereign credit ratings downgraded by major ratings agencies on the back of lower oil price outlook and its effect on fiscal deficits. According to IHS Banking, although the Kingdom’s sovereign and bank rating downgrades will likely increase funding costs, it is still believed to be manageable for banks in the country. Moody’s in May updated the ratings of 11 Saudi banks by downgrading the longterm deposit ratings of nine banks and confirming the ratings of two banks, all with a stable outlook. The rating actions on the banks follow Moody’s downgrade of Saudi Arabia’s Government issuer rating on 14 May 2016 to A1 (stable) from Aa3. The sovereign action reflects the ongoing negative impact of lower oil prices on Saudi’s fiscal position and economic strength. According to Moody’s, the rating downgrades of nine Saudi banks reflect, to differing degrees, a combination of the reduced fiscal capacity of the Saudi Government to provide support to the

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Saudi Arabia could account for a sizeable

2.9

of the MSCI EM index banks in times of stress, if needed; and an assessment of each bank’s resilience to the weakening domestic operating environment, which Moody’s expect will dampen funding, asset quality and profitability in the coming quarters. The nine banks are SAMBA Financial Group, Banque Saudi Fransi, Saudi British Bank, Arab National Bank, Riyad Bank, Saudi Hollandi Bank, Saudi Investment Bank, Bank AlBilad and Bank Al-Jazira. “Saudi Arabia remains in investment grade territory and so far Gulf banks have continued to see strong interest in international debt issuances, which they have been able to secure at relatively favourable rates. Although the lower oil price environment presents challenges for Saudi banks, the IHS Banking Risk Service views the Saudi banking sector as resilient to the current shocks. We assign a rating of 20, Moderate Risk, equivalent to A to A- on the generic ratings scale, with a Stable outlook,” said Alyssa Grzelak, Senior Economist at IHS Global Insight.

On the brighter side of things, Credit Suisse recently found that Saudi Arabia’s stock market reforms support the country’s prospective upgrade to emerging market status. The Saudi Arabian Monetary Agency has announced crucial reforms to be implemented by mid-2017. This is suggested to strongly increase the likelihood of the Kingdom being classified as an emerging market (EM) by MSCI. “We believe a much more likely outcome is for MSCI to include Saudi Arabia for the review in June 2017. Therefore, the earliest that we believe Saudi Arabia can enter the EM Index is June 2019. It is possible that MSCI takes Saudi Arabia into review this year, despite the reforms not being implemented yet. A similar approach was applied in the UAE and Qatar’s case, however these two markets were supported by strong international investor interest, something noticeably lacking in Saudi Arabia. According to our estimates, if included, Saudi Arabia could account for a sizeable 2.9 per cent of the MSCI EM Index,” explained Fahd Iqbal, Head of Middle East Research at Credit Suisse. Should Aramco be successfully listed in time, its weight in the index could increase to 5.5 per cent. Credit Suisse further expounds that the run-up to an EM upgrade would trigger strong performance in Saudi equities. Iqbal further added, “The policies outlined by Saudi Arabia as part of its Vision 2030 plan are sensible and proactive with many elements being long overdue. However, it is extremely ambitious and aims for a large-scale transformation of the economy. Even if half of all the targets are reached, we believe it would yield significant improvements in the structure of the Saudi economy. Despite the reduction in subsidies it entails, we believe the policies will have a relatively greater support with the large youth population as it brings with it the prospect of change and greater employment opportunities.”

(Photocredit: LukaszZfarerlife/Shutterstock.com)

NEWS ANALYSIS

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NEWS BITES

Property prices in the UAE continue to slide in 2016

Bahrain’s debt levels on the rise, issues Sukuk

eal estate prices in the UAE are likely to continue declining in 2016, projected Standard & Poor’s Ratings Services (S&P) in a recent report. For the coming year, the agency sees no sign of market improvement for the sector, despite housing affordability improving from the current price environment. Pressures have arisen from declining oil prices dampening the hiring and expansion plans of oil-exposed companies; non-oil private companies’ business activities having softened; the strong US dollar rendering UAE real estate more expensive for international investors holding non-US dollar liquidities; and pressures on tourism negatively affecting retailers and their landlords, as well as hotel operators. S&P does not foresee major negative movements in the real estate sector ratings over the next 12 months. It believes that that its rated developers could absorb a 10 per cent drop in residential sales prices in Dubai this year. The lifting of geopolitical restrictions, such as the sanctions on Russia and Iran, could strongly benefit the recovery of the UAE property market. This would open new investment flows into the regions’ real estate markets and partly compensate for the softening demand from other countries. A rebound in oil prices as well as weakening US dollar would also likely reverse the negative trend.

The Bahraini government in May privately placed a $435 million, three-year Sukuk. According to industry reports, the deal was priced in the area of 325 basis points over midswaps. The Kingdom, whose state finances are strained by low oil prices, is increasing its borrowing and in late February borrowed $600 million in a twotranche reopening of a previous US dollar bond issue. Moody’s Investors Service cut its rating of Bahrain’s sovereign debt by one notch to Ba2, taking the rating deeper into junk territory, with a negative outlook. The research and ratings agency in a recent credit analysis report projected that Bahrain’s fiscal deficit is set to expand and government debt levels could rise to 100 per cent of GDP by 2019, if the government cannot effect significant revenue and expenditure reforms amid low oil prices. Bahrain’s government has low fiscal flexibility owing to its very high breakeven oil price. As a result, general government debt rose to an estimated 59 per cent of GDP at the end of 2015. In 2014, Bahrain’s oil-related revenues represented 86 per cent of total government revenues. However, Moody’s expects this share to drop significantly to less than 70 per cent of total revenues from 2016 onwards as oil prices decline. Following an already very wide fiscal deficit at 13 per cent of GDP in 2015, Moody’s expects it will widen to 16 per cent in 2016 and narrow only gradually over the following years.

RATINGS REVIEW Entity Saudi Arabia Kuwait

Abu Dhabi

Qatar

Ras Al Khaimah Bahrain Turkey

Lebanon

Egypt

LT IDR/LT Rtg (FC)

ST IDR/ST Rtg (FC)

Country Ceiling

AA-

F1+

AA+

Saudi Arabia

F1+

AA+

United Arab Emirates

AA+

United Arab Emirates

AA AA A

BBB-

BBB- B

F1+ F1+

BBB+

BBB

Positive Negative Evolving Stable

Under Review

AA+

KEY

AA+

B OUTLOOK

Country Kuwait Qatar

Bahrain Turkey

Lebanon Egypt

WATCH

APICORP completes innovative Shari’ah-compliant facility in Algeria

he Arab Petroleum Investments Corporation (APICORP), a multilateral development bank established in 1975 by the 10 member states of the Organisation of Arab Petroleum Exporting Countries, announced the completion of an innovative Shari’ah-compliant financing facility for Oil Recovery Services SAL (ORSsal), with operations based in Algeria. In March 2015, ORSsal was awarded a $47.6 million in Algeria by Sonatrach for providing drilling/completion fluids, waste management and engineering services over a period of three years. The purpose of the facility is to finance part of the cost of the equipment and to cover the working capital requirements for implementing the contract. The initial $10 million financing provided by APICORP will act as a template for the financing of several other contracts in the pipeline. The facility is the first of its kind for APICORP in the Algerian market, and is dedicated to support a service contracting company working for Sonatrach.

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Ezdan floats $500 million maiden Sukuk

zdan Holding Group priced its inaugural Sukuk transaction on 11 May 2016. The successful $500 million five-year Sukuk attracted an order-book of more than $800 million, with a participation of 71 investors. Investors from the Middle East took 68 per cent of the issuance, with European investors subscribing for 21 per cent and Asian investors taking 11 per cent. In terms of distribution by investor type, banks took 47 per cent of the issue amount, followed by fund managers with 27 per cent, private banks with 19 per cent and other institutional investors with seven per cent. Ezdan’s Sukuk is the first ever international issuance by a private sector Qatari corporate in the debt capital market and the first issuance from Qatar and in the international market this year.

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14/06/2016 09:07

Acquisition of Finansbank poses manageable risks for QNB

Institutional strength in GCC countries determines economic and fiscal resilience

ue to conclude at the end of June, Qatar National Bank’s (QNB) acquisition of Turkey’s Finansbank will locate around 30 per cent of QNB’s operations in the MENA markets. Moody’s in a commentary views this as posing greater risks than Qatar, QNB’s domestic market. This will test the bank’s risk management capabilities, and will require prudent risk control and oversight. Nevertheless, QNB’s strong capital buffers are expected to offset the heightened risks and that the challenges posed by the Turkish acquisition and the bank’s other international operations will remain manageable over the next 12-18 months. The deal will increase the geographical diversification of QNB’s assets and revenues. Moody’s expects Finansbank will contribute to QNB’s earnings growth given the higher net interest rate margins in Turkey. While credit costs for the group will increase post-acquisition given the higher risks in Turkey’s volatile market, Moody’s expects they will remain at low levels and continue to underpin QNB’s profitability and internal capital generation.

GCC countries’ institutional strength will determine their ability to push through economic and fiscal reforms designed to counter the drop in oil revenue, said Moody’s in a recent report. Moody’s review of the ratings of GCC countries considered each sovereign’s capacity to formulate and implement effective policy responses to the lower oil prices. Sovereigns have implemented several fiscal measures to adjust to lower revenues including the introduction of a GCC-wide value-added tax of five per cent from 2018 that will support revenue diversification. Governments are also considering increases in corporate income taxes and taxes on remittances. However, the reforms—while positive—will only partly compensate for the continued oil price slump. As such, Moody’s expects that fiscal and external constraints will persist beyond 2016. The social impact of fiscal reforms is expected to make policy implementation tougher for Bahrain (Ba2 negative), Oman (Baa1 stable) and Saudi Arabia (A1 stable), where governments are under pressure to continue redistributing oil revenues to their populations to avoid economic-related civil unrest. In comparison, Kuwait (Aa2 negative), Qatar (Aa2 negative) and the United Arab Emirates (UAE, Aa2 negative) have fewer such constraints. Similarly in a commentary by the Institute of Chartered Accountants in England and Wales, GCC countries are in need of a new economic paradigm to retain its prosperity and successfully end its reliance on oil. In a recent roundtable conducted by the accounting and finance body, industry players have suggested that economic policy in the GCC countries must move to countercyclical fiscal policy and countercyclical monetary policy. The former policy could include removing subsidies, privatisation, public-private partnerships, and structural reforms to remove current investment barriers and make the private sector more active. These efforts must in turn be supported by countercyclical monetary policy changes that stop GCC countries from being pegged to the US currency only, which has been appreciating over the last three years by 20 per cent. GCC countries need to move towards a ‘basket of currencies’, which include the US dollar, euro, yen and renminbi. This will enable each country to have a more flexible exchange-rate system.

MENA M&A market to remain unchanged in 2016 Ernst & Young in its latest EY Capital Confidence Barometer has found that low oil prices have little impact on M&A strategy as MENA executives continue their steadfast pursuit of deal-making. Of the MENA executives surveyed, 37 per cent expect to actively pursue acquisitions in the next 12 months. Geographically, MENA companies are sticking close to home, with four out of five of their top deal destinations residing within the region, according to the CCB. The first quarter of 2016 saw a 43 per cent increase in domestic deal volume, rising from 21 deals in the corresponding period in 2015 to 30 deals in the first quarter this year. Deal-making in MENA is influenced by: depressed asset sales; price dislocation with the equilibrium price moving closer to buyer valuations caused by disparities in vendors’ price expectation versus buyers’ valuation; transformational deals and disruptive trends due to changes in consumer behaviour; and the position of watchful waiting as executives wait for the US economy to pick up, seek more certainty in China’s economy, and await the outcome of the Brexit debate.

GIQ Update: Oil’s Rollercoaster Ride

Emirates Islamic issues $750 million Sukuk

mirates Islamic (EI) on the 23 May 2016 announced the issuance of its five-year $750 million Sukuk paper drawn down from its $2.5 billion Certificate Issuance Programme. The issue, which will be listed on NASDAQ Dubai and the Irish Stock Exchange was priced at 5Y Midswap+220bps and oversubscribed by 2.95 times. It attracted investment from GCC, Asia and Europe. Fitch has assigned EI a long term issuer default rating of A+ with a stable outlook.

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(Photocredit: slava296/Shutterstock.com)

THE MARKETS

GCC bond markets on path of Latin America Philipp Good, Head of Portfolio Management at Fisch Asset Management explains the evolution of the bond market in the region

he GCC’s sovereigns and corporates have, for some time, come under increasing pressure from credit ratings agencies. This pressure is set to grow as debt obligations in the region increase. As that process develops, it will be new bond issuances that enhance diversity in the region, improve liquidity and lead to a broadening of the Middle East’s fixed income investor base. Findings by Fisch Asset Management’s subsidiary, Independent Credit View (I-CV), whose services are commissioned by investors as opposed to issuers, have clearly indicated that corporate governance in the Middle East needs to improve, particularly in regard to transparency surrounding the use of proceeds. This improved transparency will, in turn, require improved dialogue between issuers and investors. So, where is the region now, and where is it heading? There is no doubt that Middle East countries have the capacity to lever up. The region has the highest average ratings globally, but budget deficits need to be addressed through a combination of investment and reform. The funding of these deficits can be achieved at a sovereign level or among government related entities.

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Privatisation will also play a key role. This is an exciting time for the region’s markets and the current scenario offers plenty of interesting opportunities for investors. Corporate governance still has room for improvement, and this will have an impact on pricing power–open dialogue with investors will positively affect credit assessments for issuers. We recently reviewed Emirates Airlines, who I-CV rated at BBB-/ Marketweight for the issuance of senior unsecured debt. The report highlighted Emirates’ longstanding track record in successful airline operations as a strength, as well as Dubai’s ideal operational and regulatory environment. Key weaknesses included geopolitical and economic risks, along with oil price erosion. Although the market prices the 4.5 per cent Emirates Airlines 2025 issue with a risk premium of 230 basis points over Treasury (and this is in line with BBB Emerging Market Corporate Credits), we do not see much relative value, and we are therefore not currently invested. Other leading GCC issuers are also under scrutiny. Saudi Telecom Company (STC), for example, was recently rated at A- by I-CV. Assessment highlights included its high and stable margins, free cash flow, pursuit of a regional

Philipp Good

expansion strategy, and the stability that is provided by state ownership. While the current low oil prices that have battered the Saudi economy do not seem to have impacted STC, that situation could change very rapidly. It has also been noted that up to 20 per cent of outstanding receivables could be classified as doubtful debts, which is a significant concern for any investor. In March, Moody’s Investors Service said, unsurprisingly, that lower oil prices would slow growth and increase budget

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19/05/2016 09:42

deficits in GCC countries in 2016. Last August, an I-CV credit analysis for Dubai’s DP World rated the port owner and operator at BBB (Marketweight), noting that despite its efforts to diversify it remained dependent on the UAE’s economic development. With the UAE’s economic growth expected to slow as a result of low oil prices, the proximity of companies such as DP World to unstable geopolitical regions in the Middle East presents commercial risk. Such commercial risk is not carried by corporates alone, but by sovereigns too. I-CV’s latest review for Kuwait rated the country at A. Kuwait is endowed with abundant natural resources, large oil reserves and high per capita income, as well as a relatively robust fiscal position, a well-endowed sovereign wealth fund and large foreign currency reserves. However, important and glaring weaknesses have impacted Kuwait’s credit rating. These are, namely, limited economic diversification and dim growth prospects due to the oil price collapse. Oil is responsible for 90 per cent of Kuwait government revenues, and the country operates a generous welfare state Fisch Asset Management largely financed by oil income.

We’re currently expecting increasing leverage across the GCC at a sovereign, corporate and household level.

– Philipp Good, Head of Portfolio Management at Fisch Asset Management Diversification should now be regarded as a necessity, not a luxury. But should we be comparing the GCC region with Latin America? Argentina’s recent experience, for example, suggests that there are obvious opportunities for GCC economies to exploit the sovereign debt market. Latin America’s third largest economy has just sold $16.5 billion of sovereign debt in its first international bond issue since defaulting in 2002. The deal’s underwriters received nearly $70 billion in orders for the bonds. This ‘emergency’ bond was issued by a government in a far worse fiscal position than any country in the GCC, and on top of a poor track record for defaulting, yet the issuance was four times oversubscribed. GCC countries still sit on large cash and oil reserves, and carry a relatively low default risk. Investor confidence in the Middle East as a growth market is still | fairly robust, Media Presenta?on 4 May 2016

Middle East on the Path of La?n America

Middle East on the Path of Latin America

Hard Currency Debt Stock vs. Nominal GDP by Region 900

Weighted bond ra4ng Region

700 600

GCC

Latam

Asia

5,000

4,500

Africa

Ra?ng

A-

BB+

BBB+

BB+

HY-Share

4.9%

54.9%

16.3%

62.1%

58.1%

4,000 3,500 3,000

500

2,500 400

2,000

300

1,500

200

1,000

100 0

500 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Africa & Middle East (ls) Source IMF / JP Morgan / SCB, April 2016

La?n America (ls)

Source: IMF / JP Morgan / SCB, April 2016

Middle East (rs)

South America (rs)

Nominal GDP in bn USD

Hard Currency Debt Stock in bn USD

800

while transparency and governance at both corporate and sovereign level are showing signs of improvement. In short, GCC bonds remain an appealing prospect, particularly when we consider the recent success of prominent Latin American issuances. We’re currently expecting increasing leverage across the GCC at a sovereign, corporate and household level. This will result in further downgrades throughout the region and, probably, higher risk premiums. On the other hand, the starting point for GCC credits is fairly comfortable, and investors can be expected to absorb the first wave of issuances relatively easily. The GCC will increase its weighting on various indices and more global investors will look at the region. Ultimately, this will bring improved liquidity in the secondary market. Page 1 With room to lever up, there are clear opportunities for investment and reform at GCC sovereign level. Demand for capital can readily be met by the issuance of sovereign debt, as well as by government-related entities. Another obvious way to attract capital is to divest a portion of the vast number of government-owned businesses across the GCC. The main threats to this process are misallocation of capital, coupled with domestic hesitancy and external doubts over fiscal policy reform. We expect a number of sovereigns, such as Oman, Qatar and Saudi Arabia to issue in different tenors. This will give a clearer indication of risk appetite for bank and corporate issuance thereafter. Our view is that risk premiums will maintain their elevated position for the time being.

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THE MARKETS

The strength of foreign exchange in the UAE S. Karunakaran, Joint Treasurer at Foreign Exchange & Remittance Group provides an overview of the money traffic landscape in the UAE

S. Karunakaran

he remittance landscape continues to grow with expatriates remitting funds for family maintenance, real estate and investments on a regular basis. Though the compliance requirements are getting stringent the retail customer will have the necessity to remit funds on a regular basis for the above purpose. However due to regulatory challenges there is pressure on foreign exchange [currency business] as there are limitations to the maximum value of cash that one can carry while travelling to many of the countries as most governments are moving towards reducing the circulation of cash in order to reduce exposures as well as to minimise any associated risks and to have better control on how the money is spent by consumers.

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The change in the foreign exchange and remittance landscape is largely in the approach and vigilance which will make it difficult for people who are cash dependent and not keen on moving funds through legitimate banking channels. The monitoring and vigilance by the regulatory authorities have increased manifold, which in a way is helping the industry, eliminating the non-compliant players over time. In the long term the regulatory change will certainly help the overall business in general. The challenges faced by the sector is in line with the compliance standards of the banks, both local and global, in addition to meeting the regulatory requirements. Hence it is important for organisations to be focused in this area and they are required to invest in strengthening

the compliance programme in terms of people, systems, standard operating procedures, training, etc. This would only be possible if the organisation and the leadership believe that this is the way forward and any deviation from this will make it difficult to be part of the industry and serve a customer. Like many other businesses, technology will play an important and critical role in the way funds are transferred to bank accounts globally and the trend is that there will be an introduction of technology based products to support the new age consumers who would like to complete their transactional requirements while at office or home with the convenience of using their mobile phones or laptops. While the sector is moving towards such

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consumer requirements, it will be a challenge in terms of investment on infrastructural requirements such as systems and resources to manage such operations. With time the players will move into this space to satisfy and attract a new set of customers, especially the young generation who are highly dependent on these systems. The UAE foreign exchange sector is not so different when compared to the way business operations are carried out in other GCC countries or where the target groups are concerned, as the core activities are largely similar. However the players in the UAE are highly focused on how best the service requirements address the consumer needs in line with the culture of a customer friendly environment.

The money exchange service providers here in the UAE play an active and important role in serving the customers who are part of the financial inclusion and are in the unbanked segment. â&#x20AC;&#x201C; S. Karunakaran, Joint Treasurer at Foreign Exchange & Remittance Group

Foreign exchange and remittances have greatly assisted in supporting the unbanked sector in the UAE on a large scale. It has created new dimensions to the way the money exchange business is conducted compared to how it has been operated globally. The strength of this industry, with the support

of the government and regulatory framework, has facilitated to extend services beyond the normal banking hours and at multiple convenient locations making it very easy for consumers to carry out their foreign exchange or remittance transactions. The money exchange service providers here in the UAE play an active and important role in serving the customers who are part of the financial inclusion and are in the unbanked segment. The unbanked or the low income customers are deprived of the banking services due to various reasons and they depend largely on foreign exchange services for remitting their hard earned money to support the families back home. It is estimated that the business will continue to grow, however the industry may get streamlined with stricter process control.

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LEGAL FOCUS

To sue or not to sue? That is the question Haytham Alieh, Counsel in the Litigation & Disputes Resolution Practice of Baker & McKenzie Habib Al Mulla explains the importance of litigation in default situations

his year has seen a dramatic rise in the number of law suits filed by Emirati and foreign banks in the UAE against a wide range of clients are failing to meet their financial obligations, compared to the same period last year, and the impact is being felt in the UAE banking and finance sector. The reasons behind this trend are very clearâ&#x20AC;&#x201D;the global and regional economic slowdown, the drop in the oil prices in addition to other macro-economic and geopolitical factors. During such period of economic downturn, and with an increasing number of defaulters, how can banks best deal with the faltering debtors in the UAE and help stabilise the current economic situation? Is litigating against them the best option, or can loan restructuring be a better solution, not just for the parties, but for the economy as a whole? Small and medium-sized enterprises (SMEs) are major contributors to the local economy, and the difficulties they face impact the UAEâ&#x20AC;&#x2122;s banking and finance sector, since they are the first to feel the impact of any

Haytham Alieh

cont. on page 16

14 page 14-16 Legal Focus.indd 14

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BME AD JUNE 13th 2016 AW.pdf

6/13/16

12:03 PM

AND AGAIN… THE BEST BANK FOR BUSINESS IN THE UAE Best Corporate Bank Best Commercial Bank Five years in a row as best local commercial bank. Two years running as best corporate bank in the UAE. At National Bank of Fujairah, we’d like to think that such strong recognition is no mere coincidence, but a reﬂection of our grit, hard work and, most importantly, the partnerships that we’ve managed to enjoy with our clients. To all our valued customers, thank you for choosing us as your bank for business in the UAE.

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LEGAL FOCUS

cont. from page 14

economic slowdown, thus affecting their ability to settle their instalments or facilities to the banks. But even large companies operating in the domestic market are feeling that slowdown, as less liquidity in the market often result in banks tightening their credit and loan facilities.

WHY LITIGATE?

It is a common practice for banks to turn to litigation once debtors default in settling their payments after a sustained period of time, and after being notified by the banks of such defaults. Litigation is a good option, as long as those defaulting SMEs have enough collateral or assets which the bank can liquidate or seize to ensure the majority of the debt or the granted facilities will be recovered. At the same time, pursuing this route sends a message to other debtors that this bank will aggressively reclaim any defaulted amounts. However, this option will cost the banks time and money to get the litigation process going, and may even have a negative impact on that SME if that business is forced to shut down, fire its employees and be unable to generate any income to meet its liabilities.

RESTRUCTURING—A VIABLE OPTION?

Restructuring of loans is a viable alternative that banks can revert to, and this option was recently supported by the UAE government, who immediately gave their full attention to alleviating the impact of bad debt on the economy as soon as the slowdown began. There have already been several meetings between the UAE Central Bank and the Banking Association to consider the current economic downturn and to study ways and take the necessary measures to prevent the situation

16 page 14-16 Legal Focus.indd 16

- Haytham Alieh, Counsel in the Litigation & Disputes Resolution Practice of Baker & McKenzie Habib Al Mulla

from deteriorating. Sensitive to the impact it would have on the general economic situation, government and regulators are calling on banks to reduce interest rates and fees with the rescheduling of debt in order to give a grace period to help the SMEs that are the backbone of the economy. In addition, banks should conduct a thorough due diligence on the financial situation of a company or individual prior to granting any loans or facilities. Risk assessment teams at the banks should always be on the alert and work closely with SMEs in particular to have constant control and follow up on the financial situation of those companies, so as to be able to act instantly whenever a change or a delay is observed. Restructuring can work only if the business can offer the bank a clear and concrete payment plan showing that it will be profitable enough

to meet its financial obligations. Otherwise the banks will go back to the litigation option, which will cost both the bank and the business time and money. Accordingly, banks must carefully consider their objective when looking to recover bad debt—and take a commercial approach to each case as to whether litigation or loan restructuring is the best way to achieve the desired result. Deciding on the appropriate course of action also depends on the nature of the debtor. Ultimately, one size does not fit all.

MOVING FORWARD

During times of stability, banks would grant great facilities, but the opposite tends to happen during an economic downturn. To mitigate against this going forward, banks should consider changing their approach to the way they handle their client relationships right from the start— comprehensive assessments of cash flows, projects, sectors, competitors, and constant dialogue combined with regular monitoring. With oil prices rising again and the impressive approach GCC countries are taking to proactively implement economic diversification strategies, there is light at the end of the tunnel for the UAE’s banking and finance sector. To ensure that the UAE remains an attractive destination as a global centre for business and finance, the right legal and regulatory frameworks must be in place to support both creditors and debtors. Legislative changes are needed to bring about a smoother process for lenders under UAE law, either prior to or after default, and the fact that the UAE’s Ministry of Finance is preparing more than 16 federal laws for the financial services sector is welcomed news.

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COVER INTERVIEW

Patrice Couvegnes believes that BSF is in strong position to leverage on in the new Saudi economic context.

Achievement of a lifetime Patrice Couvegnes, Group CEO of Banque Saudi Fransi discusses his ambitions as the bank operates in a new economic climate

hat are the driving factors of BSF’s fiscal performance over the past five years?

One of the driving factors of Banque Saudi Fransi’s (BSF) success was a fruitful restructuring exercise in 2012 and 2013–a new organisation, a deeply reshuffled management team, an adjustment of business models to deal with the low interest rate environment and high capital requirements. Furthermore, we also had a restructuring period that was completed by a major clean-up exercise of the loan book in 2013. This difficult and painful exercises gave the foundation and the impetus for the bank’s successes in 2014 and 2015.

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Supported by the Medium-Term Plan 2014-2016, the bank also underwent a transformation phase from a commercial bank to a relationship bank with a focus on balance-sheet optimisation through systematic cross-selling. We had a moderate and selective loan growth, driven by a prudent risk strategy and a focus on risk adjusted return. This strategy paid off with our net interest margin improving over the past two years, with non-interest revenues growing systematically faster than loan growth, and cost of risk maintained at a low point. As a result, BSF posted the best ever net income for two years in a row: SAR 3.52 billion in 2014 and SAR 4.03 billion in 2015 while being well positioned to deal with more challenging economic environment.

The concept of ‘Banque of Excellence’ aims to make BSF the bank of choice in terms of client servicing for corporate and individual clients, which can be achieved through a highly motivated, professional workforce so as to become the bank of choice. – Patrice Couvegnes, Group CEO of Banque Saudi Fransi What are the bank’s biggest achievements in the last five years?

We were disciplined in delivering a difficult restructuring exercise and subsequently implementing the transformation phase. Breaking silos and putting cross-selling systematically was at the heart of our new model. Our cross-selling ratio, which stood at 40 per cent in 2011, reached 60 per cent in 2015. This is indeed a huge progress in a period of five years. Finally, maintaining strict risk policy along those years helped the bank benefit from a record low cost of risk while having aggregated at the same time, a massive cushion of collective provision.

Tell us about your ‘Banque of Excellence’ vision.

The concept of ‘Banque of Excellence’ aims to make BSF the bank of choice in terms of client servicing for corporate and individual clients, which can be achieved through a highly motivated, professional workforce. The new strategy that we are adopting throughout out all segments and departments in our organisation reflects excellence in all aspects namely in achieving the set targets, in quality service, in achieving synergies across all bank’s segments, in building and retaining staff and in attaining growth and return. As of January 2014 we started implementing, across all of our business, the new strategic direction of ‘Banque of Excellence’. We continued to unfold the Medium-Term Plan 2014-2016 which is centred at excellence in client services. Concretely it means moving from a commercial bank to a relationship bank where the different business lines of BSF are mobilised and positioned as a solution provider for our clients. On the corporate side, senior bankers ensure a seamless integration between business lines to come up with relevant solutions. While on the retail side, we have put strong emphasis on e-channels with a new version of our e-banking and mobile applications delivered early January 2015. We will continue to develop in the e-channel area which is really appreciated from our clients. From a risk management point of view, we will continue the prudent policy which has been at the centre of the strategy. BSF is well positioned to face a more challenging economic environment. cont. overleaf

BSF won Most Improved Retail Bank and Best Corporate Bank in Saudi Arabia at the Banker Middle East Industry Awards 2016.

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cont. from page 19

BSF is on a massive push to align with Saudi Arabia’s Vision 2030.

How important is client services to BSF and what are your plans for this area moving forward?

Our focus at BSF is the client and only the client. The corporate banking group’s (CBG) vision is to be the home bank to our clients by engaging in superior relationship management, and delivering market leading services that propel the bank as a reference for banking of excellence. We aim to maximise return on equity by diligently promoting and practicing a sound risk culture, and by applying a client coverage framework to promote the cross-sell of the bank’s products and services with digital banking and client service topping our interests. The CBG’s strategy is to create a distinguished customer experience by increasing the pace of innovation to serve our ever changing customer needs. We aim to serve our clients anywhere and anytime through e-channels that provide comprehensive and evolving digital solutions. As for our retail banking group (RBG), the client is the milestone of the RBG to deliver excellent service and excellent experience. It is the main pillar for us to differentiate ourselves from competitors. And based on the NPS [net promoter score] strategy study done in March/April 2016, BSF has been mainly recommended by

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our customers for its customer services, fast transaction services, branch locations and qualified staff. Our strategy is to constantly monitor and measure customer expectations, satisfaction, loyalty and feedback to understand not only the gaps in BSF’s offerings and service delivery, but also to evaluate what customers feel about BSF. We are implementing ongoing studies, surveys and programmes to benchmark our services delivery and compare it to our competitors. We employ the mystery shopping study to measure and monitor the service deliver on branch channels level. We have the NPS study that measures and monitors BSF customer loyalty and understand the main driver toward loyalty. We also use the customer satisfaction study, to measure customer satisfaction index and work on increasing it. And lastly we engage the Voice of Customer programme, to measure and monitor the service delivered on digital channels, products, segments and on the transaction levels. Additionally, we also plan to implement physical monitoring to BSF branches as well as our ATM’s look and feel to ensure that BSF customers are in the best environment when they visit our branches. Moreover our aim is to serve BSF retail customer through social media platforms and live chat tools.

Patrice Couvegnes receives the Lifetime Achievement Award at the Banker Middle East Industry Awards on 12 May 2016.

We are currently preparing our new Medium Term Plan covering 2017-2019. It is a very relevant time considering the major on-going changes for the country. It is clear that the environment is already challenging and will continue to be more stimulating in the coming years. – Patrice Couvegnes, Group CEO of Banque Saudi Fransi.

In this regard we plan to undergo a digital transformation project that will help to deliver instant services and provide an option to apply for any products online. At the end, we are looking to build a customer-centric business model for retail banks based on a deep understanding of customer needs.

Looking ahead, how do you envision the bank’s growth and performance over the next few years?

We are currently preparing our new Medium-Term Plan covering 2017-2019. It is a very relevant time considering the major on-going changes for the country. It is clear that the environment is already challenging and will continue to be more stimulating in the coming years. The

efforts and achievements that took place over the past five years has largely prepared BSF to operate in this new environment—capacity to optimise balance-sheet usage, controlled growth, strict risk policy, etc.—all these provide a very solid base to unfold our relationship bank model with our clients. On top of the basic and recurrent strategic guidelines, we will also focus on developing our retail banking activities through differentiation, putting a massive push on the digital transformation and position the bank to align with the Vision 2030 and the important economic transformation that accompanies it. I really believe that BSF is in a strong position to leverage on the new Saudi economic context. cont. overleaf

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COVER INTERVIEW

BSF net income were

SAR 3.52 billion

BSF’s cross-selling ratio was

40 % 60 %

in 2014 and

in 2011 and reached

in 2015

SAR 4.03 billion cont. from page 21

You recently received the Lifetime Achievement Award at the Banker Middle East Industry Awards 2016. What are the biggest achievements of your career?

Rather than achievements, I prefer to focus on challenges which have really been shaping my professional career over the last 40 years as I believe that experience and being able to learn from mistakes are key drivers of success in banking. My first major challenge in a general management position came with the Asian financial crisis in 1997. I was then the Regional Head of Corporate Banking for Asia Pacific at Credit Agricole Indosuez (CAI). The crisis came from an uncontrolled development of loans, excess corporate leverage and currency mismatch in borrowing. Well, till now, believe me, I pay extreme attention to those 3 points upon taking any credit decision. CAI, which had followed reasonable lending policy, went through this Asian crisis without meaningful credit issue except for the collapse of Daewoo in Korea. The – costly – lesson was learnt: there is no “too big to fail”… But Korea was also a fantastic redevelopment experience. I took over as Country Head in 2000 and was assigned mission to rebuild our local operations from scratch. After a complete change of staff, we implemented a new business model relying on client relationship, crossselling, risk adjusted return on capital (raroc) and prudent risk strategy. By 2005, supported by the incredible Korean “can do” spirit, we positioned Korea as one of the topearning countries in the region for the Bank with one of the lowest cost of risk across the cycle.

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Second key challenge was the global financial crisis that took place in 2008~2010. I took over position of CEO of Asia for Credit Agricole CIB in September 2008. Few days later, Lehman defaulted… Aside from managing the crisis, we saw the emergence of tighter regulatory framework and development of the concept of “scare resources”: capital and liquidity had now a – heavy – price… We paradoxically saw it as an opportunity for our Asia operations that we positioned as a liquidity provider for the group. Third and last challenge, Banque Saudi Fransi. As you have understood, I used those past experiences to drive the restructuring and development of BSF. When I was appointed in 2011, the Bank had a wonderful client base with exceptional loyalty coming from long history and dedication but it was losing ground and, more importantly, was not prepared to deal with the upcoming new regulations and market environment. We took advantage of favorable market conditions to embark in heavy restructuring exercise in 2012 and 2013 with a deep change in the organization and the management team through a mix of promotion of talents and on-boarding of new blood. As mentioned before, this initial exercise was followed by a Transformation plan in 2014~2016 to go from a Commercial Bank toward a Relationship Bank. Importance of clients, cross-selling, focus on return, cautious risk strategy, changing management team when required… All key elements that I took from my previous experiences. Obviously I am very proud of the position of BSF with its clients as well as its strong financial results but I guess the one last lesson I learnt is that all achievements are the result of a collective effort and nothing is for granted. So keep fighting!

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COUNTRY FOCUS

Braving uncertainties in the Lebanese market Lebanon’s financial and economic stability remains dependent on foreign capital inflows and the sustainability of public finances

tuck between a rock and a hard place, Lebanon’s stability has been affected by various external factors. The recessive Lebanese economy over the past year has been dealing with a large influx of refugees due to the Syrian war, continuous pressure from its government and US sanctions as well as geopolitical tension. These factors have impacted both the country’s political and economic landscape. The crisis also affected Lebanon’s ‘growth drivers’– according to the IMF–namely its tourism, real estate and construction industries, which in turn influences the way banks operate within the country. According to the Association of Banks in Lebanon, the country is home to 69 operating banks, some of which are small-

24 page 24-26 Country Focus.indd 24

medium- and large-size private owned commercial banks, 16 medium and long-term credit and investment banks, Islamic banks, Lebanese banks, foreign and mixed. As for its presence abroad, 18 Lebanese banks have 407 banking units spread across 32 countries and 89 cities of which 19 are representative offices of 11 Lebanese banks, 64 are branches of 11 Lebanese banks, and 310 branches of 40 banks (associates, subsidiaries and sisters to 13 Lebanese banks). Lebanon is a B-rated country; Moody’s has affirmed Lebanon’s B2 government debt and issuer ratings and maintained the negative outlook, while the country’s short-term rating is affirmed at (P) Not Prime. According to Moody’s rating reflects the credit support derived

from the country’s demonstrated fiscal resilience and strong liquidity position, which have been maintained despite the country’s continued political vacuum. In particular, banking sector deposits have continued to grow and the central bank has maintained high reserve levels, while the debt structure has improved over time. “However, the negative outlook recognises the downside risks associated with the delay in policy action to reduce the fiscal deficit, including passing budgets, subsidy reforms and raising new revenue. In the absence of policy action, the deterioration in the government’s fiscal deficit and debt burden will accelerate. The negative outlook also captures the increased risk to the country’s financing

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(Photocredit: Anna Omelchenko/Shutterstock.com)

capacity as a result of a slowdown in deposit growth, a large current account deficit and the elevated political and geopolitical risks that Lebanon is facing,” said Gabriel Torres, VP—Senior Credit Officer at Moody’s and lead analyst for Lebanon. Sharing the same sentiment, Standard & Poor’s Ratings Services (S&P) also affirmed its ‘B-/B’ long- and short-term foreign and local currency sovereign credit ratings and maintained its negative outlook. The affirmation incorporates S&P’s assumption that Lebanese bank deposits will grow by at least four per cent in 2016, or about 12 per cent of GDP. Approximately two-thirds of Lebanese bank deposits are in foreign currency and nearly one fourth is externally sourced.

These flows of funds are critical sources of funding for the government’s 2016 gross borrowing requirement of about 26 per cent of GDP and for the country’s 2016 gross external financing requirement of 88 per cent of GDP (or 147 per cent of current account receipts [CARs]). “In our analysis, the Lebanese government’s debt servicing capacity depends on the domestic financial sector’s willingness and ability to add to its holdings of government debt, which in turn relies on bank deposit inflows,” said S&P in a ratings commentary. “Domestic banks support the government debt market in two ways. First, they buy Lebanese government debt directly. Banking system claims on the public sector account for about 20 per cent of total banking system assets. This means bank creditors hold about one half of total government debt. Second, Lebanese banks buy certificates of deposit issued by its central bank, Banque du Liban (BdL), which in turn buys government debt. As of year-end 2015, BdL held 37 per cent of the government’s outstanding treasury bills, which amounted to 23 per cent of total government debt. Although we view the concentration of government financing from these sources as a structural weakness, at the current rating level these flows are an essential support,” it explained. The financial system remains key in meeting the country’s external financing requirement. According to the ratings agency, bank deposit inflows are largely sourced by remittances from the Lebanese diaspora. The banks induce the inflows by paying on average about six per cent on Lebanese pound deposits and three per cent on US dollar deposits. The inflows covered net government debt issuance twice last year. And it was noted as a consequence that banks’ external positions have deteriorated. S&P expect banks’ net external debtor positions will almost double in 2016 to $13 billion (41 per cent of

CARs), compared with $7 billion in 2013 and a net creditor position in 2010. Non-resident retail deposits constitute the bulk of banks’ external liabilities (about 83 per cent as of year-end 2015), the rest being cross-border interbank deposits. To meet the 2016 gross external financing requirement, banks and corporations are also expected to add to their external borrowings, and the government will return to the Eurobond market. “We also note that drawdowns on the BdL’s external reserves [nearly $32 billion at end-February, net of our estimate of bank reserve requirements on foreign currency deposits] could finance part of Lebanon’s 2016 $46 billion gross external financing requirement,” said S&P. The economic growth in Lebanon is projected to remain weak as long as the domestic political standstill persists and the Syrian civil war continues. The Syrian crisis is about to enter into its sixth year–without a resolution in sight–and it is expected that Lebanon’s political, security, and economic trajectories will remain entwined with its larger neighbour. S&P therefore anticipates that Lebanon’s traditional growth drivers— tourism, real estate, and construction— will remain subdued, despite the current oil price. Economic growth over 20152018 is forecasted at 1.6 per cent on average, down from the 2.6 per cent estimated previously, with per-capita GDP at $10,000 in 2016. The nation’s current account is expected to remain large but narrow to average about 18 per cent of GDP in 2016-2019, due to a smaller import bill stemming from lower oil prices and weaker domestic economic activity. The strengthening US dollar is seen to reduce the cost of imports from the Euro zone, which accounts for about one-third of Lebanon’s imports. On the other hand, exports, tourism, and net remittances will remain constrained because of the Syrian crisis. cont. overleaf

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COUNTRY FOCUS

cont. from page 25

“We estimate Lebanon’s public and financial sector external assets will exceed the country’s external debt by an average 54 per cent of CARs between 2016 and 2019, albeit on a declining trend. We estimate that gross external financing needs will average 117 per cent of CARs plus usable reserves over the same period. We expect that general government deficit will widen to about 8.7 per cent of GDP in 2016, compared with 6 per cent in 2014,” stated S&P. The deficit includes transfers to the electricity company Electricité du Liban (EdL), estimated at about two per cent of GDP in 2015 compared with four per cent of GDP in 2014, with EdL requiring less government support due to lower oil prices. The Syrian civil war and the flow of refugees to Lebanon is forecasted to continually impose a heavy burden on Lebanon’s infrastructure. Registered refugees have reached 1.1 million according to the UN High Commissioner for Refugees, however estimates range up to about two million, compared with an estimated population living in Lebanon of about 5.9 million according to the government. According to S&P, public finances and fiscal flexibility will remain constrained by structural expenditure pressures, including transfers to EdL, as well as by high interest payments, which account for more than two fifths of general government revenues. Nevertheless, without a fully functioning government, current expenditures were contained at about 23 per cent of GDP in 2015, while capital expenditures were cut to one per cent of GDP in the same year, notwithstanding Lebanon’s significant infrastructure needs. The firm expect that the high net general government debt will increase in the coming years, to 129 per cent of GDP by 2019. In terms of regulation, the central bank has been working to implement the Basel III framework and has

26 page 24-26 Country Focus.indd 26

established the guidelines for Lebanon’s financial interactions with the rest of the world. Last year, Lebanese authorities have reportedly lifted banking secrecy on 13 accounts over suspicion of money laundering, terrorism funding and financial embezzlement in 2014, and are investigating more cases, according to the Special Investigation Commission (SIC). The SIC said it received 277 cases, 76 of which came from foreign sources and 201 from local sources, and 73 pending cases which need investigation. S&P’s negative view on the country’s standing reflects its view that the protracted political deadlock and increasing regional tensions could

further impair the functioning of the Lebanese government and result in a further slowdown in banking sector deposit growth over the next 12 months. The agency further stated that it may lower ratings on Lebanon if, over the next 12 months, deposit inflows significantly slowed or foreignexchange reserves declined much further than expected; and if the domestic political gridlock escalated to something more destabilising. On the other hand, it may revise it’s the outlook to stable if Lebanon’s policymaking framework became more predictable, supporting foreign capital inflows and the sustainability of public finances.

BLOM Bank ‘targeted’ in terrorist attack A bomb exploded outside the headquarters of BLOM Bank in Beirut, Lebanon on Sunday evening around 8pm local time. The building itself was damaged and nearby parked vehicles destroyed but early reports did not indicate any fatalities. The Lebanese Red Cross reported two minor injuries. Later that evening, BLOM Bank’s corporate Twitter account included a message that read, “We reassure everyone that the damage was confined to the building and that BLOM Bank will continue with its mission to secure peace of mind and tomorrow we open as usual.” The attack itself has been condemned as an attack on the Lebanese economy by the country’s leading political figures. No immediate claim of responsibility has been made although many observers point to the Lebanese banking sector’s pivotal role in targeting the financing of Hezbollah at the behest of US legislation as a potential reason. Nohad El Machnouk, Lebanese Minister of Interior and Municipalities, said the bombing was ‘not in the traditional framework… not related to previous bombings.” State Minister for Administrative Development, Nabil de Freij, said that ‘targeting of the banking sector will lead to catastrophes’. “This explosion targets the entire banking sector on which Lebanon depends, and through which it can face many crises and internal and external financial dues,” he added Former President Michel Sleiman said via Twitter, that ‘away from speculations, it is certain that the Lebanese economy is the target…’ Finance Minister Ali Hassan Khalil, also via Twitter said that “the blast which targeted BLOM Bank is actually aimed at de-stabilizing the banking sector, and therefore, targets the stability of Lebanon as a whole.”

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Cybersecurity–a growing challenge in the Middle East Booz Allen Hamilton highlights the alarming cybersecurity issues amongst financial institutions in the Middle East

ntil recently, the risk of data theft and cyberthreats was perceived to be an issue that mainly faced more developed countries and impacted western financial institutions, businesses and governments who have typically been the main targets of cyberattacks. However, with the rapidly changing global economic landscape, increased dependence on technology and rising focus on digitisation, countries in the Middle East are now also facing the very real risk of cyberattacks and data thefts. Since 2013, more than 3.67 billion records have been reported lost or stolen worldwide–with almost 233.5 million in December 2015 alone, according to a report by Breach Level Index.

28 page 28-30 Cybersecurity.indd 28

In the Middle East, meanwhile, we have recently witnessed intrusions, compromises and data thefts through cyberattacks on a number of different organisations, including financial institutions. These attacks clearly demonstrate the severity of the challenge we are now facing at a regional level, as well as the importance of efficiently securing sensitive data. The past few months alone have shown that the cyberthreat actors of the world view the increasingly internetenabled Middle East region as a prime target for cybercrime. The number of successful ransomware and espionage cases across the region has risen at an alarming pace, and the latest Cost of Cyber Crime report predicts that

(Photocredit: wk1003mike/Shutterstock.com)

CYBERSECURITY

As the Middle East region begins to gravitate towards initiatives such as Smart Governments and Smart Cities, cybersecurity is going to become a paramount concern, given that Smart Cities require secure financial transactions to facilitate seamless integration of services with customers. – Dr. Mahir Nayfeh

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cyberattacks could potentially cost Middle Eastern economies more than $100 billion by 2020. Recent statistics drive home the seriousness of the situation: average annual losses to companies worldwide from cyberattacks now exceed $7.7 million per organisation, according to the Ponemon Institute. As the Middle East region begins to gravitate towards initiatives such as Smart Governments and Smart Cities, cybersecurity is going to become a paramount concern, given that Smart Cities require secure financial transactions to facilitate seamless integration of services with customers. In such a challenging environment, it is imperative for banks and other financial institutions to put in place systems that are working consistently and efficiently to detect and protect against data thefts, and safeguard consumer data, including credit and debit card information, birthdates, pins and passwords, and home and work addresses.

GROWING RISK AWARENESS

The good news is that governments are now increasingly aware of these risks and have established national cybersecurity agencies to protect their nations from cyberattacks. Similarly, private sector businesses are acting early to integrate comprehensive cybersecurity technologies across various business functionalities to ensure maximum protection. Although our clients across the Middle East often tell us that they have employed the very best cybersecurity tools on the market, what has become clear is how rarely they are used as a collection of common tools to defend systems. This leads to what we perceive is part of a bigger cybersecurity concern for the region. While it is clear that organisations in the Middle Eastâ&#x20AC;&#x201D; as well as around the worldâ&#x20AC;&#x201D;have

Dr. Mahir Nayfeh, Senior Vice President at Booz Allen Hamilton

Lutfi Zakhour, Senior Vice President at Booz Allen Hamilton, MENA

access to a number of the very latest technologies to detect cyberthreats and vulnerabilities, there has emerged a knowledge gap in how to best use these tools and combine them with other technologies to enhance data protection with minimal additional costs.

The fundamental pillars of the financial services business are based on confidentiality, integrity, and availability; if any of these are compromised, their business is at risk. When deciding to open an account or carry out a business transaction, a customer mainly looks for a secure, reliable bank or financial institution, which guarantees the safekeeping of their financial assets, and provides trusted and secure services for the transfer and use of those funds during their lifetime. Losing a customerâ&#x20AC;&#x2122;s trust could mean losing a customer for life. And the more financial institutions, businesses and customers gravitate to the use of e-payment systems, internet banking, and digitally enabled transfers, the greater is the threat of potential malicious exploitation. While the regional shift to the use of chip-based card payment systems and secure credit processing has proven efficient in protecting sensitive customer information at the point of sale, this is only a small piece of the overall security picture. As has been demonstrated by the surge in attacks within financial institutions, there is a need for greater effort and focus in using cybersecurity tools to efficiently secure consumer data and information.

Since 2013, more than

3.67bil

records have been reported lost or stolen worldwide, with almost

233.5 mil in December 2015 alone

Cyberattacks could potentially cost Middle Eastern economies more than

$100 mil by 2020.

cont. overleaf

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CYBERSECURITY

cont. from page 29

It may seem that customer names, phone numbers, and user account information is of little value without the security components of passwords and keys or pins, but there is a quantifiable value to this information, including the loss of confidence in a financial institution that can lead to severe reputational and financial damage that could prove difficult to restore.

SINGLE-MINDED CYBERSECURITY STRATEGIES

In order for an entity or organisation to be efficiently prepared for potential cyberattacks, it is more important than ever for its management, information technologists, and executives to develop a single-minded strategy. One that takes complete advantage of the tools at their disposal, allows them to combat the onslaught of cybercriminals, ideological hackers as well as state players seeking to profit from stealing and broadcasting sensitive information. This means that next-generation financial and transfer organisations must look beyond conventional approaches to secure customer data and financial transactions and instruments. There is an increasing need for a potentially transformational way of providing highassurance, high-trust electronic fund transfers between independent parties: one that can scale, perform and adapt to a rapidly accelerating and transforming digital economy. The new approaches must share data across a variety of emerging domains, beyond financial services and retail, and provide these services in a secure way that reduces the risks of potentially convoluted and complicated approaches to ensuring data security in financial services. The promise of big data and analytics as a means to predict cyberthreats, as well as the application of blockchain technologies to secure financial

30 page 28-30 Cybersecurity.indd 30

The technology of blockchain can help GCC governments boost security in the financial system by securing and facilitating transactions in the fastgrowing Islamic capital market, and improving trusted and broad-based access for investors.

– Lutfi Zakhour, Senior Vice President at Booz Allen Hamilton, MENA

transactions, presents some of the best hopes for tipping the scale away from cyberattackers and hackers. Organisations can benefit from predictive analytics by reaching new levels of efficiency and optimisation that were impossible with traditional business intelligence methods. Advances in big data and data science tools and techniques have enabled the ingestion, storage and visualisation of large volumes of data with a higher level of accuracy and granularity to derive powerful insights that can then analyse this complex data in a number of different contexts and efficiently predict and help stop imminent cyberattacks.

THE GROWING SECURITY IMPACT OF BLOCKCHAIN TECHNOLOGY

As Gulf countries in particular seek to create some of the world’s smartest cities amid a culture of innovation, blockchain technology is becoming an indispensable tool in the quest for success. Known primarily as the public ledger of Bitcoin transactions, blockchain offers a more streamlined and effective way of enabling digital trust. The uses of blockchain technology are far broader than simply for bitcoin transactions and that momentum is rising.

Described as a generational disruptive force in the financial services industry, these distributed ledgers maintain tamperproof lists of ever-growing data records, and enable secure value exchanges—be it money, stocks or data access rights— between different parties. Blockchain is increasingly being recognised as a potentially transformational approach to cybersecurity in a multitude of domains, and its applicability in the financial services domain is profound. This new technology is disrupting the financial system by offering a direct, efficient and secure transaction environment for the exchange of a full range of financial instruments—from stocks, bonds and cash, to wages, benefits and airline miles. The technology of blockchain can help GCC governments boost security in the financial system by securing and facilitating transactions in the fastgrowing Islamic capital market, and improving trusted and broad-based access for investors; assisting in applying for loans from Islamic banks by issuing a smart contract that is mined, validated, and replicated through the network; managing identity theft; and enabling smart grant financing. The issue of cybersecurity is going to remain highly relevant particularly for the financial services sector as the industry continues to cultivate and develop digital ecosystems. Prime amongst the range of challenges in any transaction is security and the internet has become the ultimate network of networks. In cyberspace, where threats of data theft are growing in both strength and numbers, the question is not if an attack will happen, but when—and the need of the hour is for public and private entities—including banks and financial institutions–around the world to beef up their security by employing latest technologies and practises in order to thwart the constantly evolving threats of cyberattacks.

www.bankerme.com

14/06/2016 09:52

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INSURANCE

GCC insurance market contributes to the economy (Photocredit: Chinnapong/Shutterstock.com)

Cedric Charpentier, Chief Executive Officer at AXA Gulf, explains the resilience of the insurance market in the region

W Cedric Charpentier

32 page 32-33 Insurance.indd 32

ith evolving economic conditions, the GCC insurance markets perspectives continue to remain strong and offer abundant opportunities for insurers to meet changing customer needs. Key factors contributing to this growth include the ever-expanding population, positive regulatory developments and increased awareness of insurance products. Over the past decade, the insurance industry has seen a number of exciting innovations and new business models aiming to meet customer expectations and improve core insurance functions. Insurers in the region are always faced with change both due to internal and external factors, requiring continuous improvement of products and services to enhance the customer experience.

A non-negotiable opportunity for insurers is to include digital technology in their strategy, allowing them to personalise insurance solutions and meet the growing requirements of a wide audience. In 2014, the GCC recorded a total population of about 51 million and generated a combined GDP of around $1.6 trillion, which is close to two per cent of the worldâ&#x20AC;&#x2122;s total. The income per capita levels in the GCC region match the global average, but insurance penetration levels are surprisingly low. Insurance premiums accounted for only 1.3 per cent of GDP in 2014, which is expected to improve to around two per cent in 2017. Insurance density is a good indicator of increased awareness and the take up of insurance by individuals whereas insurance cover for businesses is normally best expressed in terms of

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While the key opportunity for future growth is the region’s low insurance penetration and positive demographic trends, this is supported by regulatory improvements, such as in the UAE and Saudi Arabia.

– Cedric Charpentier, Chief Sales and Distribution Officer at AXA Gulf

Insurance premiums in the GCC accounted for only

1.3

of GDP in 2014, and is expected to improve to

1.3

in 2007

the level of penetration (premium as a percentage of GDP). If the population simply increases and there is no take up then insurance density will decrease so the increase in density is best expressed as an increase in awareness amongst a fast growing population. While the key opportunity for future growth is the region’s low insurance penetration and positive demographic trends, this is supported by regulatory improvements, such as in the UAE and Saudi Arabia. The UAE dominates in terms of share of insurance premiums in the GCC at 44 per cent, in 2014 revealing

a growth rate of 13.5 per cent. As highlighted by the UAE insurance authorities in its mid-2015 annual report, the market continued to maintain its leadership in the Gulf with a total volume of underwritten insurance premiums reaching $9.1 billion in 2014 led by 60 insurance companies in the country, of which 34 are local, and 26 comprise of foreign insurers. Following in the footsteps of Abu Dhabi, the recent mandate by Dubai Health Authority (DHA) requires all expatriates and nationals in Dubai to have health insurance cover before 30 June 2016, and failing to do so could lead to substantial penalties by the authorised body. This is followed closely by Saudi Arabia with an insurance market size of $8.1 billion in terms of written premiums. The insurance market in Saudi Arabia is dominated by health and motor insurance making up 75-80 per cent of the market. The expectation is that Saudi Arabia may surpass UAE as the largest insurance market in the region in the next few years, based on the relative size of the economy and population together with the pace of insurance market growth. Qatar ranked third in terms of written premiums for the sector amounting to about $2.2 billion in 2014. Despite the long-term potential for the insurance industry in the region, there are some current challenges such as fierce competition among the growing number of local and

international players which has led to profitability concerns in some countries, a shortage of insurance skills and a regulatory environment which is still evolving. International insurers can bring a wealth of expertise to the region which will help with overall market development in areas such as technical knowledge, distribution capabilities, customer orientation, and financial capabilities. Furthermore, insurance regulations in the Gulf are continually improving to meet the requirements of a modern insurance market. Essentially, the customer is at the heart of the business, and it is vital to build and deliver an impressive experience such as tailored products for specific customer segments and strong servicing capabilities. With 2016 being the year of digital, those insurers who are not already taking the required steps to improve existing solutions and technologies will lag behind in an extremely competitive market. In addition, strong technical knowledge and sophisticated pricing will benefit customers and the industry as a whole enabled by new initiatives such as big data which offers insurers an opportunity for greater customer insights, tailored pricing, and customer responsiveness. There are also opportunities to improve efficiency through transformation of systems and processes, which in turn will help to better control costs. Insurers should also address one of the region’s challenges by building a more sustainable ‘locally-grown’ workforce equipped with insurance technical knowledge and skills. It is critical they shape a culture of inclusion, innovation and trust whilst supporting the development of local talent.

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PENSIONS

(Photocredit: Looker_Studio/Shutterstock.com)

Pensions in the Middle East Michael Brough, Director in Willis Towers Watson’s International Consulting Group, provides an insight into the current state of the GCC pensions system

Social security is offered to local nationals in the GCC and is typically a generous benefit. For non-nationals, there is no social security [and no contribution requirements], but there is an end of service benefit [ESB]. This benefit is typically based on a defined benefit formula; for example in the UAE this is 21 days’ base pay for the first five years’ service, plus 30 days’ base pay for service in excess of five years’ service, with the benefit capped at two years’ base pay. Each GCC country has a different formula, but based on the same defined benefit principle [the differences are around the number of days, definition of salary or the use of a cap]. The ESB is a basic benefit and its value does not compare favourably to pension plans in more developed countries, some of which now have auto-enrolment

Michael Brough

34 page 34-36 Pensions.indd 34

ell us more about pensions in the GCC.

[a form of compulsion]. This is for instance in the UK, New Zealand, Norway and piloted in Turkey. As a result, many companies, in particular multinationals, have begun offering supplemental defined contribution pension and savings plans to their employees.

How would you describe the development of the pensions system here?

There has been very little development in the current systems around the GCC over recent years—Kuwait capped its benefit a few years ago,—although there has been a lot of discussions around the need to make reforms and to initiate change. Much of the developed world has moved away from a defined benefit model over the last 20 years, principally due to the volatile and high costs of such structures. State pensions have been reduced and occupational pensions cont. on page 36

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PENSIONS

cont. from page 34

have changed to defined contribution. Elsewhere in the developing world, such as Central and Eastern Europe, there has been a move from planned economies straight to the alternative defined contribution structure, whereby a flat fixed cost is paid into individual pension accounts and invested for the benefit of individuals. Poland has a three pillar pension structure [state, mandatory/occupational, voluntary] and all components are defined contribution-based. The questions for the GCC pension model are many and complex. For example: should a new system be defined contribution? Should this just be for non-nationals or nationals too? What level of contributions should be applied? Should it be for the future only or somehow be integrated with the current ESB [which is typically not funded and is an expense paid out of the profit and loss account as and when it falls due]? Where should contributions be invested? How can investment monies be retained or concentrated in the GCC to support local markets? Who should do the administration and where should this be based? How will the system be communicated to members? How will they be enrolled and contributions collected? And ultimately how will it be regulated?

What are your suggestions to further propel the functionality of the region’s pension system?

Reform is needed, particularly as employees coming into the region to work are staying longer and average age is therefore increasing, putting the pension topic in the minds of workers—who typically really start to think about this in their early forties, as income and focus on retirement and mortality rises. There is a need to introduce an affordable, probably defined contribution, sustainable system across the GCC and this might

36 page 34-36 Pensions.indd 36

There has been very little development in the current systems around the GCC over recent years [Kuwait capped its benefit a few years ago], although there has been a lot of discussions around the need to make reforms and to initiate change. – Michael Brough, Director in Willis Towers Watson’s International Consulting Group be a cross border solution, so not just developing individual country systems, but rather an integrated multi-country GCC structure, allowing free movement of workers and pensions around the GCC, in a similar way to the PanEuropean Institutions for Occupational Retirement Provision [IORPS]. There needs to be an administration hub locally and regionally, a free and flexible investment policy that somehow can ensure that sufficient local monies are invested locally to build and support infrastructure: also, low costs, a multilanguage communications strategy, and strong and effective regulation, oversight and governance are key.

What are the untapped areas of opportunities?

In the absence of forthcoming reforms to the social security and ESB structures, the opportunities are around supporting local and multinational businesses provide supplementary savings opportunities. At Willis Towers Watson, our International Pension Plan Survey 2015 and Middle East End of Service Benefit Survey 2015, indicate that only around 25-30 per cent of participants offer employees access to a supplementary savings plan. There is demand for quality savings opportunities and potential for the banks, insurance companies and wealth management organisations to develop and provide access to products to help customers save for the longer term. Corporate savings plans can provide fantastic value if they are set up with

institutional charges on a group and/ or nil-commission basis to clearly show value to employers and their employees, the ultimate members of these plans. This provides transparency and maximises value and appreciation to build a savings mentality and a positive reputation that is missing in many GCC retail pension and savings products.

What is your outlook for the short term and what should the market be weary of moving forward?

Certainly there is a great opportunity to develop a sustainable pension system over the next few years. This does require direction from GCC governments to replace or reform the archaic ESB systems and if there can be co-operation across the GCC this will further enhance the local economies through investment in local companies, job creation and supporting local infrastructure. With supplementary corporate savings and pensions not yet being a market practice benefit, there is potential for the growth of new supplementary plans sponsored by forward looking employers. Demand for these is only likely to increase in the short term, as the demographics in the region change with older and longer serving employees. It is important that such supplementary plans are well designed, and delivered through good quality providers, with investment choices and low charges to build up decent employee nest eggs for the long term.

www.bankerme.com

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TRADE FINANCE

Stimulating trade activity Casey Bell, Head of Trade Credit GCC at AIG says that the trade credit insurance sector is set to bolster UAE trade, especially in volatile times

ncreased use of trade credit insurance and trade finance insurance could be a vital tonic for UAE companiesâ&#x20AC;&#x2122; flagging confidence and could help see the UAE economy securely through volatile times. These instruments protect companies against the default of payment arising from the sale of goods and services on credit terms. This is an important and growing concern in the region. The ripples through economies of the oil price slump threaten an increased risk of defaults and cases of absconding. Trade confidence in the UAE fell by 19 points in the second half of last year, according to an index from HSBC. Cited as a key factor was an expected increase in the risk of buyers and suppliers not honouring agreements. Trade credit insurance and trade finance insurance provide balance sheet protection and enable companies to identify new creditworthy customers, enter new markets with confidence, extend better credit terms to them, and secure the finance that they need. Here is how they workâ&#x20AC;&#x201D;trade credit insurance provides sellers with the accounts-receivable protection needed

38 page 38-40 Trade Finance.indd 38

Casey Bell cont. on page 40

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TRADE FINANCE

cont. from page 38

to safeguard themselves against a customer default due to financial or political events. Accounts receivable— money owed by customers—is often the largest asset on a company’s balance sheet. Firms naturally become reliant on their customers’ payment habits. Globalisation has increased competition and has fuelled corporate buyers to demand longer credit terms. To remain competitive, companies need to meet those needs. The prospect of a large customer being unable to pay is alarming and potentially catastrophic. Profits would suffer, but the shock on cash-flow may well result in the corporate seller being unable to pay its own vendors. They may have to borrow or invest cash to sustain business operations. A company with a 10 per cent profit margin would need to increase its sales 10 times the value of the bad debt, just to bring it back to the same position.

their approval criteria, reducing facilities or even withdrawing completely from some markets. The same Gulf Finance study showed that two in five firms are finding that credit availability is tightening. There is more need than ever for an innovative, robust approach that provides a high degree of protection for banks and companies. Banking lines drive trade, so there will always be a need for adequate levels of trade finance. Receivables finance enables companies to access sufficient working capital. Many credit insurance policies are not designed to support bank finance. Standard credit insurance products are risk transfer policies designed for the corporate, and for the funder, the operational risk remains on their corporate client policy compliance. Many insurance companies write policies for companies without

The coming months could test these markets and shake out some bad practices, which can only strengthen trade credit insurance and trade finance insurance’s ability to support sustainable economic growth in the UAE. - Casey Bell, Head of Trade Credit GCC at AIG Trade credit insurance protects the seller’s balance sheet, bottom line and ultimately its future success. Even in good economic times, many businesses in the region find that some of their customers are tardy payers. A recent survey by Gulf Finance showed that one-in-three firms in the region are seeing worsening payment collections. Outright customer default can quickly impact liquidity and send companies to the wall. Especially when combined with an increasing reluctance from banks to lend in the current economic climate. Over recent months, banks have been tightening

40 page 38-40 Trade Finance.indd 40

considering the underlying funding agreement and the potential discrepancies in the terms and language between the insurer and the bank. The majority of insurers reserve the right to withdraw or cancel limits when times turn bad, directly reducing the level of funding available to the corporate at a time when they need the working capital the most. AIG attempts to address this by introducing a trade finance product with non-cancellable limits that offer insurance designed to specifically support trade finance as a solution. We also created technology to qualify

A company with a

profit margin would need to increase its sales 10 times the value of the bad debt, just to bring it back to the same position

invoices prior to funding, so there is absolute certainty that an individual transaction with a customer is covered under the policy. In the UAE, the development of the trade credit insurance and trade finance insurance markets is at an early stage. Education and awareness are key to help unlock the potential benefits these instruments have for the economy. I believe the prospect of rapid adoption of these financial instruments is good news for the local economy by facilitating trade, especially as we face uncertain times ahead. Not everything is rosy in the UAE market. In the good times, some insurers wrote policies that enabled them to cancel their clients’ cover if their view of risk changed. Some companies are now finding that their insurers are leaving them high and dry, just when they need insurance most. The coming months could test these markets and shake out some bad practices, which can only strengthen trade credit insurance and trade finance insurance’s ability to support sustainable economic growth in the UAE. These instruments are a commercial safety tool. It is time for insurers to deliver on their promises.

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05/06/2016 16:29

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(Photocredit: c orlaffra/Shutterstock.com)

IN-DEPTH

Tapping into Australiaâ&#x20AC;&#x2122;s property sector Alande Mustafa Safi, Managing Director and Investment Specialist at Paragon Business Group provides an insight into its new fund and foreign investor behaviour towards Australia

Alande Mustafa Safi

42 page 42-44 In Depth.indd 42

ell us about the Paragon Premium Investment Fund.

The Paragon Premium Investment Fund (PPIF) is an Australian owned and regulated wholesale investment fund issued by Paragon Premier Investments (Paragon). The fund is limited to wholesale investors, meaning typically investments of a minimum of AUD 500,000. Australia has a stable political system, strong investment laws and a comprehensive financial services regime applicable to licensed entities such a Paragon. There is significant appetite therefore for foreign investors to invest in Australia. Paragon has developed the PPIF to allow both local and overseas investors to participate in investments that ordinarily an investor would not have access to. Investments in property

development, property acquisition and mortgage lending to the development sector provide opportunities to earn quality returns. Paragon assesses many investment opportunities in property development, property development and mortgage investments. Out of the many investment opportunities sourced by them only the ones that meet stringent criteria as to capital protection and income sustainability are selected. All investments must be backed by real estate security and/or registered mortgages as relevant. The PPIF was created to meet a demand in the Australian investment market place and from overseas investors that relies on the expertise and standing of Paragon to deliver investment outcomes, invests in quality Australian property and mortgage investments, places an emphasis on

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05/06/2016 16:30

Paragon aims to have

AUD

1 billion

funds under management in the PPIF within the first 3 years

By the 5th year, the firm aims to have

AUD

3 billion

funds under management

security of investment and meets the investment requirements of the Significant Investor Visa programme.

Do you expect the fund to resonate with foreign investors?

Foreign investors wishing to invest in Australia are seeking relationships with investment managers not aligned to large institutions. Paragon offers them a principal to principal arrangement as we seek to be the private foreign investor’s Australian manager of choice. Many foreign investors investing in Australia have been limited to generally available managed investment products issued by larger institutions. This is generally unattractive in terms of return, flexibility and investment fit. Where the foreign investor has tried direct property investment and/or property

The global low interest rate environment is expected to continue for some time. Investors will look to improve their investment returns while maintaining protection of their investment monies. – Alande Mustafa Safi, Managing Director and Investment Specialist at Paragon Business Group acquisition, it is evident that not all has gone to plan for many foreign investors. Lack of understanding of Australian property conditions and poor management of their investment has caused sub optimal returns for foreign investors. The PPIF is designed to give foreign investors, Australian property and/or mortgage investments not generally available to them. Australia is well regarded as having a stable political system, rigorous financial services regime and a state based registration of land and mortgage interests. Accordingly, with a AAA credit rating and advanced legal and commercial system, Australia is seen as an attractive place to invest for foreign investors. Quality returns and security of investment are expected to entice foreign investors into the PPIF. Expected returns from the PPIF will surpass the returns available from bank and fixed interest available in their home country. While investment yield and capital growth are important, capital security is the fund’s investment objective. Foreign investors are also expected to be attracted by the proposed returns and the fact that the investment is backed by real estate and/or mortgages.

What is the potential for PPIF?

Paragon aims to have AUD 1 billion funds under management in the PPIF within the first three years. By the fifth year, the firm aims to have AUD 3 billion funds under management. This target is more than achievable based on the level of investment in Australia from

foreign entities over the last few years. Investment opportunities in property development and mortgage lending are expected to grow significantly. Mortgage lending to the commercial property sector is bound to grow due to inefficiencies within the Australian banking system. Property developers will look to private mortgage fund lenders for finance to ensure that their development completes on time. Property acquisitions and property development investment opportunities continue to be a growth area. The demand for residential housing, land subdivision and housing for Australia’s growing seniors’ community will continue to provide investment opportunities for the PPIF. Australia will continue to be seen as a stable and safe investment location. Foreign investors will see Australia as an attractive investment jurisdiction. With a strong focus on capital protection, transparency and disclosure to investors, the fund provides comfort to Australian and foreign wholesale investors. The global low interest rate environment is expected to continue for some time. Investors will look to improve their investment returns while maintaining protection of their investment monies. By investing in direct property and mortgage based assets, the PPIF seeks to secure the investors monies. For many foreign investors the attraction of having their monies invested in hard property assets and/or mortgage investments has some appeal.

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IN-DEPTH

(Photocredit: CristinaMuraca/Shutterstock.com)

Financial centres: the gatekeepers of untapped opportunities Geoff Cook, CEO of Jersey Finance discusses investor trends and key features that make a good financial centre

ompetent financial centres play a significant role in attracting foreign investment into a country and indirectly elevating the financial and economic position of both a country and a region. It is therefore pertinent for these destinations to possess certain legal infrastructures as well as other relevant features to operate as a financial hub.

CHARACTERISTICS

Above everything, competent financial centres must have the rule of law. If one were to invest capital outside their home country, one needs to know that their investment will be fully protected and secure. â&#x20AC;&#x153;Particularly in this day and age where cybercrime becomes alarmingly rampant, data protection is one of the important infrastructures a financial centre should have. Investors also want to know that their legal interest and rights are respected, that there is integrity and safety around their assets,â&#x20AC;? said Geoff Cook, CEO of Jersey Finance.

44 page 44-46 In Depth.indd 44

Apart from that, having a broad pool of expertise within the centre also plays an important role in determining the continuous success of the financial centre. Investors need to be confident in the people that are managing their money. The financial services providers should also command a strong understanding of cross-border transactions in order to operate within legal requirements while meeting international standards. Lack of these main characteristics will lead to a high exposure to risks such as security of the value invested, contravening with regulations of other countries and breaching international standards. Additionally, transparency and confidentiality are also two factors to be aware of when operating in a crossborder environment. â&#x20AC;&#x153;The international community are very concerned about bad actors in the system such as corruption, moving proceeds of crime, non-disclosure of tax, etc. There also should be a balance between transparency and

Geoff Cook

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05/06/2016 16:32

confidentially as companies still need to respect the client’s legitimate rights to compliant confidentiality–only sharing information through controlled circumstances such as only with the governments, otherwise their data is completely protected,” he added. Furthermore, influences such as political stability, fiscal stability and legal consistency in tax regulations for example, are also crucial in retaining investors.

JERSEY AS A FINANCIAL CENTRE

Jersey has four main sectors: international cross-border banking, private wealth (common law trusts, Shari’ah compliant trusts, foundations and companies for carrying value cross-border), alternative funds industry (private equity, hedge funds, commodities, infrastructure and non-conventional assets), company formation and listing. The state has one stock exchange, but is recognised in nine other stock exchanges in the world. Jersey Finance is the representative body for the finance industry in Jersey– a private-public sector partnership between the financial services industry and the Jersey government. As of January 2016, it has 107 companies listed worldwide, with a value of just over $3 billion in market capitalisation and 95 companies on the London stock exchange markets–making it the largest foreign company listed on the London stock exchange as there are more Jersey companies listed compared to other jurisdictions. Jersey is one of the few jurisdictions that have dual listings in Asia and Europe, and Europe and the US. It is active in private wealth management around the world, with capital raising vehicles of big conglomerates incorporated in the jurisdiction. The only market that Jersey is not extensively present in is South America.

Jersey has 107 companies listed worldwide, with a value of just over

$3 billion in market capitalisation

“I think we’ve become quite wellknown as the preferred jurisdiction for investment in the European real estate and that is the biggest activity in the Middle East through Jersey. Middle East investors tend to still be into very tangible things. We’ve become experts in managing and administering real estate investments,” highlighted Cook. Jersey also has Islamic finance capabilities. The first Sukuk in Europe was structured in Jersey over 20 years ago. “We did some work with the Islamic finance council of Britain a few years ago and they examined our legal system. They looked at our various laws, at our regulatory environment, and the product set that we have. And the scholars agreed that it was entirely fit for purpose for Islamic products and services,” said Cook. Companies such as Gatehouse Bank, IDB, Gulf-based sovereign wealth banks’ have structured their instruments in Jersey through a number of firms that specialise in Islamic finance transactions.

INVESTMENT TRENDS

“What’s topical at the moment is to acquaint people with a strong level of demand for the commercial real estate in the UK and the continent. Particularly commercial real estate in the UK regions such as Manchester, Birmingham and Glasgow which have strong upside growth opportunities,” said Cook. There is an increase of investments into cities outside of London. This is because in London, yields are down three to four per cent; however investors are still able to reap a five to eight per cent yield in other parts of the UK. Jersey Finance finds that institutional investors and ultra-high net worth individuals have increasingly been looking for opportunities. Another growth area is investment into the southern European countries such as Spain and Portugal, from US and Middle East based investors. This also includes cities such as Paris and Madrid. “We’ve also seen investors buying distressed real estate assets from banks in those countries [Spain, Italy and Portugal]. Bascially they believe that the Euro zone has stabilised enough to make investments attractive, having to buy at very low prices,” said Cook. He explains that this has been a very active trend over the past 24 months and is still going on. It was suggested that it may however cool off from now forward due to the upcoming of the EU referendum.

What’s topical at the moment is to acquaint people with a strong level of demand for the commercial real estate in the UK and the continent. Particularly commercial real estate in the UK regions such as Manchester, Birmingham and Glasgow which have strong upside growth opportunities. – Geoff Cook, CEO of Jersey Finance

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IN-DEPTH

(Photocredit: SukanPhoto/Shutterstock.com)

A bullish outlook in spite of economic headwinds

Eddy Abramo, Regional CEO at Banque Internationale à Luxembourg gives his projection of the wealth management industry in the GCC

Eddy Abramo

escribe the wealth m a n a g e m e n t landscape in the region.

As a result of tremendous volatility in financial markets as well as the low oil price, the beginning of the year was particularly tense. But overall, the growth we have in the region is strong especially compared to any European markets. So even if the economy is not ‘booming’ capital inflows and investments coming into the GCC and more specifically into the UAE are very strong. The Iranian market will be also very important for the region especially regarding the medium-term impact on the oil price but also in terms of business opportunities for the GCC.

46 page 46-47 In Depth.indd 46

What are the wealth management trends developed in 2015 and how do you see it evolving this year? In 2015, we had a huge interest in European real estate for several reasons. First, bonds were less attractive than in the past. Also, European real estate is very attractive for GCC investors for two main reasons: the very low interest rate environment in Europe and the weakness of the Euro compared to the US dollar. So overall, real estate was very attractive in 2015 and will continue to be this year, not least due to the lack of alternatives. In addition, private equity which was also very attractive last year will continue to be so in 2016.

What are the biggest issues challenging the sector this year?

Wealth management is really a sector linked to all of the different aspects of financial market and geopolitics. This means the challenges will not go away this year! Some question marks include the continued anaemic growth in the US combined with the election and the geopolitical situation in the Middle East, especially in relation to Syria. As well, the opening of Iran and the resulting financial impact on the GCC, the low-interest-rate and low-inflation environment in Europe, as well as the risk of Brexit are also likely to have a significant impact. So as you can see, the challenges are numerous, to which I will

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05/06/2016 16:35

add ‘as usual’, which means our knowhow in guiding and advising our clients in such a treacherous environment will remain critical.

Particularly across the GCC, what kind of developments do you expect to see?

I personally think that the wealth management industry will continue to grow in the region. In fact our sector is linked to the growth of our region. In the GCC, we have growth. The region sees also a lot of ‘new joiners’ from all around the world. If you have a look to the expected population growth in the region, where else in the world can you have such numbers? [UAE 25 per cent; Iraq 40 per cent; Saudi Arabia 20 per cent; and Qatar 25 per cent]. Therefore our sector is linked to private clients and entrepreneurs. And the GCC is one of the most attractive regions for these client segments. So I am very optimistic for this year and beyond even if we will encounter some turbulence along the way!

What are the opportunities do you see available in the Middle Eastern market?

There are a number of investment opportunities in the region. In the equity space we have a thematic approach with emphasis on companies with strong high quality earnings growth, attractive valuations as well as restructuring plays. We also see opportunities in UAE bonds as the current rally is likely to continue on the back of the rebound in oil prices as well as technical factors whereby demand in the region is far exceeding the available pool of bonds. Average credit spreads on GCC bonds have compressed in the recent past due to a revival of risk appetite not only due to

Fiscal accounts in the GCC swung from a surplus equivalent to

3.8 % 10 % 7

of GDP in 2014 to a deficit projected at

of GDP in 2015 and

of GDP in 2016

higher oil prices but also due to increasing confidence in GCC governments’ ability to manage their budget deficits. That said, overall credit spreads are still almost 50 per cent higher than where they were in mid 2014 which appears justified in view of falling credit ratings and likely increase in debt levels in the region.

With a more sombre global economic outlook projected this year, investors are expected to be more cautious in allocating their assets. What is your outlook for 2016?

Risks for the region have receded somewhat due to the sharp rebound in oil prices from their February lows. The main reasons are lower US production, supply disruptions is some parts of the world and the low level of spare capacity. At the same time demand from China has remained healthy as economic activity is responding positively to renewed stimulus measures.

Wealth management is really a sector linked to all the different aspects of financial market and geopolitics. - Eddy Abramo, Regional CEO at Banque Internationale à Luxembourg

At the same time, headwinds remain for the region amid the necessity for significant fiscal consolidation. The collapse in oil prices between the middle of 2014 and the first quarter of 2016 has been extremely disruptive for GCC fiscal balances. Fiscal accounts have swung from a surplus equivalent to 3.8 per cent of GDP in 2014 to a deficit projected at 10 per cent of GDP in 2015 and seven per cent of GDP in 2016. In the absence of flexible exchange rates, oil revenues in local currency terms have come down sharply. Saudi Arabia, the largest economy in the region will run a budget deficit of 13.5 per cent of GDP in 2016 versus 15 per cent in 2015. This is based on an oil price of $35 per barrel. The government has responded with a budget containing spending cuts, subsidy reforms and privatisations of state owned assets, notably parts of Saudi Aramco. Among the planned revenue increases is the introduction of VAT along with the other GCC countries. The ongoing weakness of oil prices and the strength of the US dollar are giving rise to speculation in the foreign exchange forwards market that GCC countries in general, and Saudi Arabia in particular, may adjust their long standing currency pegs to the US dollar. While such a move might appear compelling in the current environment, we believe the potential costs would outweigh any short term benefits to fiscal budgets for various reasons. The most important one is the GCC economies’ dependence on oil exports. Since oil is denominated in US dollars a devaluation of local currencies would have a limited impact on export competitiveness, which would be eroded by the higher costs of imports within a very short time. We expect the GCC currency pegs to the US dollar to remain in place. Overall, risk appetite should be on the rise again in coming months, since in our view oil prices have seen their lows and the fiscal challenges in GCC countries are manageable.

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TECH FOCUS

ATM Channel Payments Roundtable Saudi bankers investigate the opportunities on offer for ATM channel developments at a roundtable in Riyadh

eld with partner BPC Banking Technologies at the Ritz Carlton Hotel, Riyadh, on 26 April 2016, Banker Middle East ’s ATM Channel Payments roundtable brought together representatives from seven leading Saudi banks to discuss how to manage the ATM (automated teller machine) channel’s operational expenditure. The ATM channel in Saudi Arabia already offers a growing range of services, including bill payment, remittances and cash. However, banks need to be in a position to continue to innovate, develop and deliver these services while ensuring quality and analysing cost implications. To improve customer engagement and convenience is the goal for ATM implementation. However, banks need to look to reduce ATM channel management costs, and improve ATM channel profitability and cash flow. Among those attending the roundtable: Mohammed Subih, Head of ATM and Muath Al Beshr, Product Development Manager, both of Al Rajhi Bank; Ali Al Omran, Deputy General Manager–Technology Services, Arab National Bank; Essa Al Salem, Head of IT Services Development, Samba Financial Group; Ms Ghada Al Jarbou, Chief Operating Officer,

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Robin Amlôt opens the discussion.

Attending the roundtable (L-R): Yagoub AlSuliman, Head of e-Channels, Alinma Bank; Essa Al Salem, Head of IT Services Development, Samba Financial Group; Muath Al Beshr, Product Development Manager, Al Rajhi Bank; Ali Al Omran, Deputy General Manager– Technology Services, Arab National Bank; Mohammed Subih, Head of ATM, Al Rajhi Bank; Johan Bahia, Sales Director, BPC Banking Technologies; Robin Amlôt, CEO, CPI Financial; Ms Ghada Al Jarbou, Chief Operating Officer, Retail Banking & Wealth Management, SABB; Khalid Ramadan, VP & Head of Alternative Delivery Channels Division, Bank AlJazira; Hussein Al Zahdah, ATM Product Manager, Banque Saudi Fransi.

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Robin Amlôt, CEO, CPI Financial

In full flow, a frank discussion of the challenges facing bank ATM networks.

Retail Banking & Wealth Management, SABB; Hussein Al Zahdah, ATM Product Manager, Banque Saudi Fransi; Yagoub AlSuliman, Head of e-Channels, Alinma Bank; and Khalid Ramadan, VP & Head of Alternative Delivery Channels Division, Bank AlJazira. The event was hosted by Robin Amlôt, CEO of CPI Financial, publisher of Banker Middle East, with Johan Bahia, Sales Director of BPC Banking Technologies.

JUST A CASH MACHINE?

The ATM of today is not the ATM of the past. The original ATM concept was of a straightforward commodity service–‘card in, cash out’. This does, of course, remain very much a key service. In common with the rest of the GCC

countries, the personal banking market space in Saudi Arabia remains very much a cash-based economy. This is beginning to change and will continue to do so, gathering pace because of the way in which customers wish to use banking services through computers, smart devices and through ATMs for bill payments and money management. In terms of the technology in use and now available, innovation in the ATM channel appears to be more a matter of what the software can offer and achieve with the hardware playing a secondary, supporting role. There is a clear global trend towards vendor agnostic infrastructure for next-generation platforms. EFT switch vendors have traditionally focused their research and development on the basic

functionality required by their direct clients [banks], ensuring the likes of stability, scalability, ease of integration but does this focus mean that enduser [bank customer] needs have been left unsatisfied? The speed of delivery of new services in Saudi Arabia will partly be dictated by the nature of the regulatory regime managed by the Saudi Arabian Monetary Authority (SAMA). Amlôt opened the discussion by asking the attendees what services they believed banks in Saudi Arabia would need to be delivering through their ATM channel to satisfy customer requirements over the next three-to-five years. Responding first, Ms Ghada Al Jarbou of SABB noted that a number of banks had embarked on programmes of investing in interactive ATMs within the last year but added that the focus now was more on ‘24/7 e-banking’. However, she stipulated that, “An e-bank cannot exist if we do not extend the functionality of these machines [ATMs]. The capabilities of the machines are limitless. What we are looking for is to enable these machines to operate 24 hours with all the functionalities you have inside a branch.” Khalid Ramadan of Bank AlJzaira added, “I would not limit the enabling of services to the ATM along but across all digital channels. The ATM has the advantage of being a physical delivery channel with a unique bundle of services. You can migrate branch visits to the ATM channel for services such as cheque book requests and statements.” He also noted the potential for further services through the implementation of interactive teller machines (ITM) but noted that core functions would need to be offered across all channels while underlining the advantage of the ATM [or ITM] acting as a physical presence for the institution. cont. overleaf

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TECH FOCUS

cont. from page 49

However, in the general discussion that followed, a different view was posited in which it was suggested that the range of services offered through ATMs need not be extended with one attendee arguing that he would rather put minimum services on an ATM, adding that If there is a service that can be put mobile, he would rather put it there, keeping the physical [ATM] channel to services that the bank is obliged to keep there, because of regulatory, risk and technical limits. Doubt was also cast on the power of the ATM as a communication channel to the customer with one banker suggesting that there is little interaction–customers come to ATMs for a single certain purpose, carry out their transaction and depart. He added that promotional campaigns carried out on ATMs had proved less effective than other channels in communicating to customers.

SOFTWARE, HARD CHOICES

Attendees did confirm that they were unsatisfied with the length of time it has been taking to develop new services and agreed that standardised applications on ATMs that could be ‘developed once and used many times’ through different ATM vendors would be preferable. One noted, perhaps wistfully, that he wished that ‘vendors could convince me that there are new solutions at lower costs’, adding that the ATM business for vendors is ‘a big cake’ that they do not want to lose, citing the example of requesting a proposal from one company for a multivendor solution that resulted in a quotation significantly higher than the bank’s existing costs. It would thus appear that a suggestion that revenue opportunities for the banks are being lost, could be a truism but there is no getting away from the cost of providing the basic ATM service. Most of the costs come from cash withdrawals, resulting

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in negative interchange. The ATM networks in Saudi Arabia remain, first and foremost, cash dispensers. This may change over the course of the coming three-to-five years with the introduction of contactless payments and NFC (near field communication) technology that may trim cash requirements. However, offsetting any reduction this may result in is the growing usage of prepaid cards and payroll cards with an increasing number of customers still using ATMs for cash withdrawal and remittances. The nature of the regulatory regime in Saudi Arabia makes it difficult for the banks to differentiate the services they offer through ATMs. However, from all participants there was a clear message that the banks are prepared to pay for the quality of service they require from vendors with the clear driver behind any move to replace vendors being not technology,

not cost but vendor performance–the willingness and ability to provide aftersales support. One banker commented that in the evaluation of any vendor proposal, more than 50 per cent of the analysis was devoted to this area. It was noted that ‘none of the vendors is doing everything perfectly yet: some do site development well, some managed services but none cover the whole cycle yet’. Finally, looking ahead to market developments, the ATM channel is certainly not going away in the next few years but it was agreed that any significant changes in product offerings are most likely to depend on the regulator–notably if/when SAMA licences third party processors. Further, while customer behaviour is evolving, no real change is expected in the medium term. Improvements are expected in service quality and service stability and availability.

Driving revenue through innovation The ATM estate acts as the front line or face of the bank, providing consumers with high levels of service to meet their increasing demands. Consumers now demand additional functions such as money transfers, bill payments, mobile phone top-up and even cash withdrawal without cards or via a mobile phone. Together with the ability to issue instant virtual cards and also the timely delivery of marketing messages, these are just a few of the fundamental requirements from a modern ATM. BPC Banking Technologies was established in 1995 and is headquartered in Switzerland. SmartATM from BPC aims to ensure that each ATM is delivering uninterrupted service 24x7. SmartATM is capable of running run on a wide range of industry standard hardware and provides support for all major ATM manufacturers. SmartATM enables financial institutions to deliver these services and functionalities more speedily and more cost effectively, moving away from the legacy approach developing within the Switch. Furthermore, adding functionality on ATMs is made easy with the integrated SmartATM thin-client. SmartATM’s cash monitoring and forecasting tools also ensure that the right amount of cash is held in the right ATMs at the right time, dramatically reducing costs associated with cash processing. Integrated with SmartATM’s dashboards and linked to a map-based view, this means replenishment plans may be optimised for speed and cost.

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TECH FOCUS

Core banking transformations Balaji V, Vice President-Financial Services, Maveric Systems highlights key challenges and risk mitigation strategies in core banking softwares Balaji V

ver the past decade, banks in the Middle East have embarked upon a number of core banking transformation initiatives with the stated objective of improving business agility, only to realise the magnitude of challenges and their unpreparedness midway, and finally go live compromising on quite a lot of objectives. Given that a transformation initiative has tremendous interplay across multiple service providers including the banking product (solution) vendor, system integrators, assurance specialists and others, this article heavily draws upon our organisation’s experience providing assurance services during core banking transformation engagements and highlights some of the common pitfalls along with possible remedial measures. A common pitfall is the absence of a common understanding among the banks’ stakeholders on the expectations from a transformation programme. Replacing a legacy system with a ‘modern’ core banking platform does not automatically result in improved business processes or translate into better customer experience. The programme sponsor needs to have onboard all key stakeholders, prioritise key features for

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implementation, strategize the roadmap and periodically evaluate the business benefits delivered during the course of the transformation programme. Our recommendation: the original business case, payback and benefits realisation needs to be revisited periodically to examine the impact of programme delays. Corrective actions need to be initiated that may include a re-look at the programme objectives and scope, especially when programmes involve huge budgets and are spread over long timelines. As a part of the programme initiation, all key features/requirements need to be catalogued to align with the bank’s business/operations process flow. This activity needs to be done independent of the product (solution) vendor. An observed practise is the banks’ tendency to identify the core banking product first based on high level product walkthrough sessions without going through the exercise of documenting business requirements. In a lot of instances, requirements were documented only for those features that deviated from the existing functionality available. In our experience, selecting the core banking product first resulted in mismatches

between product features and business operations requirements, excessive customizations during implementation and deferring some of the business critical requirements for implementation post Go-Live due to programme schedule pressures resulting in expectations mismatch for business stakeholders. Also, incorrectly implemented/deferred implementation of requirements results in maintenance costs for all such changes and delayed business benefits realisation. Our recommendation: engaging specialists (in-house or external) to document business requirements through structured storyboarding sessions or business process documentation led walkthrough sessions with business stakeholders can ensure a prioritised set of features and functions. This should be used as a basis for core banking product selection. Another common trend observed was to bundle too many initiatives as a part of the transformation programme. Core banking transformation per se may lead to technology and architecture changes. However, bundling it with various other initiatives such as business process re-engineering, new middleware implementation, and introduction

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of new delivery channels [Including digital platforms] besides replacement of some surround systems and adopting an omnibus approach complicates an already complicated programme and adds significant number of failure points. Banks have tried to tide over this situation, trying to engage service providers who specialise in such services. However, the enormity of the task of managing multiple solution vendors, stakeholders and conflicting priorities has resulted in mixed results. Our recommendation: a strong programme Office that oversees multiple programmes being run in parallel is critical to ensure success in this context. An empowered programme Office with staffing experienced programme management staff and clearly established accountability would mitigate some of the risks. A phased approach to implementation was more successful rather than a big bang approach. Quality assurance services are almost an afterthought during transformation programmes. There is an inherent assumption that core banking products are standard products that do not require extensive testing and hence, inadequate time and budget is allocated for verification and validation. What is overlooked is that core banking products need to be tested extensively for integration with other applications in the eco system besides being thoroughly tested for custom developed features. We have observed a few banks engage the services of the core banking product for testing services as well. The downside to the approach is the lack of an independent perspective of requirements implementation. Our recommendation: banks need to plan and budget for quality assurance services adequately during the programme initiation itself. Engaging independent assurance service providers can help detect incorrect requirement implementation (prior to Go-Live) that would otherwise go unchallenged in the absence of an independent perspective.

All core banking transformation engagements have their fair share of challenges. Acknowledging the complexities and addressing the same through appropriate risk mitigation measures can help banks tide over some of these challenges. - Balaji V, Vice President-Financial Services, Maveric Systems

A key aspect that gets missed out during the contracting process is the absence of service level agreements (SLAs) that aligns the interests of all the service providers in the programme. Most contracts are bilateral (between the bank and each service provider) and hence can potentially miss out the inter-dependencies. For example, SLAs pertaining to delivery of defect fixes and quality of defect fixes has a direct impact on the quality assurance programme, but the requirements of the QA service provider are ignored during the contracting process with the core banking product vendor thereby having a direct impact on the programme schedule. Engaging external advisory firms has produced mixed results on this front. Our recommendation: banks need to factor in inter-dependencies of all service providers during the contracting process. Banks need to conduct adequate due diligence before engaging third party advisory firms who can weigh in with industry benchmarks and help them with the contracting process and subsequent monitoring. Another critical area often glossed over is the extent of the complexities involved in data migration. The legacy application would have undergone extensive customisations driven by business and regulatory requirements with inadequate documentation describing the changes resulting in an inadequate grasp of the data structures of legacy systems leading to a bigger problem—migrating the data from legacy system to the target system in a reliable manner.

Our recommendation: early involvement of in-house business/ application experts, engagement of the right specialist firms for data migration services and product (solution) vendor teams, agreement on acceptable data quality and scheduling adequate mock runs early during the programme to ascertain data quality are some mitigation measures. As a part of dress rehearsal/operational readiness, banks often complete infrastructure testing, end user training on the new solution and go live. In a few instances, centralised helpdesk services are set up to tide over the challenges associated with change management. However, there is no ‘ready reckoner’ available for end users to assist with navigating the newly implemented core banking system. Our recommendation: banks should get adequate documentation done and get business user manuals created that is in line with the customised version of the IT system being implemented. This will help tide over users’ resistance to uptake of the new system, a key challenge associated with change management. Some of the other challenges include a lack of attention to non-functional requirements, ability to manage the scope and exit criteria during various rounds of testing through tight gating criteria and a lack of a strong governance and oversight mechanism. All core banking transformation engagements have their fair share of challenges. Acknowledging the complexities and addressing the same through appropriate risk mitigation measures can help banks tide over some of these challenges.

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EVENTS

Making payments a breeze Banker Middle East catches up with Boloro Global at Cards and Payments Middle East 2016

uring the Cards and Payments Middle East 2016 held last month, Banker Middle East managed to speak to Ann Camarillo, President and CEO of Boloro Global, a new global mobile payments network headquartered in New York. Boloro is a cloud-based payment network that connects people with ways to make payments both face-to-face and online. The system connects to most accepting point of sale (POS) and online shopping carts. The mechanism adopts a simple integration process and customised solutions where merchants receive guaranteed payments and are able to provide customised online and face-toface payment acceptance solutions. Customers use their mobile phone for funding and authentication, following which the customer’s prepaid, postpaid, wallet or bank account is charged. The system integrates easily with issuers and merchants and is compatible with all types of mobile phones. Payments are authenticated by customers using a PIN via their mobile phones and not the merchant’s POS hardware, with NFC Sticker facilitating faster checkouts. By connecting directly to Mobile Network Operators (MNOs), Boloro offers point-to-point secure connection for PIN-based authorisation. Similarly through a direct dial-tone connection, Boloro also offers enhanced security through a direct connection with operator and handset. All Boloro transactions are merchant initiated through keying in customer’s

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Ann Camarillo, President and CEO of Boloro

phone number or with a Near Field Communication (NFC) Tap (NFC tags or built-in handset NFC function) to initiate customer authorisation on handset with real-time settlement, end of day clearing and next day payment guarantee. This in turn provides convenience, security and control for clients, at a cost lower than the conventional card payment systems or cash. Boloro also offers authorisation, clearing and settlement of any transaction via a four party model, providing merchants with payment guarantee at time of authorisation. Boloro is a better alternative to cash and provides customers a quick and safe way to pay. It connects directly to customers’ mobile accounts to fund transactions as well as enhances sales and guarantees payments. The versatility of Boloro’s payment system encompasses various types of transactions including

online shopping, parking and public transportation transactions, usage of vending machines, bill payments and top-up in the telecommunications sector and food/courier delivery transactions. “We are targeting cash replacement in Africa, Middle East and South Asia. This is an opportunity for banks, and other issuers, to offer their existing account holders a next generation mobile payments technology without significant investment and can translate to increased electronic spend,” explained Camarillo. Boloro Global has developed and is operating a payments platform using its own intellectual property for mobile payments authentication. Boloro is currently operational in Afghanistan, Kuwait, South Africa and Pakistan, and is close to launching in Jordan, Nigeria, Bahrain, India, Mexico and Puerto Rico. The company’s most recent venture was with MobiCash (a cashless financial platform) where they launched their mobile payments ecosystem in the townships of South Africa with Big Save Group, one of the largest wholesalers operating within South African townships and servicing thousands of small scale spaza shops [informal convenience shop businesses]. MobiCash’s partnership with Boloro allows small scale retail businesses to offer secure, consumer friendly, handset agnostic, merchant initiated payments using MobiCash multi-factor biometric authentication together with Boloro’s secure pin authentication that uses Network Initiated USSD messaging.

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Increasing oil prices to pose risks Oil above $58 a barrel is greed not need, says Narenda Taneja, Chairman of Energy Security Group and the Federation of Indian Chambers of Commerce and Industry

t an exclusive press briefing at the Fourth Abdullah Bin Hamad Al Attiyah International Energy Awards, Narenda Taneja, Chairman of Energy Security Group and the Federation of Indian Chambers of Commerce and Industry and Energy Advisor and Spokesperson of BJP, India’s ruling party, stated, “If oil is more than $58 a barrel it is greed, not need, driving the price.” Taneja made statements regarding the Indian government’s concern as to the long-term viability of the Middle Eastern gas supply due to growing instability in the region. Abdullah Bin Hamad Al Attiyah, Chairman of Abdullah Bin Hamad Al-Attiyah International Foundation for Energy & Sustainable Development, replied in a speech, “Energy is a very sensitive issue. When I was minister, one of my biggest challenges was to break into India. Analysts told me I was wasting my time. When I became minister in 1992, gas production was zero and oil was less than 360,000 barrels. After a lot of challenges we became one of the biggest gas producers in the world. We broke into India and created trust between us and them, and finally I asked the government of India to create a budget that I could work with. Finally we signed one of the biggest contracts with India, almost eight million tonnes [of natural gas], and we just increased it by another one million tonnes.” An oil price between $40 and $50 is good for the Indian economy while $58 a barrel is a good price for producers,

(Left) Narenda Taneja, Chairman of Energy Security Group and the Federation of Indian Chambers of Commerce and Industry.

(Right) Abdullah Bin Hamad Al Attiyah, Chairman of Abdullah Bin Hamad Al-Attiyah International Foundation for Energy & Sustainable Development.

explained Taneja. The nation’s energy sector relies 80 per cent on hydrocarbons imports and there will be no alternative to oil for India in the foreseeable future, although the country is investing billions into renewables. “I would like to see oil prices rise to a more realistic level. If oil is more than $58 a barrel it is greed not need driving the price. If it goes beyond $60 a barrel it is bad for the global economy and will not support growth,” said Taneja. Al Attiyah replied, “Everyone is very concerned. Oil majors have cut billions in investment and fired thousands of employees. $120 per barrel price will backfire and affect our customers. We never fix our oil price. With a weak world economy, shale will come back strongly and create another disaster. It is a volatile time. Inventories are the highest ever at all most five billion barrels with a 1.5 billion oversupply– geopolitics is affecting the price.” Narendra further responded, explaining that one of the challenges faced in India is a lack of investment in internal gas infrastructure.

“I think Qatar should invest in India to help develop India’s internal gas development. When we look at gas, what is Qatar doing to bring about order in the gas prices?” Al Attiyah explained that OPEC cannot defend the price or market share without support from producers. “Producers want OPEC to do the dirty business and benefit from them. The freeze on a general level [referring to the failed freeze talks in Qatar last month] is at the highest production, for all and not just OPEC. In 2008 we froze production but we were a single producer back then and there was no shale, no deep water drilling, there were no alternatives.” Nasser Khalil Al-Jaidah, Board Member of Qatar Petroleum, further added, “OPEC cannot fix the oil price. In any monopolistic economy you play like a cartel you cut down on cheaper oil and push expensive production.” Speaking at an event in Abu Dhabi, the UAE Economy Minister, Sultan Bin Saeed Al Mansoori said that oil could go over $60 a barrel during the summer.

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HUMAN CAPITAL

Nurturing talent in the Gulf Ehsan Razavizadeh, Founding Director for MENA & Head of Dubai Centre, Cass Business School, discusses present issues in the region’s talent development landscape

escribe the progress of human capital development in the region’s banking and finance sector.

Human capital development in the UAE’s banking and finance sector has improved greatly over the past 10 years. Dubai has shifted from a destination reliant on tourism—to a diverse city, which boasts an international financial hub, the DIFC, which hosts over 1,400 companies within the free zone. At Cass Business School’s Dubai Centre, we have seen our number of inquiries rise for the EMBA and Executive Education short courses which is encouraging.

What are the issues currently faced in terms of talent development in this region?

Talent development becomes a hot topic of conversation during economic downturns. Corporate spending on training and education is linked to economic optimism, and this is something we see a trend in currently. Corporate sponsorships for education has declined over the years, and can be a struggle for individuals that are looking to invest in themselves. Although, to combat this, we have close ties with the National Bank of Abu Dhabi (NBAD), who provide a zero per cent easy payment plan to our students to fund their tuition fees, interest free.

What are your suggestions to overcome the challenges mentioned above?

Ehsan Razavizadeh

The key is for both government and private sector, across the region, to recognise the strength and importance of a highly skilled and talented workforce. Education in such specific banking and finance sectors is not a short term investment. cont. on page 58

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HUMAN CAPITAL

cont. from page 56

Companies reap the benefits of educated employees throughout their career life cycle. Education initiatives needs to be rooted at the heart of a company’s strategy.

In which sectors of the economy do you see a dearth of talent?

The talent is available within the region, but the training for new departments or divisions needs to be a necessity within the banking industry. Employees cannot be expected to be experts in niche sectors, without the background skillsets. Islamic finance is an excellent example, which Dubai has a huge opportunity through Dubai’s vision to become the global capital of the Islamic economy, as it looks to boost exposure to an industry valued at trillions of dollars and further diversify its economic base. The Islamic banking profit pool in itself is expected to reach $30.3 billion by 2020 according to EY, but to capture this potential, we must invest in our people.

What are your views on education as an asset class? Education is ingrained in the culture of the UAE; UNESCO Institute for Statistics show the UAE sends about 8,500 students abroad for tertiary-level study, although in return, it hosts over 54,000, predominantly from countries in Asia and the Gulf region. Clearly, the UAE, and specifically, Dubai, has become a growing regional hub for education and City University London

UAE sends about

8,500 students 54,000 students

abroad for tertiary-level study and in return, it hosts over

from Asia and the Gulf

is looking to take advantage of this by looking to invest and improve its market share almost across the board with its five schools. The School of Engineering currently holds three MSC programmes in Dubai and have seen an impressive amount of applications, with the most recent induction at capacity. After the success of these programmes we are currently researching the possibility of two further courses. The City School of Law is one of London’s major law schools and offers a wide range of academic and professional courses. The Dubai Centre offers the opportunity to study a Masters of Laws degree (LLM) through distance learning, and we are also talking to major legal entities in the UAE to try and develop some short tailored courses. The university is also looking at offering courses in health sciences, journalism and economics.

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What is your opinion on Emiratisation?

While expatriate workers can be a great advantage to a region, nurturing much-needed skills and talent, GCC nationals are vital for the region’s economic ambitions to be realised. The model of over-reliance on expats is not sustainable either, as they cannot fill the labour requirements of such a unique culture without the wisdom and guidance in social-context of the nationals raised in the region. A large number of the unemployed people in the GCC, and especially males, do not have university degrees. Figures from a recent poll by Strategy& indicate that the majority of the unemployed across the GCC have a high school diploma or lower. This is where education could make a huge difference in the path a student chooses at an important juncture in their lives. Building further critical knowledge by studying for a university degree or vocational training prepares an individual for the considerable challenges of a career outside of the public sector. I believe the UAE leads the GCC region in providing thought provoking private sector careers, and we are heading in the right direction. But more can always be done, and education does play a considerable role in unlocking potential.

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PERSONALITY

Ramesh Shivakumaran Group Business Services Director, Gulftainer I am a Chartered Accountant by profession, and have been in the field of financial and business management for close to thirty years. I have been living and working in the UAE since 1988. I was always fascinated with the world of business, finance and economics. Upon completing my professional training from PricewaterhouseCoopers in India, I worked with EY in the UAE for four years. During this time, I was involved in the annual audit of my current employer, Gulftainer—one of the largest global privately-owned port operators, with a presence in the UAE, Saudi Arabia, Iraq, Brazil, Pakistan, US and Lebanon—and developed a keen interest in the marine, shipping and logistics industry. I was given the opportunity to join the financial department of Gulftainer in 1993, and have never looked back since that date. I have had a very productive journey so far, with a number of milestones achieved during the past several years. In my view it is challenging to pick any one as the biggest achievement, given their significance at different stages of my career. These vary from successful business deals and negotiations, to achieving key goals and objectives by working as a team in diverse challenging circumstances. As Group Business Services Director, I manage various functions at Gulftainer, including the finance team, treasury, information technology, human resources, administration, QHSE, corporate governance, insurance, procurement and external audits. A typical day involves several internal and external meetings, and addressing a number of routine and nonroutine business issues with the concerned stakeholders. In addition to this, I am a member of the board of directors of several affiliate companies of Gulftainer in the UAE and overseas, owing to which regular business-related travel forms an important part of my work. The most interesting area of my work includes regular interaction with the business process owners, key executives, decision-making, leading and managing change, overseeing the timely implementation of

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decisions, which leads to streamlining the business processes and ensuring satisfaction of internal and external stakeholders. I read a lot on topics relating to business, fiction and biographical works. My favourite books are those that have helped bring about positive changes in me. Wings of Fire by India’s late former President APJ Abdul Kalam is one of my favourite books. I enjoy being physically active by playing sports and travelling. I also enjoy watching cricket, movies and spending as much time as I can with my family. The financial services and banking industry in the Middle East has been affected by the current economic slowdown, although a number of developments over the past couple of years have positively influenced the sector. For example, the digital banking wave has taken off extremely well in markets in the GCC and the Levant, which is not surprising given the growing demands of a largely young population in the region. Moreover, we have seen a number of progressive banking policies take root to ensure the industry remains resilient despite macro-economic headwinds. In addition, it is also interesting to note the various advancements being made in promoting Islamic banking in the region. With this structured and focused outlook, the region’s banking and financial industry can very well match or outperform their international counterparts. There is certainly a marked decline in the economic outlook for both advanced and emerging markets globally. Much of this stems from the uncertainty fueled by low oil prices. Looking at the region, the effect of lost oil revenues is further evidenced by the new regulatory and policy decisions being made to create long-term change and more sustainable economies. As the IMF recently stated, a broad-based policy response is needed to secure financial stability across global markets. Developed economies must deal with their legacy issues, emerging markets need to bolster their resilience to global headwinds, and the resilience of market liquidity should be enhanced.

www.bankerme.com

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Banking Of Growth saib.com.sa

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LAST WORD

Mathieu Vasseux

Practise Head—Financial Services (Middle East and Africa) and Office Leader—Saudi Arabia at Oliver Wyman

On navigating through current economic headwinds What services does the company provide? Oliver Wyman is a global management consulting firm that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, and organisation transformation. I head Oliver Wyman’s Financial Services practise in the in Middle East and Africa (MEA) region. We advise leaders of MEA banks, central banks, central monetary authorities, exchanges, sovereign funds and Finance Ministries on their most pressing strategic issues. We also support large transformation programmes, helping clients to enhance their performance and adapt to market dislocations.

Which areas does the company seek to focus on this year? The financial services practise seeks to focus on risk management, both for financial institutions in managing the downturn and supporting the regulators in pressing and complex policy shifts.

What does your daily task entail and what do you like most about your job? My day is typically dotted with meetings and conducting workshops for clients based on strategy solutions. I also spend substantial time in preparing for major presentations with project teams to fine tune analysis and messaging to ensure right decision and maximise impact. What I love the most about my job is the opportunity to work with the best talent in the industry to address the most complex problems.

What is your favourite book? La violence et le sacre by Rene Girard.

What are your hobbies? Yoga, swimming, reading, outdoor sports with my kids.

Who would you like most to have dinner with? My best friend, we live eight hours apart and don’t see each other nearly enough.

What do you think is the biggest weakness of the GCC’s banking and finance industry? Management teams are not well prepared for the upcoming downturn. On the one hand, GCC financial institutions’ managers have not experienced a financial crisis for over 15 years; 2008 was a blip and had limited impact in GCC, hence many lack the experience to navigate the rough waters ahead. On the other hand, GCC risk management techniques would benefit from a significant upgrade, leveraging the lessons of recent global regulatory reforms.

What is your outlook on the region’s financial market over the next year? 2017 will be a difficult year. Unless oil price rebounds to $80 and above, which I doubt, current early signs of deterioration in credit quality and liquidity will start to fully materialise in the banking systems, creating further strains. Due to prudent regulators, GCC banks are well-capitalised and mostly wellfunded, so barring a few exceptions, the impact should be limited to severe strain on profitability.

What do you think is your greatest success in your career? Building the leading financial services consulting practise from scratch over the past six years at Oliver Wyman.

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Villamar is located at Bahrain Financial Harbour on an island in the center of the business district in Manama, the capital of the Kingdom of Bahrain. The development overlooking the seafront of BFH, consists of five elements being three twisted towers, lifestyle apartments with one to five bedrooms, floating sky villas, retail outlets and a quiet boardwalk. The development has distinctive engineering and architectural designs and features. The main facilities of the project include a health club and spa, swimming pools and other recreational amenities. In addition, the boardwalk will act as a point of attraction to the public as it will host cafes, restaurants, retail outlets with a terraced air-conditioned podium, sea views, spacious car parking, marina and landscaped areas. gfh.com | Invested with insight

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