#184 - May 2016

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MAY 2016 | ISSUE 184

DIB— moving DIB—moving markets Dr. Adnan Chilwan

Group CEO of Dubai Islamic Bank Get the next issue of Banker Middle East before it is published.

Full details at: www.bankerme.com

18

Post sanctions—a cautious market

page 3-4 contents.indd 1

34

Maintaining resilience

46

UAE: key to GCC’s wealth

52

Dubai Technology and Media Free Zone Authority

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

Preparing for the future

04/05/2016 16:01

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14/04/2016 12:03

CONTENTS

MAY 2016 | ISSUE 184

Editor’s Letter

W

ith market sentiments improving, many have now also begun to accept the fact that macroeconomic conditions will remain as they are this year, and perhaps see a gradual climb to improvement in the years to come. 2015 was a year of denial for the oil and gas industry. However as low oil prices become the new normal, many governments have had to draw out fiscal measures as they try to reign in their current economic performance.

Several oil-dependent countries have, since last year, made plans to diversify their economies away from oil. The latest country to join this era of change is Saudi Arabia, as it recently announced an economic overhaul to wean off its oil dependence.

The Kingdom’s Vision 2030 itemises the government’s goals in non-oil sectors, increasing private sector contribution and reducing unemployment (pg.8).

Our cover story this month discusses Dubai Islamic Bank’s commendable performance and explores its global footprint and expansion plans moving forward (pg. 22). This month’s issue also provides you an overview on private equity—an analysis of the past, present and future of the buoyant sector (pg. 34), as well as a comprehensive discussion of the pensions landscape in the Middle East—giving a breakdown of the challenges and opportunities in this nascent segment (pg. 38).

The second half of the magazine takes a look at talent development, customer engagement and IT (p. 52 onwards). As usual, technological innovation is something that can no longer be overlooked by the financial sector. With more advanced solutions in the market, comes more technical and securityrelated issues. Providing you a wholesome meal for pondering, the May issue tackles various ongoing concerns surrounding the region’s banking and finance industry. Have a fruitful read.

10

22

28

6

News Analysis Adapting to a new reality

8

News Bites

THE MARKETS 10 GCC banking sector enters a new paradigm 12 Oil drivers: from the Kuwait strike to US inventories 14 The earnings game LEGAL FOCUS 18 Post sanctions—a cautious market COVER INTERVIEW 22 DIB—moving markets COUNTRY REPORT 28 Bahrain’s evolution as a financial centre PRIVATE EQUITY 34 Maintaining resilience

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APRIL 2016 | ISSUE 183

| ISSUE 182 MARCH 2016

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ISSUE 182 MARCH 2016 | Dancing in the

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

light Tirad Al Mahmoud,

Chairman of Dubai First

n’t

12

Nabilah Annuar

Editor

9 on Impact of IFRS Gulf banks across the

36

of 2016: a matter check and balance

54

Investment banking in hazy conditions

strategies

68

Digital payments—do get left behind

30

Egypt: an uphill battle

34

A promising market segment in the Gulf

52

Bank Audi aligns IT with business

56

DIB— B—mov markets ing

Dr. Adnan Chilw an

Group CEO of Dubai

Get the next issue Banker MiddleofEast before it is published.

Full details at: www.bankerme.com

Collaboration—the key to getting ahead

18

Post sanctions— cautious market a

34

Maintaining resilience

46

UAE: key to GCC’s

wealth

52

Preparing for the

future

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

Full details at: www.bankerme.com Follow us on Twitter: @bankermena

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page 3-4 contents.indd 3

Islamic Bank

Zone Authority

First lady Hana Al Rostamani

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

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and Media Free

Zone Authority

Chief Executive

and Media Free

Get the next issue ofEast Banker Middle before it is published.

Full details at: m www.bankerme.co

Dubai Technology

ud Tirad Al Mahmo Officer of ADIB

Dubai Technology and Media Free Zone Authority

Officer of ADIB

Dancing in the light

Dubai Technology

Chief Executive

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

“This is the Facebook want generation so we bank to be a Facebook for them.”

3 04/05/2016 16:01

CONTENTS

MAY 2016 | ISSUE 184

PENSIONS 38 Working towards a functional scheme 42 Inculcating positive change WEALTH MANAGEMENT 46 UAE: key to GCC’s wealth

38

42

CYBERSECURITY 68 Avoiding another ‘Panama Papers’ scandal PERSONALITY 72 Tim Childe, Head of International and Jersey office, Quilter Cheviot

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

IN DEPTH 52 Preparing for the future 56 Reaching the masses TECH FOCUS 60 The race towards digital universality 64 Transaction, interaction, convergence

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46

LAST WORD 74 John Iossifidis, Head of Corporate Banking Group at Mashreq

Managing Editor GEORGINA ENZER georgina@cpifinancial.net Tel: +971 4 391 3728

Sales Director OMER HUSSAIN omer@cpifinancial.net Tel: +971 4 391 5419 EDITORIAL editorial@cpifinancial.net

ADVERTISING sales@cpifinancial.net

Editor Banker Middle East NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 375 2527

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Editors SARAH OWERMOHLE sarah@cpifinancial.net Tel: +971 4 391 3726

Business Development NIKHIL NIDHAN nikhil@cpifinancial.net Tel: +971 4 391 3717

WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718

DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526

JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024

MOHAMED MAKSOUD mohamed@cpifinancial.net Tel: +971 4 391 4680

London Bureau ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476

68

74

56

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

ou

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Contract Publishing Editor SARAH SPENDIFF sarah.spendiff@cpifinancial.net Tel: +971 4 391 3729

Head of Contract Publishing & Business Development VINOD THANGOOR vinod@cpifinancial.net Tel: +971 4 391 3725

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Adapting to a new reality IMF lays down its economic projections as the Middle East embraces a new dawn

L

ow oil prices and deepening conflicts continue to weigh mightily on the economies of the MENA region. A recent regional economic outlook by the International Monetary Fund (IMF) has projected that oil exporters will continue to face another year of heavily reduced oil export revenues. Governments will require ongoing fiscal consolidation and reforms to cope with these losses and diversify their economies away from oil.

Oil importers are experiencing uneven and fragile growth, and need to adjust to the challenges of spillovers from their oil-exporting neighbours and the threat from conflicts. A situation such as this can be seen as well in the Caucasus and Central Asia, where growth has hit a two-decade low amid a climate of low commodity prices, especially oil, and the spillovers from the recession in Russia and the slowdown in China.

The growth prospects for most oil exporters have been revised down markedly since last October, due to the continued struggle in the global oil market, stated the IMF. Oil exporters’ growth is still projected to rise from two per cent in 2015 to three per cent this year; however, this will be mainly due to increased oil production in Iraq and post-sanctions Iran. As for the GCC, economic activity is projected to witness a further slowdown. Ambitious fiscal consolidation measures are being implemented this year, however, IMF

6 page 6 News analysis.indd 6

expects budget balances to deteriorate in spite of these measures given the sharp drop in oil prices.

Industry experts are of the view that an additional and substantial deficit-reduction effort is required over the medium term to restore fiscal sustainability, and, in the GCC countries, to support the exchange rate pegs. The ability of the private sector to create enough jobs for the young and growing population is also an important priority at a time when public sector job creation is constrained. According to the IMF this requires deep structural reforms to improve medium-term prospects and facilitate economic diversification.

Policymakers in most countries have become increasingly determined to be proactive in addressing the challenges posed by the oil predicament.

For oil-importing countries, the IMF expects an uneven economic recovery.

Following a four-year stagnation, economic activity amongst MENA oil importers appears to be strengthening, although at a gradual and uneven pace.

Growth increased from three per cent in 2011-2014 to 3.75 per cent in 2015 and is projected to remain around that level in 2016-2017, According to IMF data. Lower oil prices, less fiscal drag, and improved confidence attributed to progress with recent reforms are supporting this recovery. Nevertheless security disruptions and social tensions persist, and adverse spillovers from regional conflicts—including economic pressures from hosting refugees—and, more recently, slowdowns in the GCC, strain the outlook.

Reforms of generalised energy subsidies according to the IMF, have assisted in stabilising public debt and preserve macroeconomic stability, and improved targeted safety nets have helped protect the vulnerable.

However, additional fiscal consolidation is still needed to put public debt firmly on a sustainable path and rebuild policy buffers. In some cases, greater exchange rate flexibility would also help reduce vulnerabilities and improve competitiveness. Stepped-up structural reforms in business, labour and financial markets, and trade are critical for boosting economic prospects, improving living standards, and creating muchneeded jobs.

(Photocredit: Nwayfarerlife/Shutterstock.com)

NEWS ANALYSIS

Real GDP Growth, 2014-17

MENAP Oil Exporters

GCC

Iran

Countries in Conflict 1

MENAP Oil Importers

2014

2.7

3.5

4.3

-4.8

2.9

2015

1.9

3.3

0.0

-2.0

3.8

2016

2.9

1.8

4.0

5.4

3.5

3.1

2.3

3.7

5.4

4.2

2017 1 Countries

in conflict include Iraq, Libya, and Yemen. Data for Syria are not available.

Source: National authorities; and IMF staff calculations

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At Union Bancaire Privée, we apply our steadfast vision, our entrepreneurial spirit and our investment expertise to bring significant added value and long-term performance to our clients’ wealth management strategies.

Union Bancaire Privée (Middle East) Limited Al Fattan Currency House Tower 2 | Office 3001 | Level 30 | Dubai International Financial Centre PO box 33778 | Dubai | United Arab Emirates | T +971 4 818 48 00 | F 971 4 362 94 90 E ubp@ubp.com | www.ubp.com This marketing material is for information purposes only. It is not intended for or use in any jurisdiction where its distribution, publication, or use would be unlawful, nor is it directed to any person or entity to which it would be unlawful to direct it. This is not an offer to buy or sell or as solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. Past performance is not indicative of future performance.

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03/03/2016 10:03

NEWS BITES

Corporate green bonds to reach $28 billion in 2016

C

orporates could issue up to $28 billion in green bonds worldwide this year, estimated Standard & Poor’s in a recent market report. If issuance continues at the rate seen in Q1 2016, corporate green bond issuance would be about $15 billion, which would already mark a large rise from $9.6 billion issued in 2015. However, taking into account predictions that the Chinese corporate green bond market takes off this year, this could add around another estimated $13 billion to corporate bond issuance in 2016, bringing total corporate green issuance to $28 billion. This is nevertheless subject to the release of the Chinese corporate green bond guidelines which is expected this quarter.

Factors that could further boot this include, emerging issuance by US utilities, increasing reporting requirements on corporations and investor demand for corporate green bonds following investor commitments at the Paris climate change negotiations in December 2015. Corporate green bonds are issued by companies (as opposed to governments, municipalities, and development finance institutions), which use the proceeds raised by the bond to finance specific environmentally-focused activities or programs. Their coupons are repaid from the issuer’s general balance sheet which alleviates any project specific risk and the bond is typically assigned the companies’ credit rating.

RATINGS REVIEW Entity

Kuwait

LT IDR/LT Rtg (FC)

Kuwait

AA

United Arab Emirates

Saudi Arabia

AA -

Qatar

AA

Abu Dhabi Israel

Qatar Israel

United Arab Emirates

A

Bahrain

Bahrain

BBB-

Turkey

Turkey

BBB-

Cyprus

Cyprus

B+

Lebanon

Lebanon

B

Egypt

Egypt

B

Iraq

UR

Saudi Arabia

A

Ras Al Khaimah

B-

OUTLOOK

Under Review

Country

AA

WATCH

Iraq

KEY

Positive Negative Evolving Stable

UAE signs avoidance of double taxation agreement with Jersey

T

he Ministry of Finance of the UAE has signed an agreement on the avoidance of double taxation on income with Jersey. The agreement is in line with the ministry’s belief in the importance of strengthening its network of international relations with regards to the avoidance of double taxation on income.

The ministry seeks to coordinate and cooperate with all financial legislative authorities across the globe to establish a legal framework through the agreements on the avoidance of double taxation on income, in order to establish cooperation with tax legislations, the evasion of income tax, as well as providing full protection to companies and individuals from direct or indirect double taxation.

8 page 8-9 News Bites.indd 8

Takaful Emarat shareholders approve first ever cash dividend Takaful Emarat, a DFM-listed, Shari’ah compliant life and health insurer, during its recent Annual General Meeting (AGM) has approved a proposed cash dividend of AED 8 million, equating to 5.33 per cent of its paid-up capital. The company’s first ever dividend pay-out, proposed by the board of directors, follows a 42 per cent uplift in net profit for the 12 months of the year ending 31 December 2015.

Saudi Arabia announces economic reforms to pull away from oil

D

eputy crown prince of Saudi Arabia, Mohammed bin Salman has announced Vision 2030, a major transformation programme for the Kingdom in a bid to steer the economy away from oil. This begins with the sale of a five per cent stake in national petroleum and natural gas company, Saudi Aramco. Following the exercise, Aramco will be converted into a holding company and its ownership will then be transferred to the state’s Public Investment Fund, which will assist to turn it into a sovereign wealth fund. This has been valued at approximately $3 trillion, potentially making it the largest sovereign wealth fund in the world.

The government’s targets include: raising non-oil government revenues from SAR 163 billion to SAR 1 trillion, increasing the share of the private sector from 40 to 65 per cent of the GDP, raising foreign direct investment from 3.8 per cent to 5.7 per cent, reducing unemployment from 11.6 per cent to seven per cent, boosting the SME sector from 20 to 35 per cent of GDP. The complete National Transformation Plan that will set detailed performance indicators will be revealed in late May or early June.

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04/05/2016 16:34

Dubai Sukuk listings reach $42.61 billion

F

ollowing the listing of a $300 million Sukuk on Nasdaq Dubai by the Islamic Corporation for the Development of the Private Sector (ICD), the total nominal value of Sukuk currently listed in Dubai has now reached $42.61 billion. This is more than the value listed in any other centre globally, reinforcing the Emirates leadership role in the Islamic bond sector.

The Sukuk issued by ICD, the private sector arm of the Islamic Development Bank Group, was listed on 14 April 2016. IDB has seven other Sukuk currently outstanding on Nasdaq Dubai that have listed since 2014, with a total nominal value of $8.05 billion.

Gulf International Bank raises SAR 2 billion through bond issue Gulf International Bank’s (GIB) latest bond issue was met with strong demand as the bank on 19 April, 2016 successfully priced its senior unsecured SAR 2 billion five-year Floating Rate Notes issuance at a spread of 140 basis points above three-month SAIBOR. The issuance was oversubscribed, achieving an attractive spread for GIB and reflecting investors’ high confidence in GIB’s financial strength and credit worthiness.

GIB’s bond issue is considered as the first financial institution issuance in the domestic Saudi Riyal market since September 2015. It has been rated A by Fitch (foreign currency) and A3 by Moody’s (senior unsecured debt).

The order book was well diversified and investors comprised banks, non-banking financial institutions, corporates, government agencies and investment companies within the Saudi Arabia.

Saudi Hollandi Bank bags two BME Product Awards Saudi Hollandi Bank (SHB), the longest-established provider of financial products and services to Saudi Arabia’s leading companies, has successfully won two accolades in the BME Product Awards. Having catered to the largest corporations and its fast-growing smaller enterprises, the bank was voted for Best Cash Management and Best SME Customer Service in the Kingdom.

Saudi Hollandi Bank has built a strong reputation in the retail market for its support of individuals and families.

Founded in 1926, SHB was the first bank to operate in the Kingdom and acted as the de facto central bank, holding the Kingdom’s gold reserves and receiving oil revenues on behalf of the Saudi Arabian government. Two years later it issued the first Saudi Riyal, the Kingdom’s new independent currency, thereby establishing a central role in the growth of the economy, a position it holds to this day. SHB has grown its understanding and depth of relationships with SME customers and with private, retail, individuals by focusing on combining an efficient and effective service approach with innovative product and channel development.

Qatar First Bank lists shares on QSE Following the approval of the Qatar Financial Markets Authority, Qatar First Bank (QFB) has successfully listed on the Qatar Stock Exchange as ‘QFBQ’. The guiding trading price for the first day was be QAR 15 per share with a fluctuation of limit of 30 per cent up or down which was permitted only for the first day of listing. QFB was established as one of the first independent Shariah compliant financial institutions licensed by the Qatar Financial centre Regulatory Authority, on 4 September 2008. The bank’s authorised capital amounts to QAR 2.5 billion and the issued and paid up capital is QAR 2 billion.

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9 03/05/2016 09:07

THE MARKETS

GCC banking sector enters a new paradigm Omar Mahmood, Head of Financial Services for Middle East and South Asia and Partner at KPMG Qatar, discusses the evolving banking landscape in the region

I

t is not ‘new news’ that most industries in the Middle East have felt the impact of the current changing market conditions, largely due to the significant drop in oil prices over the past few years. And the effects of reductions in government spending and streamlining by many large organisations have been felt throughout the region’s banking sector.

2015 was a tough year for listed banks in the GCC. A recent KPMG report which analyses results of 56 of the region’s leading listed commercial banks (covering over 90 per cent of listed banking assets), highlights that while profits and assets have grown year on year on average across the GCC, the growth rate (at approximately six per cent) is below the levels we have seen in recent years.

Banks in the GCC have clearly been impacted by the persistent low oil price—government spending curbs have resulted in lower liquidity in the market which in turn has limited the ability of banks to grow their balance sheets. Banks in the region have benefitted for a number of years from the low cost deposits they attract from government and related entities, which has helped them achieve

10 page 10-11 the markets.indd 10

Omar Mahmood

attractive net interest margins, being the predominant source of profitability.

However, with a reduced supply of lower cost deposits, banks are being forced to raise funds from costlier sources which is negatively impacting margins and in turn profitability.

Comparison of listed bank results across the GCC demonstrates how the liquidity ratios across all but one of the GCC countries, have decreased when compared to 2014.

In addition to the declining liquidity levels, which are still prevailing in 2016, another significant trend in 2015 was the decline in capital adequacy levels by two per cent on average over the year, which is a concern for many bankers. When improved liquidity levels do return to the market, banks are fully aware that they will only be able to grow their assets (which in turn will increase the risk-weighted asset levels) if they have adequate capital to do so. Regulators across the region are implementing Basel III requirements in a phased manner and as a result, the minimum capital adequacy levels are rising through addition of the counter cyclical buffer, domestic systemically institution buffer and the Internal Capital Adequacy Assessment Process (ICAAP) buffer in some countries. This will all create an additional burden on banks to raise capital levels to ensure that they comply with regulatory requirements.

In 2016, we are therefore likely to see an increase in capital and fund raising activity with debt issuances, rights issues and additional Tier 1 issuances just some of the routes that banks will explore.

On the cost side of the business, banks in the GCC have reacted well to market conditions, with cost to

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03/05/2016 09:08

income ratios declining by 7.4 per cent on average across the region. Cost optimisation exercises and efficiency initiatives were high on the agenda for most boards throughout 2015, given the income pressures they are facing. Banks have therefore used this opportunity to review their operating costs and look to rationalise where possible to help them become more efficient and ‘weather the storm’.

Despite the economic realities banks are facing, 2015 did not see a significant increase in impairment charges on financing portfolios nor a rise in non-performing loan ratios. In fact, over the last year there has been a decline in net impairment charges on financing activities by 9.2 per cent on average, and non-performing loan

Capital adequacy Cost to income ratios levels declined by declined by

2

%

on average over 2015

7.4

%

on average across the region

ratios have remained broadly in line with or declined from 2014. This is a reflection of the more cautious approach to lending adopted by banks in prior years, which is proving to be beneficial. Nevertheless, there are still sectors which could be a cause for concern, namely the contracting and

Common trends developing across the region for the year ahead: Continued regulatory oversight/scrutiny: regional regulators are becoming far more active in supervising banks. Banking supervision departments at central banks are recruiting staff, using external consultants, training their people more, leveraging best practise and adopting regulations that are being rolled out in more developed markets, all to ensure that banking stability is maintained through appropriate control, culture and governance.

Rising cost of funds: with three GCC sovereign credit rating downgrades and numerous bank downgrades occurring already in 2016, we expect yields to widen and the cost of funds to increase further, which will impact bank profitability in the coming year.

Increased focus on risk: banks have been, and will continue to, maintain a significant focus on risk management. Increasing regulator scrutiny and the overall caution as a result of current market conditions will force banks to ensure that risk management remains the utmost priority from the highest levels.

Focus on innovation and efficiency: we expect banks to continue to focus on cost efficiencies as they have done in 2015, but also to look to ways in which they can innovate and differentiate their service offering and delivery methods. In a competitive banking landscape across the GCC where margins are under pressure, customers are becoming more demanding and shareholder expectations for growth remains, banks will be forced to innovate faster than they have been.

Source: KPMG

Decline in net impairment charges on financing activities by

9.2

%

on average in 2015

SME segments which could face a lag between the start of the oil price decline and the direct impact being felt. Banks are however aware of this issue and are monitoring these sectors closely.

The region’s banks are well aware of the upcoming International Financial Reporting Standard (IFRS 9) on financial instruments. IFRS 9 will transform the way in which banks will recognise impairment charges, essentially moving away from an incurred loss model (which many believe delayed the accounting for losses during the 2008 credit crisis) to an expected loss model, which will be more forward looking. Despite an effective start date of 1 January 2018, most regulators and banks in the region have already started to prepare for the new standard, which will place an increased burden on risk, systems, data and finance.

Despite the current challenges being faced, banks remain relatively resilient, and the long-term outlook is still positive in our view, given the expectation of continued government support for the sector and committed infrastructure investment for landmark events such as the FIFA 2022 World Cup in Qatar and Expo in Dubai. Governments across the region are focusing on non-oil growth and looking to move ahead with their national visions aimed at reducing the dependence on the hydrocarbon sector, which will have a positive impact on banking and financial services as a whole.

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11 04/05/2016 16:16

THE MARKETS

Oil drivers: from the Kuwait strike to US inventories Ole Hansen, Head of Commodity Strategy at Saxo Bank, discusses the Brent landscape post Doha talks

A

fter touching $40 per barrel in the aftermath of the failed Doha meeting, Brent crude has since recovered and almost made it back up to $45 per barrel on 19th of April. The oil strike in Kuwait which was called off the day before (18 April) saved the day for the embarrassed group of oil ministers leaving Doha in the third week of April. The focus on Monday, 18 April quickly turned from price war and overproduction to another involuntary supply disruption. This latest disruption was one of several over the past couple of months which, together with the slowing US production, has supported the strong recovery and attracted investors.

12 page 12-13 The Markets.indd 12

Ole Hansen

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03/05/2016 09:11

in Saudi Arabia who by his action at the weekend clearly showed that Al-Naimi the long-serving oil minister had been sidelined. The American Petroleum Institute released its estimate late 19 April and the rise of 3.1 million barrels was close to double of what was expected.

We still see Brent crude oil to be range bound between $35 per barrel and $45 per barrel this current quarter before moving higher in the second half towards $50 per barrel by year-end. We also have to respect the continued demand for oil from

investors and unless they are being challenged by changes in the shortterm outlook, these trades will be maintained.

This will leave the risk skewed to the upside which in turn may end up being self-defeating due to improved economics in North America which could help stabilise [falling] production while also increasing supply from abandoned carry trades. But for now, we should focus on today’s inventory report which during the past four weeks has generated major market moves.

Current drivers contributing to the continued volatility in the market: Supporting higher prices

 The rebalancing process is well underway, especially in North America where the US and Canadian high-cost producers are forced to cut production.  Global demand continues to rise and together with the slowdown in nonOPEC production this well help support the price over the coming months.  Capex cuts worth billions of dollar has created a situation where the market focus eventually will shift from oversupply to lack of supply.  In the very short term the oil worker strike in Kuwait, now over, has been a major supporting factor as it removed more than 1.5 million barrels of daily production.

Supporting the call for lower prices

 A faster-than-expected increase in production from Iran and a stabilising Libya which raises the prospects of barrels returning from a country which used to produce 1.6 million barrels per day and now only around 300,000 barrels per day.  Following the failed Doha meeting, there is a risk that the power structure in Saudi Arabia has changed thereby increasing the political impact on oil prices. If Saudi Arabia turns its oil weapon on Iran and begin to increase production, as threatened, a revisit to the low $30s cannot be ruled out.  In the very short term, a record long speculative position in Brent crude could have a significant negative impact on the price if events trigger a need to reduce exposure.  The collapsing contango in Brent crude which on one hand has cheered investors as it reduces the pain of holding a long position could in near term lead to rising supply as storage plays are being abandoned. The six-month contango—i.e. the discount between the sixth and first month—hit $4.5 back in January and since then it has collapsed to just $1.5 currently. At current levels, storage plays from both on and offshore ‘cash and carry’ trades will increasingly be abandoned, thereby reducing supply into an already oversupplied market.

Source: Saxo Bank

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page 12-13 The Markets.indd 13

(Photocredit: Arlo Magicman/Shutterstock.com)

With Kuwaiti production moving towards pre-strike levels the focus can return to the other drivers, of which there are currently numerous ones pulling the price in both directions.

We expect crude oil to be range bound between $35 and $45 this quarter, before moving higher in the second half of the year, towards $50 by the end 2016. Even if the market starts to rebalance there is still an oversupply of hundreds of millions of barrels of oil in storage, which needs to be reduced. This will add to supply over the coming months, especially as the contango begins to contract.

The rebalancing process is well under way, especially in North America, where US and Canadian high cost producers are forced to cut production.

The continuous rise in global demand and the slowdown in non-OPEC production will help support the price over the coming months.

The increase in production from Iran, and a stabilising Libya raises the prospects of barrels returning from Libya which used to produce 1.6 million barrels per day and now only around 300,000. The failed Doha meeting, indicates that the risk of political impact on oil prices has increased. If Saudi Arabia begins increasing production, a revisit to the low $30s cannot be ruled out.

In the very short term, a record long speculative position in Brent crude could have a significant negative impact on the price if events trigger a need to reduce exposure.

OPEC has become much more political and three failed meetings highlights the cartels inability to agree on much. Considering the market share that OPEC controls, a different organisation including other countries would not have much success either. The market will be looking out for statements from MbS, the 30-year old crown prince

13 04/05/2016 15:01

THE MARKETS

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The earnings game Binod Shankar, Director and Trainer at Genesis Institute discusses the implications of earning predictions

ou know the old saying ‘The secret to happiness is low expectations’.

This is nowhere truer than when US companies release their quarterly earnings. Before the results came out, S&P Capital Intelligence estimated an eight per cent drop in earnings in Q1 2016 compared to Q4 2015. But just look at the results. JP Morgan reported first-quarter earnings of $1.35 per share on revenue of $24.08 billion, beating the analyst estimate of $1.26. Morgan Stanley reported first-quarter net income of $1.13 billion, or $0.55 per share, topping analysts’ consensus estimates of $0.46 earnings per share (EPS) on revenue of $7.78 billion. Citi was also able to ‘beat’ expectations, reporting net income of $3.5 billion, or $1.10 per share; analysts were expecting an EPS of $1.06.

Over the last three months, the chieftains of these mega banks have been crying out that profits will be hammered. Analysts dutifully adjusted their forecasts. This practice is called earnings guidance. And in this case it cleverly guided analysts to a lower EPS number. In other words, keep expectations of earnings low enough and you will of course exceed that target!

The practice of earnings guidance became more common during the late 1990s, after the US Congress protected companies from liability for statements about their projected performance.

Most CFOs issue earnings guidance because they believe it improves valuation multiples, shareholder returns, reduces share price volatility and boosts liquidity.

Way back in 2006, McKinsey & Co Consultants Peggy Hsieh, S. R. Rajan and Tim Koller published some interesting findings. Contrary to what cont. on page 16

14 page 14-16 The Markets.indd 14

www.bankerme.com

03/05/2016 09:54

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At National Bank of Fujairah, we understand that to achieve success in business you’ll need lots of passion, intuition and a partner that is as committed to your business as you are. Over the past 30 years, NBF has established itself as a leading bank for business in the UAE, renowned for its strong track record, client relationships, business expertise and market insight.

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THE MARKETS

cont. from page 14

some companies believe, guidance does not result in superior valuations in the marketplace. When a company begins to issue earnings guidance, its share price volatility is as likely to increase as to decrease compared with that of companies that don’t issue guidance. When companies begin issuing earnings guidance, trading volumes rise relative to companies that don’t provide it. However, this rise wears off the following year.

Since most companies don’t have a liquidity issue, this rise in volumes is neither good nor bad from a shareholder’s perspective.

There are however, serious downsides to this practice. The difficulty of predicting earnings accurately can lead to the often painful result of missing quarterly forecasts. As a result, senior managers can get paid less or even be fired.

That can be a powerful incentive for management to focus excessively on the short term; to sacrifice longerterm, value-creating investments.

Like cutting back on research and development, and training.

Managements also sometimes manipulate earnings to meet EPS targets. In bull markets, some companies have given optimistic forecasts when the market wants momentum stocks with fastgrowing EPS. In bear markets, companies have tried to lower expectations so that they can ‘beat the number’ during earnings season, such as in Q1 2016.

The practice has costs. Demands on management’s time is the biggest cost—putting it together, analysing and communicating—given that forecasting net income is much tougher than forecasting revenue. And there is the significant indirect cost of an excessively short-term focus.

Analysts can become less diligent due to earnings guidance. Analysts

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The difficulty of predicting earnings accurately can lead to the often painful result of missing quarterly forecasts.

- Binod Shankar, Director and Trainer at Genesis Institute

should be thorough and shouldn’t expect management to do their work for them. It is one of the analyst’s jobs to evaluate management expectations and determine if these expectations are too optimistic or too low. Sadly, this is something that many analysts often forget to do, like during the dotcom bubble.

It’s not like earnings guidance is essential for a well-developed financial market. European markets and investors have functioned just as well without much forward guidance from management.

Moreover, beating estimates won’t pull up a bad stock, just like missing earnings will not pull down a company’s share price. Look at Netflix. In one quarter a few years ago, in spite of turning in earnings that more than doubled expectations, the share price collapsed, reflecting its challenges in trying to monetise streaming videos. Or Apple a few years ago. It missed earnings in a quarter and saw its shares immediately stumble on the news. Yet the very next month Apple’s shares raced to

an all-time high after a court ruled in its favour in a patent dispute with Samsung. Guidance is useful only in exceptional situations, when uncertainty about your company’s prospects is high.

Let’s go back to the Q1 2016 earnings where many big banks ‘beat’ analyst estimates. A closer look shows what really happened; revenues from advisory and trading fell, thanks to a plunging stock market, banks had to take a hit for losses due to bad loans to the energy sector, setting aside as much as—in the case of Bank of America and Wells Fargo—$1 billion and $200 million dollars respectively in just this quarter, and finally banks cut costs aggressively to maintain margins. But not many analysts focused on this, instead crying out ecstatically when earnings estimates were beaten.

In a June 2014 piece in the Harvard Business Review titled ‘How to Kill Earnings Guidance’, Gabriel Karageorgiou, Daniela Saltzman and George Serafeim offer some useful recommendations. Companies should scrap earnings guidance. They should help the market to understand their business, the underlying value drivers, the expected business climate, and their strategy. This can be achieved by integrated reporting which is the process of communicating how the firm is using different forms of capital, human, financial, natural, physical, intellectual, and social to create value over the short, medium and longterm. Analysts and investors can then prepare better forecasts of earnings and value. Companies should also communicate a detailed long term business plan to the market, with financial milestones.

Coca Cola, Mattel, AT&T, McDonalds and Gillette have stopped providing earnings guidance. Let’s hope more companies are bold send sensible enough to follow.

www.bankerme.com

03/05/2016 09:54

The region’s most transparent awards

The BME100, a list of the region’s top-performing banks, is not only a benchmark in bank performance, but the judging process is unequivocally transparent. Each bank is ranked according to its financial performance relative to other regional banks, there are no grey areas.

Every bank’s financial data is carefully scrutinised by our in-house analytics team and each bank is ranked in our BME100 list according to that financial data. Our analysts use the Data Envelopment Analysis (DEA) method for analysing the efficiency of the banks in the BME 100.

The analytical framework of our BME100 reports is based on secondary data drawn from the annual reports of the major financial institutions and Islamic windows around the MENA region. In our analysis we measure the performance of the whole banking sector of the countries against each other and compare the best banks of each country against each other.

Where annual reports are not publically available on the institution’s website for the year in question, the institution is not included in the analysis.

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Results are collated in the currency in which they are originally published and are then converted into US dollars and normalised before the institutional rankings are calculated. The currency conversions are carried out using the prevailing exchange rate at the end of each year and as published by the relevant Central Bank.

The institutions are ranked according to both the absolute size of and the dollar value increase in size of the following: Assets Liabilities Income Net profit The rankings obtained within these areas are then combined to create an overall ranking.

CHECK OUT OUR LATEST BME100 HERE:

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(Photocredit: Jiri/Shutterstock.com)

LEGAL FOCUS

Post sanctions—a cautious market Rovine Chandrasekera, Managing Partner Middle East at Stephenson Harwood, provides an analytical outlook on the GCC landscape following the lifting of sanctions on Iran

S

ince the lifting of sanctions, how would you describe the global financial landscape?

I think it is important to emphasise that the Joint Comprehensive Plan of Action (JCPOA) lifted some sanctions against Iran but that many restrictions remain in place. The JCPOA has lifted nuclear-related sanctions on Iran imposed by the UN and EU. The agreement has also led to the lifting of a number of the US secondary sanctions on Iran, those that applied to non-US entities, but the primary sanctions regime, applying to US entities, remain in place as do the

18 page 18-20 Legal Focus.indd 18

UN and EU sanctions relating, for example, to human rights and terrorist finance. So the legal and regulatory landscape for international trade with Iran remains complex for companies looking at trading with the country.

Because the US primary sanctions remain in place, the international banks and businesses with significant exposure to the US, which includes all upper tier banks, are concerned about the risks associated with Iranian trade and financial transactions. So we have been working with a wide range of companies to advise them on those risks and compliance issues as they start to explore the opportunities of

Rovine Chandrasekera cont. on page 20

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LEGAL FOCUS

cont. from page 18

the Iranian economy. So I would say on balance that the global financial system is very reluctant to engage with Iran until the banks receive a lot more comfort from regulators, and organisations such as the US Treasury.

What is the impact of this on the GCC economy and the wider region?

In the short term there has been little impact on the GCC as there remains a lot of uncertainty about what trade is allowed and concerns about the risks.

At the moment the trade-off between risk and reward is not in favour of trading with Iran. A good example of this is the shipping sector, where there remains uncertainty about insurance cover for vessels operating in Iranian waters, [although solutions seem to be coming]. This effectively puts a hurdle in place for international shipping to fully re-engage with Iranian trade. The trading of physical goods has been one of the first sectors to open up post the JCPOA but vessel owners remain reluctant to operate in the Iranian market until there is complete certainty on the insurance side of things.

The other aspect is due diligence.

International companies operating in the GCC are very concerned about who they are actually doing business with in Iran, because many international sanctions remain in place. Our international clients are therefore looking for detailed due diligence to ensure that they will not be engaging with any listed entities, and that takes time to conduct. It will therefore take some time for Iranian trade to make a real economic impact in the region.

How does this affect the banking sector, both international and regional?

If you took away the concerns about US exposure, the GCC would be a logical destination for people trying to

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I would say on balance that the global financial system is very reluctant to engage with Iran until the banks receive a lot more comfort from regulators, and organisations such as the US Treasury.

- Rovine Chandrasekera, Managing Partner Middle East at Stephenson Harwood raise capital for major projects in Iran.

But there has been slow progress in this area to date. The fact remains that the global banking system, which is so reliant on US dollar transactions and US dollar clearing, remains largely out of bounds for any international companies seeking to finance trade with Iran.

While Iran has been isolated from the global system, the banks have adopted much more stringent regulations; compliance and risk management systems and the Iranian banks are somewhat behind in compliance. It will take some time for international banks, including those in the GCC, to feel comfortable with the procedures of possible corresponding banks in Iran.

That said, things are moving slowly in the right direction and when the global banks are comfortable and ready to do business with international companies engaging with Iran, we should see an opportunity for regional banks to participate in some of the large projects Iran plans to launch since the JCPOA.

In terms of investments, what are the risks involved in dealing with the Iranian market?

As I have already said, the compliance risk is regarded as a major hurdle to get over before large scale international interaction with the Iranian economy.

Since the nuclear sanctions were introduced, the global banking system has been de-risking all the time.

This has reduced the risk appetite of the tier-one financial institutions to engage with emerging markets.

Even for trade that is now technically

allowed under the terms of the JCPOA, the perception of risk outweighs the commercial opportunities in many cases. Until this perception of risk has been addressed—partly through the improvement of compliance within Iranian institutions and partly through the level of reassurance provided by international governments, particularly the US Treasury—I think major investments will only progress at a slow pace.

What is your short term and long term outlook on the current situation and why?

I think things are going to progress very slowly in the short term. But this is a huge economy and when people are more comfortable with the risk profile, and they start to see their competitors undertaking major projects in the market, I think things will take off and the GCC market should be well placed to benefit from the possible economic growth of such a large economy.

While the risks, and the perceptions of risk, are holding things up at the moment, this is a large country with real opportunities for development of the economy, with a large, young population, huge natural resources and a number of sectors ripe for growth investment. For the long term potential to be achieved, a lot of work will need to be done, both in Iran and by the international community, to reassure the global financial system and the tier-one banks which business can and should be done.

www.bankerme.com

03/05/2016 11:29

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COVER INTERVIEW

DIB—moving markets Dr. Adnan Chilwan

Dr. Adnan Chilwan, Group CEO of Dubai Islamic Bank, discusses the bank’s performance and global footprint, as well as his projections for 2016

D

ubai Islamic Bank (DIB) has joined the ‘billion dollar club’; group net profit for 2015 was up 37 per cent—what was the key driver behind that? And will you be able to maintain the momentum in 2016?

In 2014, we embarked on a growth strategy across all our core businesses within consumer and wholesale. The platform created during the first year of growth allowed us to effectively carry the success into 2015 as well. The 20142016 growth plan’s success so far comes from the fact that we have touched every single financial touchpoint whilst formulating the agenda. A deliberate focus on customer and multi-sector penetration has led to both consumer and

22 page 22-26 Cover Story.indd 22

corporate financing significantly increasing by around 30 per cent plus year on year. Simultaneously, improvements in our asset quality have also supported this growth with our non-performing assets (NPAs) ratio decreasing from eight per cent in 2014 to five per cent in 2015 lowering cost of risk and reducing provision requirements. Cost of funding and operating costs overall have been aligned, primarily stemming from areas that support revenue growth. And, last but not the least, net interest margins (NIMs) have been maintained at strong levels allowing for the revenue-cost jaws to widen.

This remarkable performance has led to the bank joining the exclusive ‘billion dollar profit club’, with increasing

www.bankerme.com

03/05/2016 09:13

global interest in the institution from the international investors and financial community. The bank continues to grow from strength to strength, a fact recognised through the various awards and accolades received in 2015.

Despite the challenging times, our growth strategy continues in 2016 as we look into untapped opportunities both regionally and internationally. However, we still see growth opportunities within our existing businesses with huge cross sell potential of key products within our large customer base.

Non-performing loans and assets were down in 2015. Has the bank been assisted in risk management by the activities of Al Etihad Credit Bureau?

The decrease in the non-performing book of the bank was primarily a result of firming up our risk management processes and policies and strengthening our balance sheet during our consolidation period at the time of the financial crisis. It is important to note that due to our focused efforts on recovery we have had no write-offs and there has been a genuine movement from non-performing to performing book. 2014-2015 has witnessed a continuous improvement in our asset quality, a trend that we expect to continue going forward as well. It is also important to note that the primary growth over the last few years has come from wholesale [being large ticket transactions] and there has been no new non-performing loan [NPL] formation in this business so far which speaks volumes for the risk management as well as the transactions structuring that we have done.

DIB has been actively working with the credit bureau to ensure that relevant information is being provided and used to streamline lending practises as well as the risk management framework. Clearly, the establishment of the credit bureau is a key milestone helping to gain a much more detailed and finer understanding of the consumer and SME segments in particular. And this goes beyond just credit and risk—I believe that, as the credit information grows, the Etihad Credit Bureau will help make the market more efficient in terms of retail lending.

You launched a clutch of tech innovations to customers late last year—apps, payWave and a virtual branch—what has take-up been like and what’s next from a digital banking perspective?

Many of these innovative launches we had announced last year are part of our on-going ‘Customer First’ philosophy initiatives where we have invested heavily in a number of programmes aimed at enhancing our customer service and re-inventing customer experience. Over a year ago, we cont. overleaf

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COVER INTERVIEW

cont. from page 23

Inauguration of the DIB virtual branch.

have introduced the concept of ‘Smart Bank’ which mainly focuses on the evolving needs of the consumer, particularly targeting technology based interaction which eliminate paper whilst simultaneously minimising turnaround times.

The significant technology advancements over the last few years have created this incredible platform which allows us to accurately predict the evolving customer needs and efficiently roll out relevant products and offerings aligned to them. And this is just the tip of the iceberg—many new products and services will follow soon.

How would you describe DIB’s current standing and what are your plans over the short term to increase the bank’s market share in the domestic market?

The bank is in a much stronger position currently compared to where it was several years back. We have crossed the billion dollar profitability which is the highest in our four decades of operations, our NPLs are in its lowest since the global financial crisis and we have expanded our international presence across two new markets in Far East Asia and Eastern Africa.

Despite the existing market conditions, the bank has managed to deliver a strong balance sheet growth whilst

24 page 22-26 Cover Story.indd 24

also maintaining adequate liquidity and capitalisation.

The financial strength of DIB as it stands today is clearly seen by the fact that it is one of those rare institutions in the GCC on which ratings have been maintained with a stable outlook, while others may have seen downgrades or negative outlooks. This is a testament to the bank’s strong financial and management strength and its growing dominance in the global Islamic finance sector.

As part of our new growth strategy, we have embarked on tapping into new economic growth sectors in the market to strengthen our overall business portfolio. So far, this has resulted in strong results as seen in 2015 where our financing portfolio has effectively doubled in size since we embarked on our growth agenda whilst the asset quality has witnessed significant improvement.

The bank’s growth strategy so far has yielded huge dividends and we will continue with the same agenda in 2016 as well. It is important to note that the last two years were challenging vis-à-vis oil prices, geo-political situation, global market sentiments and this year adds a new dimension with the introduction of tighter liquidity.

Despite that, we expect to continue to outperform the market and remain in line with guidance given at the start of the year.

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03/05/2016 09:13

How do your slogans ‘Customer First’ and ‘Smart Bank’ translate into reality?

As part of our growth agenda, we have embedded a ‘Customer First’ philosophy within the bank’s DNA, thereby ensuring that each and every employee lives and breathes a culture of service excellence. The aim obviously is become the best-in-class service provider in the banking sector.

The ‘Smart Bank’ initiative has transformed service delivery across all our branches. Any customer can now walk into a DIB branch with his or her ID and immediately do key transactions over the counter in a matter of minutes and with the added convenience of ‘no-paper’.

The impact of these initiatives has been duly recognised by the industry with the bank successfully achieving the ‘Most Overall Improved Bank in Customer Experience’ in the 10th Annual Bank Benchmark Index Awards in early 2015 whilst also receiving the ‘Gulf Customer Experience Award’ at the inaugural Gulf Customer Experience Awards in early 2016. These are but a few of the accolades that distinguish the bank’s leadership in providing highest quality of customer service across the consumer and business banking segments.

What your main target areas for business in 2016?

We will continue to focus on growing our core businesses of consumer and wholesale. This will be driven by targeting new sectors and capitalising on business opportunities within through cross-selling initiatives.

With our entry into two new markets over the past two years, we also aim to enhance the international contributions to the bank’s operations in the coming years.

Further, we are looking to maximise the potential of our other offshore franchises such as Pakistan, whilst also looking at possible rationalisation of our stakes elsewhere.

Finally, our efforts to lead Islamic finance growth in UAE and beyond is an on-going programme in line with the government’s ambition to establish the emirate of Dubai as the global capital of Islamic economy.

Looking to the bank’s international presence, you’re taking a near 40 per cent stake in Bank Panin Shari’ah—what plans do you have for the Indonesian bank? What kind of further investment is required?

The Indonesian acquisition is our first entry into the far East. The market has strong growth opportunities for Islamic finance driven by its massive population which still remains largely unexploited as far as Islamic banking is concerned. We plan to replicate the successful model of UAE in Indonesia, effectively establishing a viable Islamic

We are looking to maximise the potential of our other off shore franchises such as Pakistan, whilst also looking at possible rationalisation of our stakes elsewhere.

- Dr. Adnan Chilwan, GCEO at DIB

banking entity that can tap across the entire Indonesian population on the retail front whilst continuing to cater to the fast growing wholesale business in the country.

With a running franchise in place already, we do not foresee any material need for further financial investment; however, new product structures and service offerings along with technology improvements will come through over the years to effectively enhance the bank’s capability to efficiently cater to this highly lucrative and massive market in Asia.

DIB is also launching a bank in East Africa. What customer segments will you be targeting there?

The Eastern African region has a total population of about 300 million people and its economies are growing at an average of six per cent per annum. Growth drivers in this region include sustained economic progress, evolving demographics including growing population and urbanisation as well as opportunity to tap the infrastructure funding gaps.

Our set up in East Africa, particularly in Kenya, is through a green field operation. Africa is a part of our overall strategy to grow our international business for some time now. The bank is targeting the nascent but fast growing Shari’ah banking industry driven by a sizeable unbanked Muslim population. Although there are attractive demographics in Kenya with about 4.4 million Muslims and low penetration of Islamic finance, the country also serves as a stepping stone providing easy access to the neighbouring countries within East Africa.

What other new areas and markets would you be exploring? What are the bank’s future expansion plans?

As part of our global growth agenda, we will always be on a constant lookout for opportunities in the international markets, particularly in the Islamic finance space. Whilst not tied down in any way, our international expansion plans focus on markets where DIB’s franchise would carry value and we would play an active role in managing the entity. As such, our cont. overleaf

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COVER INTERVIEW

cont. from page 25

home markets of GCC will continue to be an area of interest.

That said, we will always remain cognisant of the fact that any new ventures, locally or internationally are aligned to enhancement rather than dilution of the existing franchise and hence economically viable not just for the bank but our loyal and growing local and international shareholder base.

In January you said the bank will require capital this year, would that be Tier 1 or Tier 2 and a bond or rights issue? What kind of timetable will you be taking that decision upon?

Our pace of growth has been outperforming the market over the recent past, hence the need for additional capital if we are to continue on our 2014-2016 growth agenda. During our last AGM meeting, the shareholders approved to increase the paid up capital of the bank through a rights issuance.

Further approvals were also granted for additional Tier 1 hybrid issues which also get equity credit thereby boosting capital ratios. With the approval granted to the board, we will be looking into implementing these initiatives at opportune times subject to all necessary regulatory approvals.

What are the main challenges facing Islamic banks in general and in particular? And how would you address them?

Liquidity remains to be a challenge in the banking sector given the global and local macroeconomic conditions. Oil price has been hovering at mid to high 30s for a while now with an obvious impact on large revenue streams which GCC government’s primarily relied on to push forth the infrastructure spend. The sustained low price of oil has also softened the operating environment and impacted regional economies and markets. However, despite this, Islamic banks still had a relatively robust year with profitability of UAE’s top five Islamic banks achieving a growth of 27.5 per cent in 2015 (AED 6.66 billion) compared to AED 5.22 billion in 2014. In addition, UAE has a stronger institutional capacity to adjust to the oil price shock relative to its neighbours due to its diversified economy.

I believe the challenge now for the whole industry revolves around growing the balance sheet given the sustained low commodity prices, slowdown in public spending and against a backdrop of sharply tighter liquidity.

In addition, the growing strength of the US dollar is putting some pressure and competitiveness on the leisure and retail industries as well the real estate sector. Despite the headwinds, we are broadly comfortable with the bank’s growth prospects for the year as we look into capitalising on opportunities within and enhancing the bank’s international contribution from our franchises abroad.

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I believe the challenge now for the whole industry revolves around growing the balance sheet given the sustained low commodity prices, slowdown in public spending and against a backdrop of sharply tighter liquidity.

- Dr. Adnan Chilwan, GCEO at DIB

What are your personal ambitions for the bank in the medium term?

We have seen a massive turnaround and rebound from DIB post the financial crisis. In just two years, since returning to growth, the bank has established itself as performance leader in the entire banking sector and not just the Islamic finance segment. The question the market is asking now is not ‘can we do more?’ but ‘how much more can we do?’ and ‘for how long?’ Whilst I am truly blessed to have led the bank to such great heights, I still see tremendous growth opportunities within the business, aside from the potential inorganic growth plans. Our customer base, particularly on the retail is largely still deposit oriented and hence unexploited. With complete product offerings in place, the upside is massive as we enhance our cross sell and penetrate further whilst simultaneously growing our 1.6 million retail base.

On the wholesale front, we have been one of the leading deal makers across the banking sector and particularly in the debt capital market segments. DIB is safely regarded as key influencer in the development of global Sukuk market and continues to be seen as the leading Islamic financial institution in the wholesale banking space locally, regionally and globally.

Within the UAE, we have cemented our position amongst the top five banks of systemic importance and a key contributor to the economic growth of the country.

Globally, we are being seen as one of the most progressive and fastest growing Islamic banks. Having led the institution through both consolidation and growth, I see huge potential for further advancements in the coming years. Clearly, financial growth is going to be a focus as we continue to climb the ranks locally and internationally, but I see DIB playing a critical role locally in supporting Dubai’s ambitions to establish itself as the global capital of Islamic economy as well as the development and progression of Islamic banking across the world—and as I have said many times, I want to make Islamic finance a norm rather than an alternative.

www.bankerme.com

03/05/2016 09:13

Some bonds are too strong to break.

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26/01/2016 13:17

COUNTRY FOCUS

Bahrain’s evolution as a financial centre Dr. Jarmo Kotilaine, Chief Economist, Bahrain Economic Development Board, writes on the development of Kingdom’s financial landscape

A

mbitious financial centre projects have been among the salient economic development themes in the Gulf region over the past decade or so. While Bahrain is now one of several modern financial hubs in the GCC, its track record and key characteristics remain quite unique in the regional context. Three factors set Bahrain apart in the financial landscape of the Gulf: the maturity of its financial services sector, integration in a unified jurisdiction, and the existence of an experienced single regulator.

28

Building on its long-standing position as a key regional centre of commerce, Bahrain established an international financial centre in the early 1970s.

This was an opportune move in an era characterised by a rapid build-up of oil-based wealth. Since its inception, this centre operated with a strong government regulator, a comprehensive legal framework, and a firm commitment to developing national talent.

Throughout its history, the financial services cluster in Bahrain has been at the forefront of the Kingdom’s

economic diversification agenda. It is today the largest sector of the non-oil economy, accounting for some 17 per cent of Bahrain’s GDP, and an important employer, both directly and indirectly.

Among other things, Bahrain has regionally recognised institutions of excellence in financial sector training and education. The sector is an important exporter of services and a key enabler of economic development in the Kingdom, as well as the broader region, thanks to the diversity of solutions and skills it offers.

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03/05/2016 09:15

(Photocredit: Philip Lange/Shutterstock.com)

Bahrain is home to 25 banks, 36 insurance firms and 35 Islamic funds.

Dr. Jarmo Kotilaine

DIVERSIFICATION AND INNOVATION IN FINANCIAL SERVICES

While the development of Bahrain as a financial centre was above all led by wholesale banking in the 1970s, the country has evolved into a more diversified hub, covering all subsectors of financial services and reshaping many of them. This track record of dynamism has been above all due to the exceptional talent pool available on the island, as well as the presence of a high-quality regulatory environment.

Bahrain has been a consistent innovator in financial services. It has pioneered and developed a wide range of different activities that have subsequently expanded far beyond Bahrain. For example, the insurance industry in Bahrain dates back to the 1950s when a group of taxi drivers gathered to form an insurance society, the first mutual insurance company of its kind, in order to abide by the law to buy Third Party Liability insurance for their vehicles.

Bahrain now hosts 36 insurance firms and in 2014 gross premiums increased

in the sector by around five per cent to register at BHD 271 million. We expect the sector to continue to grow in line with economic growth and diversification as well as the ongoing convergence of insurance penetration in the region with international norms.

Bahrain has been at the forefront of driving the development of Islamic finance globally with the first Shari’ahcompliant institutions established in the 1970s. The Kingdom is home to a large concentration of financial institutions including 25 banks with assets of around $25 billion, as well as seven Shari’ahcompliant insurance businesses and 35 Islamic funds. Bahrain further hosts a number of multilateral organisations that set international standards in the sector, such as Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), International Islamic Financial Market (IIFM) and the Council for Islamic Banks and Financial Institutions (CIBAFI). cont. overleaf

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29 03/05/2016 09:15

COUNTRY FOCUS

cont. from page 29

Likewise, there are also a number of research and development institutions that aim to develop and enhance the international Islamic finance sector through the expertise and experience based in the country. For example, EY and Deloitte have international Islamic finance research centres based in Bahrain and Bahrain’s Al Baraka Banking Group recently announced a partnership with the World Bank to enhance research in the industry.

In ancillary services, the growing global importance of the GCC market means that many businesses are expanding their presence in the region.

Having once sought to service the region through a small front-office presence, more and more companies are building up scale, which creates the need for more back and mid-office support in the region.

At the same time, fragmenting value chains in financial services, whether through regulation or technological change, are driving the interest in new ancillary service solutions. Bahrain’s deep talent pool, full integration in the regional economy, and competitive operating costs provide a compelling opportunity for structured middle office solutions. Reflecting this trend, in recent years both Citi and Standard Chartered have located regional call centre operations in Bahrain. Likewise, there is growing demand in areas such as card and mobile payment processing and third-party administration.

REGULATORY EXCELLENCE IN A UNIFIED JURISDICTION

While the development of international financial centres in many countries has involved the creation of separate jurisdictions, Bahrain-based financial institutions remain anchored in the national jurisdiction. Their Central Bank of Bahrain (CBB) licence gives them the status of Bahraini legal entities. This translated into an

30

We are likely to see an increasing role for more sophisticated products and services in areas such as pensions, insurance, and wealth management.

- Dr. Jarmo Kotilaine

absence of jurisdictional and licencing barriers, and is of particular value for businesses looking to access opportunities within the GCC. It means that businesses operating from Bahrain are also integrally part of the GCC economic bloc.

This integration in the national and regional economy goes hand in hand with Bahrain’s open and inclusive culture along with its recognised track of record of business freedom. A 100 per cent foreign ownership is permitted as a rule and hence allows companies to fully control their businesses and intellectual property.

The CBB is one of the most established regulators in the region and exercises full oversight on all types of financial institutions. It has created a comprehensive corpus of regulations to support the development of the sector.

In many cases, the CBB has undertaken pioneering innovations to proactively drive the growth of new market segments.

Among other things, it has been at the forefront of establishing a dedicated regulatory framework for Shari’ahcompliant financial services which it has repeatedly updated and expanded. The CBB has further supported the growth of Islamic finance through mechanisms such as the Waqf fund which aid in research and training in this area. Conflict resolution within the sector benefits from the presence of an arbitration tribunal based on US standards.

BAHRAIN AMONG OTHER REGIONAL FINANCIAL CENTRES

While external perceptions of financial centres in the GCC have tended to revolve around the idea of competition, the expansion of such ventures has been above all reflective of the rapid expansion of the regional economy, as well as the growing global role of the Gulf. Beyond this, it is becoming increasingly obvious that the different centres in the region promise important elements of complementarity as well, thanks to their divergent value propositions. In some cases, such hubs are critically linked to infrastructure pipelines, in others they are supported by global connectivity. Some centres benefit from large national markets or exceptional sovereign wealth, while others have sought to position themselves through bespoke regulations or institutions for certain market segments.

Bahrain’s offering to financial institutions and investors is underpinned by a value proposition which is both compelling in its own right but also unique in the broader regional context. First of all, as a legacy of Bahrain’s half century of nurturing local financial services talent, Bahrain is home to a large, educated local workforce—with Bahrainis accounting for around two-thirds of the people working in the sector. Women make up nearly 40 per cent of this total. This local workforce means that companies that are looking to achieve significant scale can expand more easily and, importantly, have access to people with a strong knowledge of the local market.

This pool of qualified, Arabic-speaking GCC nationals is also of considerable value for tapping other regional markets through Bahrain.

Secondly, Bahrain’s competitive operating costs and long history of price stability provide an attractive foundation cont. on page 32

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COUNTRY FOCUS

cont. from page 30

for long-term value creation, an opportunity that is particularly important for mid-office and ancillary services.

This exceptional cost competitiveness is underpinned by a supportive business environment. For instance, the absence of jurisdictional barriers makes it easy for businesses to adopt their premises to their evolving needs.

Finally, Bahrain also offers quick access to the rest of the GCC through excellent infrastructure from its position at the heart of the region. The 25 kilometre King Fahad causeway to Saudi Arabia means that most of the key population centres of the northern Gulf are a driving distance away. A dense network of regional air links also make one-day business trips a realistic option across the GCC.

PROSPECTS FOR GROWTH

While the attention of many analysts right now is on the challenges created by lower oil prices, the growth opportunity facing financial services in the GCC remains to a large extent shaped by structural drivers that are not significantly influenced by the oil cycle. Three things are of particular importance. First of all, the region is demographically dynamic with a large, increasingly well-educated population of young people. The benefits of this demographic dividend are driving largescale investments in social infrastructure, including private education and health care. The needs of this population translate into an unprecedented pipeline of housing and other physical infrastructure investments as well.

Secondly, the regional economies are strongly committed to economic diversification and, if anything, the recent fluctuations of oil price have underscored the urgency of this strategic priority. This is driving businesses to diversify and governments to support the development of their non-oil economies through regulatory reform and better capital mobilisation.

32

The GCC can also be expected to benefit from a growing interest

by Asian and African financial institutions to expand beyond their home markets.

- Dr. Jarmo Kotilaine

Thirdly, the ability of the GCC countries to capitalise on their unique geography at the crossroads of three continents remains one of the most impressive and transformative success stories of the past decade or two. Following large-scale strategic infrastructure investments, more trade, travel, and investment now passes through the region than ever before.

Growth rates in all three areas remains robust, projected to remain ahead of even headline GDP growth rates.

In the case of Bahrain, the recent economic data clearly underscores the power of these drivers. The Bahraini economy has continued to post robust growth throughout the period of depressed oil prices and during 2015 non-oil growth reached 3.9 per cent. Even with ongoing fiscal re-engineering efforts across the region, the near-term outlook is similar, thanks in part to a massive pipeline of infrastructure projects, where the near- to medium-term priority projects alone roughly equal the Kingdom’s GDP. Such investments have always had strong linkages to much of the rest of the economy.

Such factors can be expected to continue to drive demand for financial services. In the last year we have seen strong performance in credit growth (with total credit growth peaking at a 10

per cent annual pace in the final quarter of 2015), innovations in capital markets (including the Bahrain Bourse’s launch of a Treasury Bills Market) and growth in financial sector employment, with employment in the sector increasing by 2.8 per cent during 2015. Growth was particularly rapid in the non-bank financial sector, highlighting Bahrain’s uniquely compelling value proposition in the middle office and ancillary services area.

We expect a range of new opportunities to open up in the years ahead. For example, the region’s demographic profile means that more and more people will need to start thinking seriously about planning for their long term financial future. We are likely to see an increasing role for more sophisticated products and services in areas such as pensions, insurance, and wealth management. Businesses that are able to provide these services through local employees embedded in the regional culture will be particularly well positioned to benefit from this trend. Likewise, technological changes in areas such as fintech will spawn new opportunities and needs to create local content for the GCC market and broader Middle Eastern market, once again underscoring the role of local talent.

The GCC can also be expected to benefit from a growing interest by Asian and African financial institutions to expand beyond their home markets. For many, the GCC is a region of particular appeal and importance because of geography and historical ties. Recent examples of regional players setting up in Bahrain include JS Bank, a Pakistani wholesale bank that has launched its first international branch in Bahrain, Turkiye Finans, Bank of Khartoum and Cairo Amman Bank. Such investments are likely to benefit from the expected rapid growth in trade and investment around the broader Indian Ocean space.

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14/04/2016 12:04

PRIVATE EQUITY

The private equity market is believed to require a change in adapting to a new era of ‘normal’

2015 saw one of the best fundraising environments.

A

gainst a backdrop of slowing global economy, increasing volatility in public equity markets and feverish competition that drove investment multiples to new highs, the private equity sector has a relatively solid year in 2015.

According to Bain & Company, new private equity deal-making grew steadily in 2015, as it has every year since 2010.

Deal value for announced global buyouts totalled at $282 billion, a shade more than in 2014, and deal count dropped 14

34 page 34-37 Private Equity.indd 34

per cent—slightly lower than last year.

Yet, private equity firms face intense pressure from continued competition and ferocious deal-making, requiring a mandate to differentiate.

CURRENT LANDSCAPE

Bain’s annual Global Private Equity Report found that over the last 10 years, the private equity market went through the throes of volatility. It has however proved itself to be resilient, particularly over the decade’s second half.

(Photocredit: Looker_Studio/Shutterstock.com)

Maintaining resilience

By 2015, limited partners enjoyed a fifth consecutive year when distributions outpaced capital calls, generating strong net positive cash flows. For general partners, sharpening their focus on deal sourcing, investment thesis articulation and post-close value addition have never been more important, and they are hurrying to raise their games on these and many other fronts. The past year also saw the best environment for fund-raising since the pre-crash boom.

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04/05/2016 15:15

Deal value for announced global buyouts totalled at

$282 billion $282 billion

in 2015

Reported buyout deal value totalled

$442 billion in realisations and

1,166 deals

globally

Commenting on developments in the Middle East, Gregory Garnier, Bain partner in the Middle East said, “Last year was a very encouraging year for private equity in the MENA region with a growing volume of larger deals, notably in the retail and consumer goods, healthcare, and education sectors. To sustain these dynamics, the industry will need to remove barriers on the sell-side and the regulatory side.

New oil price levels will certainly have some impact on private equity activity: some deals will be delayed, but we will

also see more opportunity to invest counter-cyclically, which is imperative to managing portfolio companies with stringent value creation approaches.”

Several elements and trends have shaped the GCC’s private equity landscape. “First, across the region, there are limited investment activities and deal flow; instead, the focus remains on fundraising and investing abroad. And, while globally, one of the big trends in the increasingly active market for corporate transactions has been the growing popularity of spin-

Ihab Khalil, Partner and Managing Director at Boston Consulting Group Middle East

Gregory Garnier, Partner at Bain & Company

reported at year-end offs, this hasn’t caught on in the region—where there is still limited spin-off activity,” said Ihab Khalil, Partner and Managing Director at Boston Consulting Group Middle East.

A REVIEW OF 2015

Last year, the $175 billion that general partners attracted for commitments in new buyout funds came in 11 per cent below the amount they had raised in 2014, according to Bain. Despite this, general partners setting out to raise new funds in 2015 saw one of the best fundraising environments since the last boom, despite overall numbers that were down slightly from last year. Bain found that private equity funds with topquartile predecessors closed faster and raised more money than ever before— among buyout funds, a full 40 per cent closed in six months or less. Further, the percentage of funds that hit or exceeded their fundraising targets was higher in 2015 than at any time since the pre-crisis boom of 2007. The supply of limited partners’ money has been so great that even funds succeeding fourthquartile funds on average met their target for fundraising last year. Limited partners are looking at new ways to put money to work, including co-investment opportunities and using the secondary market to meet their allocations. cont. overleaf

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35 03/05/2016 09:16

PRIVATE EQUITY

cont. from page 35

“The majority of GCC private equity companies are currently investing in the broader Middle East and North Africa region. They are also focusing primarily on medium- to large-sized enterprises—in an effort to minimise risk. In parallel, assets are increasingly being offered to multiple private equity investors—a move that helps boost competition and reduce the likelihood of proprietary deals,” stated Khalil.

By region, Bain reported 2015 buyout activity grew in North America, largely reflecting stronger economic fundamentals in the US, but dipped in Asia and Europe. Reported buyout deal value totalled $282 billion globally—the strongest year since the global financial crisis—as dry powder increased to a near-record $460 billion. Asset valuations, already high as 2015 began, rose to 10.1 times EBITDA in the US. The aggregate value of buyout-backed exits came in slightly below the record $456 billion posted in 2014. But with $422 billion in realisations and 1,166 deals reported at year-end, asset sales were just shy of their all-time peak.

Exit activity was vibrant in all regions around the world, led by a healthy North American market, where buyoutbacked exits hit $223 billion. Exits in the Asia-Pacific region came in at $85 billion, in line with the region’s performance over the past five years.

Even in Europe, beset by sovereign debt and currency woes, general partners pulled in $143 billion in asset sales—an amount surpassed only twice over the past 20 years, in 2014 and in 2007, the peak of the last private equity cycle.

Yet, Bain conveys that this continues to be a tough deal environment. Dry powder and the need to put money to work is creating increased competition between funds for new deals. On top of this, corporates are using lower capital costs to fund a mergers and acquisitions boom and vying with

36 page 34-37 Private Equity.indd 36

The private equity market in the Middle East need to continue to serve as a source of funding for international private equity funds. They must increase their local activities based on changing economic conditions –as this will help generate deal flow.

- Ihab Khalil, Partner and Managing Director at Boston Consulting Group Middle East

funds for new deals. As a result of this intense competition, multiples are at all-time highs in the US and near highs in Europe, exacerbated by some turbulence in the debt markets, particularly towards the latter half of the year, as spreads increased and some deals struggled to secure fundraising.

“Most investments have relatively limited scale and therefore offer the opportunity for integration through acquisitions in adjacent segments or across the value chain. Today, buyand-build deals—in which a private equity firm buys a company and then builds on that ‘platform’ through addon acquisitions—can both accelerate revenue growth and drive margin expansion by realising synergies. More specifically, buy-and-build acquisitions offer the chance to quickly expand markets within the GCC and wider MENA region,” added Khalil on the noticeable preference for buy-and-build acquisitions over the past few years.

ISSUES AND CHALLENGES

Khalil is of the opinion that region’s private equity sector is rife with challenges. “GCC nations have limited deal flow as well as legal limitations.

In addition, potential target companies

need to spearhead efforts to improve governance and enhance transparency levels. Lastly, there is a lack of scale for private equity investors to specialise and develop sector-specific strategies,” he explained.

With today’s favourable fund-raising conditions expected to slow in the next few years, and in line with the issue Khalil highlighted, Bain urges firms to prepare now for future turbulence by investing in differentiation and value creation across their portfolios.

General partners will need to be able to demonstrate to limited partners that they have a sharply honed and differentiated strategy for achieving superior performance. Limited partners will also shift their priorities with many increasingly looking to concentrate their investments in a smaller number of top performing funds. More than ever, a strong strategy will be important for fundraising as the supply and demand balance shifts back to limited partners.

Hugh MacArthur, who leads Bain’s Global Private Equity Practice, cautions that as the industry tries to find value in investment opportunities with stubbornly high prices and return thresholds, repeatability will play a key role in post-close activism, helping to realise more value from a deal, even once it is complete.

“It used to be that you could take the deal model, trim it by 15 per cent and still wind up with a reasonable return.

Today, the need to transform the value of the assets is more acute than ever— sometimes you need to get the year five number in year three to realise an attractive payoff,” said MacArthur.

MOVING FORWARD

“While there are potential opportunities in the privatisation process, these would most likely be accessible only to the top five GCC private equity companies and international companies. Moreover, local infrastructure projects—set to

www.bankerme.com

04/05/2016 14:22

New oil price levels will certainly have some impact on private equity activity: some deals will be delayed, but we will also see more opportunity to invest counter-cyclically, which is imperative to managing portfolio companies with stringent value creation approaches.

- Gregory Garnier, Partner at Bain & Company Middle East generate $300-500 billion in the next three to five years—could open up more avenues to stimulate private equity activities. Succession handovers in family conglomerates may also provide carve-out opportunities. And, lastly, the increasing financial distress of large conglomerates might lead to the sale of assets to obtain liquidity,” said Khalil providing his opinion on opportunities available for in the Middle East.

Commenting on alternative investments in the GCC and the appetite surrounding it, Khalil explained that given the specific shareholder structure in the region— and with many holding a controlling stake in their company—it will take some time for hedge fund activism to sweep the Middle East.

Bain on the other hand, anticipates that recent investment activity, far below that of the peak period between 2005 and 2010, will lead to a falloff in exit activity over the coming five years and smaller cash distributions flowing back to limited partners. This period of ‘normalisation’ follows two massive deal spikes in 2006 and 2007, which the industry has finally digested.

Within the next 10 to 20 years, the industry can expect more of a readjustment. It is likely that third and fourth quartile funds will find it harder to raise money. Particularly in developed markets, the challenge for private equity funds will be to understand—before they buy an asset—what they can do with it,

particularly amid dense competition.

If they cannot dramatically influence a given asset, private equity firms are unlikely to realise attractive returns on their investment.

Bain believes that the time for private equity firms to prepare for a downturn is before the storm hits. Portfolio assets acquired within the past two or three years are particularly susceptible to buffeting by economic turbulence.

Purchased at prevailing high multiples and under sunny economic skies, many of these holdings were set up for exit sooner rather than later. General partners that remain stewards of their assets for longer than they had expected will want to weigh how best to insulate

them from economic headwinds and to set them up to prosper when conditions improve.

“The onus will be on general partners to outperform their peers.

This will cause a renewed requirement for strategy. You can’t do that in the moment, when it happens. You have to put it in place now,” said MacArthur.

“The private equity market in the Middle East need to continue to serve as a source of funding for international private equity funds. They must increase their local activities based on changing economic conditions— as this will help generate deal flow.

Only professional private equity firms with a clear value creation model can succeed in doing this. On a final note, as local private equity funds seek incremental returns in an increasingly competitive environment, they will need to raise their game on operational improvement and optimise their portfolios—extending their capabilities beyond their traditional core expertise as several global leading players have already done,” said Khalil.

Bain & Company’s recommendations to sustain positive market momentum in the future:  First, some firms are sharpening their focus on their investment sweet spots, enabling them to zero in on deals with characteristics that best match the firm’s unique strengths, capabilities and past patterns of success.  Second, other private equity firms are developing thematic investment insights to capitalise on broad macro trends and gain an investment edge.

They are applying their in-depth understanding of key trends to identify and evaluate businesses and sectors that will see long-term sustainable growth.  Finally, more PE firms are mobilising their talent and resources to develop repeatable approaches for creating value across their fund portfolios. They are adopting value-creation models that reflect their firm’s unique philosophy and distinctive investment preferences while ensuring that their methods for enhancing the value of their portfolio companies are consistent and focused.

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37 04/05/2016 16:48

PENSIONS

Working towards a functional scheme Marcus Gent, Managing Director of Middle East and RTW at Friends Provident International discusses the pensions landscape in the GCC

W

orking in a region without formal pension arrangements for expatriates means people have to take personal responsibility for their financial future, and to make adequate provision for a comfortable retirement. According to the EY Wealth and Asset Management Report 2015, public pension funds across the GCC amount to $397 billion, representing nearly a quarter of GDP and $15,000 per national.

These figures are actually relatively small compared with employerprovided pension funds in the UK, for example, where these assets are larger than GDP and funds per individual are nearly four times the GCC average.

The International Bank for Reconstruction and Development (World Bank) has previously recommended the establishment of a pension fund for expatriate employees in the UAE. These recommendations were made in a study by the bank at the request of the Department of Economic Development in Dubai

38 page 38-40 Pensions.indd 38

Public pension funds in the GCC amount to

Marcus Gent

$397billion $15,000

representing nearly 1/4 of GDP

and

(DED). The report said that such a pension fund would ‘revitalise business in the UAE’. It is interesting to look at the situation throughout the region to give context to what the DED in Dubai is trying to achieve.

Citizens of non-GCC countries, such as Egypt and Lebanon, have been familiar with the concept of their government making provisions for the retirement of their public sector employees since the middle of the last century. Civil servants were satisfied with the generous pensions and retirement packages afforded to them by the state.

per national

This changed in the 1990s when multi-national companies started operating in these countries. The new generation was keen to work in the private sector and for the most part, the benefits packages were better than those enjoyed by the public sector workforce. However, with the combined effects of inflation and a rising cost of living, coupled with a lack of retirement planning experience and the prevailing ‘live for the day’ attitude, very few people took a long-term view and made suitable provision for their retirement. cont. on page 40

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14/04/2016 13:03

PENSIONS

cont. from page 38

An absence of social welfare and a negligible state pension means that many are living out their retirement years in near poverty.

In the GCC, people working in the public sector—and to a certain extent the private sector—rely on support from their governments to subsidise their lifestyles. For example, in the GCC, governments have been known to settle the debts of local nationals to the tune of several hundred thousand dirhams. Coupled with very generous state pension provisions, there is little compulsion for the younger generation to manage their finances appropriately and to plan for their long-term future.

At the other end of the scale are the expatriate workers. For many of these people working in the GCC, end-ofservice benefit—or gratuity—is their only form of saving for retirement.

This is capped at a maximum of two years’ salary, which is very unlikely to be anywhere near enough to secure a comfortable retirement.

Indeed, according the EY report, there is a growing recognition amongst many employers that end-of-service benefit (EoSB) payments received by expatriates are neither adequate nor suitable as an alternative to a pension. This is leading to growing interest in enhanced EoSB schemes and international pension plans.

Of course, most expatriates have to leave the country when they reach retirement age, meaning they have to return to their home country—or to another country—where any state provision for retirement is basic to say the least, and unlikely to be nearly enough to maintain their current lifestyle in retirement.

For example, in the UK and Europe, state and private pension arrangements are coming under severe pressure, not just from inflation and the high cost of living, but from the demographic down curve, meaning there is mounting

40 page 38-40 Pensions.indd 40

The lack of formal pension arrangements for expatriates in the GCC is a definite problem, as many will not be eligible for state pensions in their home country, especially if they have been working overseas for a long time.

- Marcus Gent

pressure on fewer young people, who are working to support an increasingly ageing population in retirement.

The lack of formal pension arrangements for expatriates in the GCC is a definite problem, as many will not be eligible for state pensions in their home country, especially if they have been working overseas for a long time. The issue may be addressed at some stage in the future with the introduction of a formalised pension scheme, but in the meantime it would seem that the only option available to expatriates planning for retirement is to take control of their financial future.

More and more expatriate workers in the Middle East are realising that unless they take personal responsibility for ensuring they have a comfortable retirement, their future could be fairly bleak. The importance of taking appropriate financial advice cannot be understated. It is incumbent on the life insurance industry as well as financial advisers to educate the population on the benefits of investing appropriately for a comfortable retirement.

So, what options does the average expatriate worker in the Middle East have for saving for retirement? One solution could be to effect a unit-linked regular savings plan. Such savings plans can typically run for up to 25 years, which gives the investor plenty of time to accumulate a significant sum, which in turn could be used to purchase an annuity or other income producing assets.

One of the key benefits of saving regularly is that the peaks and troughs in the performance of the underlying investments are smoothed out over time, leading to potentially better returns—this is known as unit cost averaging. Investors usually have a choice of many funds linked to these savings plans, and can choose the ones that are a good fit with their investment philosophy, geographical investment preferences, their attitude to risk and their investment time horizon.

These types of regular savings plans are distributed by life insurance companies through banks and financial advisers. Different distributors cater for the various demographics in the region and this means that any cultural or language concerns can be addressed, and the investor’s goals are understood.

The UAE is a fantastic destination for expatriates of all nationalities to live and work. The introduction of a formal pension scheme for expatriate workers would encourage more people to be part of the country’s exciting future. Until such a time as a pension scheme is introduced I suggest that expatriate workers in the GCC do not hold off on making provision for their retirement. The cost of delaying investing in an appropriate savings plan means that investors need to save much higher amounts of money over a shorter time period to achieve the same investment goal.

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02/02/2015 09:51

PENSIONS

Inculcating positive change Massi Markus, Partner and Managing Director at Boston Consulting Group Middle East highlights the importance of both public and private pension schemes for the region

W

hat are your views on both public and private pensions in the GCC region?

How would you describe its development and what is lacking in the current system?

What are the challenges?

First and foremost, there is the lack of voluntary pension schemes. Then, you have the fact that there are issues with adequate pension coverage following certain life events, including studies, pregnancy etc. Moreover, across the region, pension systems with defined benefits typically provide benefits that exceed international benchmarks, which, again, leads to widening imbalances between assets and liabilities. cont. on page 44

42 page 42-44 Pensions.indd 42

The private pension system in the GCC is still underdeveloped.

(Photocredit: Green Apple/Shutterstock.com)

Today, across the GCC region, we have public pension systems in place with defined benefits; however, these are relatively rigid and often lead to imbalances between asset and liabilities.

In addition, the region’s demographic shift and ageing population is currently putting additional strain on and threatening the long-term sustainability of defined-benefits pension schemes. In the GCC, the private pension system is still underdeveloped, especially on the voluntary side. While some corporate schemes are available for those working in large corporations, GCC governments are almost entirely responsible for financing pensions.

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PENSIONS

cont. from page 42

Lastly, in this part of the world, expatriates—who currently make up a significant segment of the population and workforce—are not covered by any major pension schemes. This is certainly problematic for all parties involved.

Across the GCC, there is a strong need to reform existing public pension schemes to guarantee longterm sustainability. It is also imperative to introduce and support the shift towards voluntary saving schemes—so pension plans can be maintained in the long term.

- Massi Markus, Partner and Managing Director at Boston Consulting Group Middle East

What are your suggestions to further propel the functionality of the region’s pension system— both private and public?

There are three ways that GCC governments can help bring to life robust public and private pension systems. First, they can introduce or increase voluntary savings and devolve the funding responsibility to private citizens. Secondly, they can create a balance between pension contributions and liabilities—to drive long-term sustainability even amidst changing demographics. Thirdly, they can offer pension coverage to large parts of the workforce currently uncovered, i.e. expatriate workers.

These include managing voluntary saving schemes; managing corporate pension schemes; and providing asset management services as an outsourced provider for pension funds.

What is your outlook on pensions in the region in the next few years and what should the market be weary of moving forward?

Across the GCC, there is a strong need to reform existing public pension schemes to guarantee long-term sustainability. It is also imperative to introduce and support the shift towards voluntary saving schemes— so pension plans can be maintained in the long term.

Which areas of pensions do you see opportunities for banks, wealth management firms and insurance companies to tap into?

There are three key areas ripe with opportunity that they can tap into.

Massi Markus, Partner and Managing Director at Boston Consulting Group Middle East

Estimated assets (for mid-2015) Figure 5: pension estimated fund pension fund assets (for mid-2015) US$b

% of GDP

US$ per national

% invested in local equities

% share of equity market

Bahrain

11

32%

18,000

19%

13%

Kuwait

65

38%

52,000

6%

4%

Oman

12

15%

6,000

22%

10%

Qatar

14

7%

51,000

70%

6%

270

36%

13,000

24%

12%

UAE

25

6%

24,000

3%

1%

GCC

397

24%

15,000

21%

8%

3,309

116%

55,000

5%

5%

Saudi Arabia

UK (employer)

Sources: Towers Watson, IMF, Bloomberg and national stock market, EY.

Source: Towers Watson, IMF, Bloomberg and national stock market, EY.

Across the GCC, EY estimates2 that public pension funds amount to US$397 billion, representing nearly a quarter of GDP and US$15,000 per national (see Figure 5). Just over one-fifth is 44 invested in localwww.bankerme.com equities. The size of the funds is relatively small compared with employer-provided pension funds in the UK, for example, where these assets are larger than GDP and funds per page 42-44 Pensions.indd individual44are nearly four times the GCC average.

Saudi Arabia naturally has the largest pool of pension assets — but the level per national is the second-lowest after Oman. Assets are split between the Public Pension Agency (for public sector workers) and the General Organization for Social Insurance (for private sector workers). The two often co-invest in companies together and alongside the Public Investment Fund. Aside from stakes in dozens of major listed companies, such as Saudi Telecom (14%) and Riyad Bank (26%), they also invest in private companies, such as ACWA

04/05/2016 14:32

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03/05/2016 17:07

WEALTH MANAGEMENT

UAE: key to GCC’s wealth Mohammed Bitar, Chief Commercial Officer at National Bonds Corporation, discusses the potential of the wealth management sector in the Gulf

H

ow would you describe the development of the wealth management and investment landscape in the UAE and the GCC region?

The development of the wealth management and investment landscape in the UAE and wider GCC region has witnessed a gradual evolution. The slow growth of the global economy and pessimistic forecasts have led to firm decisions involving responsible investments and wealth distribution to embrace all sectors and promising industries that are directly related to people’s needs including industrial and agriculture production, properties, technology, healthcare and education.

The plummeting oil prices reinforced the concept of responsible investment and diversification of the national economy. This could not have been achieved in the absence of entities specialised in wealth management that understand the nature of the challenges and growth imperatives. Investment decisions can no longer be individual decisions. The world has tried this option in the past and despite the huge amount of wealth invested, the global economy witnessed a severe crisis that affected

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Mohammed Bitar

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04/05/2016 12:02

regional economies in a domino effect.

Today there is a growing hesitation with regard to investing and operating wealth given such shifts and volatility, but at the same time there is a greater need for this wealth in order to propel the economy in the GCC countries.

The reluctance to invest can lead to recession and affect the nature and stability of prevailing social patterns.

The current changes have matured the perception towards wealth management and prompted the owners of this wealth to seek the expertise of funds and companies that have a clear understanding of the economic growth landscape. Wealth management experts can employ this wealth in the right places to avoid risk and ensure the greater interest of the public as well as individual investors.

globally, we expect this form of wealth management to become a leading financial service industry in its own right in the near future.

Thirdly, falling oil prices have made investments in non-oil sectors the perfect alternative to maintaining a stable gross domestic product, while driving growth and achieving sustainability.

Fourth, the global recession drove overseas investors to channel their money towards the region’s markets, boosting the ability of these markets to achieve overall competitiveness.

Likewise, many of the world’s richest people were drawn to invest in the GCC markets that had proven their flexibility and resilience during previous crises.

Fifth, the increased awareness of the importance of savings and responsible low-risk investment continues to drive

What would you say are the growth drivers of this development?

Wealth management companies need to convince the public that dwindling oil prices and the global recession should drive them towards investing in safer sectors through low risk products rather than refrain from investing.

The main driver is the growth of private wealth in the GCC region.

Unlike the global economy, the income rates in the GCC region are highly stable and the regional economy is largely an active one. Private wealth in the region increased by 11.6 per cent and reached $5.2 trillion in 2013.

Experts forecast this growth to bypass the $7.2 trillion mark in 2017, which constitutes 3.6 per cent of the total global private wealth. It is worth noting that 30 per cent of this wealth resides in the UAE. This growth is driving a corresponding surge of wealth fund management in the region and encouraging the creation of multiple tools and mechanisms to attract customers.

The second driver is the high demand for wealth management funds and companies that offer Shari’ahcompliant consulting and financial products. With the Islamic economy continuing to register a healthy growth

sustained drive towards responsible and Shari’ah-compliant products in line with government strategies. Affluent families in the region have been a key driver of this demand for wealth management.

They traditionally retained a significant portion of their wealth in conventional banking accounts but have realised the importance of investing and managing a large percentage of this wealth. However, much still needs to be done. We believe a considerable proportion of manageable wealth has not been invested and still remains in the form of deposits or banking accounts. This situation though is temporary and likely to change.

The second source of wealth is the investors with small to medium wealth reserves that seek Shari’ah-compliant wealth management products. Islamic assets under management worldwide

- Mohammed Bitar

the accumulation of private wealth as seen in the above statistics. According to the opinion of a majority of regional investment experts, this wealth is expected to play a significant role in the long-term financial stability of the region. Individuals and organisations have learnt some hard lessons from previous experiences and realise the relative merit of putting their money in different baskets or diversifying their investments.

Is there a demand for wealth management products in this region?

Yes, the demand is growing. We believe that with growing awareness of wealth management, there will be a

are likely to grow to $77 billion in 2019 from the current $60 billion. However, this remains only a tiny fraction of the $2 trillion global wealth fund pool.

Private wealth held by the ultra-high net worth (UHNW) segment is set to soar by an impressive 21.1 per cent by 2019. This translates to around $2.5 trillion of Islamic assets that owners will wish to manage according to Shari’ah principles. So far there are $30 billion in assets invested while $100 billion still needs to be effectively invested.

What are the challenges faced by wealth management firms?

The biggest challenge lies in the way the global economy is perceived and analysed. Wealth management cont. overleaf

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47 04/05/2016 14:35

WEALTH MANAGEMENT

cont. from page 47

companies need to convince the public that dwindling oil prices and the global recession should drive them towards investing in safer sectors through low risk products rather than refrain from investing. This alone will ensure the sustained liquidity of the national and global economy. The repercussions of their hesitation to invest will have graver global outcomes as a result of keeping this wealth away from investment markets.

Customer reluctance to invest is undoubtedly justified. However, the end result will highly depend on how wealth management companies approach this matter over a period of time. Wealth management companies should adopt transparent and responsible standards while offering their consultancy services in harmony with clearly defined growth imperatives.

Likewise, Islamic wealth management companies need to harmonise standardisation to achieve greater wealth management efficiencies and gain an edge in the competitive market.

The adoption of responsible investments is still slow but eventually the needs will define the means. Companies will be driven to develop their products and articulate their vision for future growth.

What kind of products does National Bonds offer and how have they performed over the past few years?

At National Bonds, our products are fully compliant with the ethical principles of Islamic Shari’ah. The company enjoys a strong legacy and track record of sustainable investment, savings and wealth management solutions. These differentiators have enabled the company to achieve growth across a decade and gain the trust of its customers.

Since inception, it has been our mission at National Bonds to protect and manage the wealth of both

48

UAE nationals and expats as part of our commitment to contribute to the national economy and support the country’s march towards a sustainable financial future. Our focus is to establish a diversified investment portfolio across various sectors that represent the real economy. We take care not to expose ourselves to high risk. We are proud that the company has achieved a great performance in terms of spreading awareness about financial planning, savings and responsible investments. The National Bonds portfolio has reached AED 6 billion and our customer base exceeds 815,000 savers and investors representing 200 nationalities.

Our Term Sukuk is among our most popular products. In 2015, the National Bonds three-year Step Up Bonds for savings of AED 50,000 and above offered four per cent annual returns, while the three-year Term Sukuk for the same amount provided three per cent annualised returns compared to 2.25 per cent offered on the two-year Term Sukuk. In terms of regular savers among expatriates and UAE nationals, National Bonds registered a growth of 82 per cent in 2015 over 2014.

This year we are focusing on Takaful. Based on the National Bonds Savings Index for 2015, 90 per cent of some 200 individuals in the UAE do not have a Takaful-based insurance.

We are committed to raising awareness of the benefits of Takaful insurance that articulate ethical Islamic values through shared risk. In 2016 we have also introduced Sanadi, the Shari’ahcompliant insurance tool that provides coverage of up to 100 per cent of the monthly salary, as well as protection for job loss, loss of life, permanent disability, critical illness and terminal illness. In addition, the programme also extends hospital cash benefits and covers for a second medical opinion.

What are the popular sectors of investment and which are the preferred destinations?

Real estate and equity remain the most attractive choices among investors but it is important to diversify investments across various sectors to avoid a concentration of capital in assets that are hard to liquidate as this will lead to recession and the slowing down of the economy.

At National Bonds, we believe our mission is to continue inculcating a culture of diversification and commitment to society and the national economy. We are confident that the new economic era needs a new culture to achieve economic and social development. Through ranking high as a preferred destination to work and live in, the UAE has emerged as an ideal investment destination.

The country today is leading the way in the region in shaping a sustainable post-oil economy.

What is your outlook on wealth management in the GCC region over the short term?

The UAE today holds 50 per cent of all wealth management funds in the GCC region. If we also factor in the growth of the Islamic economy and the UAE government’s efforts to diversify income resources and responsible investment, we can safely say that the country is on the right track to achieving sustainable development.

By nurturing innovation and embracing technology the UAE is taking the right steps towards achieving greater synergies between individuals and corporates in the private and government sectors.

Individuals and families alike need to contribute to this vision and proactively support the country’s journey towards sustainable growth and financial stability.

www.bankerme.com

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14/12/2015 08:47

ADVERTORIAL

‘Hands-on’ private equity reduces emerging market risk

By Chad P. Floe, Operating Partner and Managing Director, Corporate Finance and Youssef Haidar, Partner & Managing Director at TVM Capital Healthcare Partners

Private

equity in emerging markets such as the Middle East and North Africa region is almost all about driving the growth of young and promising companies, so investors must be prepared to roll up their sleeves and get involved in day-to-day operations if they are to be successful.

Because the private healthcare sector is still only just emerging as a force in the region’s economies, investment opportunities tend to be in companies that need growth capital and also expert support to professionalise. This is in contrast to private equity in many parts of the world, where investors can pick from a range of possibilities, including turning around failing firms, and financial restructuring.

As such, emerging market investors need to focus on how they can add value to a firm’s operations. And that means it is vital to be a specialist—to use sector expertise to promote efficiency, good governance and compliance, as well as to create new business opportunities.

At TVM Capital Healthcare Partners, for example, we have taken a methodical and detailed approach to investment. We have undertaken extensive research to identify gaps in emerging market healthcare provision, worked with government agencies to establish private sector licencing frameworks, and employed our global network and a strong ‘operations group’ to support growing businesses.

50 page 50 Advertorial.indd 50

Chad P. Floe

Youssef Haidar

TVM Operations Group is essentially an accelerator company of around 25 time-tested people that provides general management support. This includes providing management and strategy development, as well as back office services, such as legal, information technology, marketing, accounting, human resources.

Setting up this ecosystem is a significant investment in itself. But it brings huge value-creating benefits for the companies we invest in, and reduces risk for TVM Capital Healthcare Partners, our limited partners and our external investment partners and co-investors.

It means that in their early years, our portfolio company management teams are left to concentrate on doing what they do best—providing high quality healthcare services and aggressively growing the business. Access to part time resources and economies of scale at TVM Operations Group mean that each company can save time and costs, and still has access to and can employ high quality specialist skills.

Meanwhile, as investors, we have an excellent view on day-to-day realities and can help to find solutions to any issues the companies may face. This encourages good corporate governance across the company, which is highly valued, especially in an emerging market context.

When TVM Capital Healthcare Partners invested in the UAE’s long-term ventilated care company, ProVita International, Medical Centre, in early 2010, we started to put this system in place. TVM Operations Group supplied strategy advisory, interim management and back-office services in the early years, and later also helped to arrange international strategic partnerships with Spaulding Rehabilitation Network and Joslin Diabetes centre to help build a centre of excellence.

As the company grew and matured, it was able to take on more of the functions itself. So by the time TVM Capital Healthcare Partners exited in mid2015—through a sale to London-listed NMC Health Plc—ProVita had become a completely stand-alone, independent, strong and well-managed provider of high quality care.

TVM Operations Group is currently serving three portfolio companies in the Middle East and India, and will again be involved in many of our new investments, including in Southeast Asia. It is a vital part of our success as our hands-on strategies serve to mitigate operational and governance risks.

www.bankerme.com

03/05/2016 09:18

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03/05/2016 14:33

IN-DEPTH

Preparing for the future Hussain Al Qemzi, Chairman of Emirates Institute for Banking and Financial Studies discusses human capital competencies in UAE and the larger region

H

ow would you describe the current development of human capital in

the GCC?

With rapid growth and development of financial services in the region and the evolving nature of the regulatory environment, the range of banking operations has become vast and comprehensive. The emergence of sophisticated financial services in the GCC has increased the demand for qualified professionals with advanced competencies. We need students and working professionals to perform at required standards to serve the growth that is taking place across the region.

With the fast changing dynamics, we need to deepen professional skills to match the types of transactions that occur today—a different financial and transactional landscape compared to that of the eighties and nineties. We thereby need to bridge the gap from what we learn in academic school towards the demand of the market. Today, with rules, regulations, markets and product offerings changing so often, students who graduate are forced to revisit qualifications and upgrade their skills.

That being said, the GCC is continuously looking for methods to attract, retain and develop high-skilled

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Hussain Al Qemzi

talent by establishing educational centres of excellence and connecting academia with financial industry experts and employers. The UAE’s Human Resources sector, for example, has significantly grown over the years—now home to more than 500 human resource, consulting, recruitment, training and development institutions, which has also aided in continuous in-house training of banking professionals.

What are the challenges faced in developing competent talent?

One of the greater challenges is the gap between educational institutions and industry requirements. Education curricula often fail to incorporate the

dynamic demands of the industry. An additional challenge is to equip UAE nationals with the right skills and knowledge to pursue their ambitions.

There is a lot of competition from other sectors of the economy, including telecom, armed forces, energy, and government, for the same pool of graduates and professionals. A complex industry such as the financial sector is only for people who find themselves interested in the challenge. There is a huge potential and bright future for those willing to opt for the challenge.

In order to overcome these challenges, GCC governments can step up investments in hard skill education and research and development.

Moreover, to ensure a continuous supply of highly skilled banking and financial professionals, governments and institutions must collaborate to develop corporate financial education—both short term training along with long-term undergraduate and diploma degrees.

At Emirates Institute for Banking and Financial Studies (EIBFS), we bridge this gap by continuously tapping into and understanding the current requirements of the banking and financial services sector through our human resource advisory committees and focus groups. There is a human capital shortage in all areas of the banking sector, particularly in corporate banking. EIBFS, for example, offers a comprehensive training programme with short-term training courses designed to meet the requirements of the financial industry. At times partnering with international institutions and local banks, the training courses range from leadership development to risk management and compliance, marketing, treasury and capital market programmes.

What are the opportunities currently available in the market?

As you know, our market predominantly comprises of commercial banks which are divided into conventional and Islamic cont. on page 54

www.bankerme.com

03/05/2016 09:20

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North America 1605 Plaza Five, Harborside Financial Center, Jersey City, NJ 07311 Office +1 201-258-3788

Latin America Gmo. González Camarena 1450 P-7 Santa Fe, Mexico, D.F., 01210 Office +52 (55) 1105-0536

Middle East and Africa 33rd Floor, HDS Business Centre, Cluster M1, JLT, Dubai, UAE. PO Box 487282 Office +971 (0)4 364 1213

03/05/2016 12:04

IN-DEPTH

cont. from page 52

banks. The Islamic banking sector is growing faster than conventional banks and according to a recent analysis by Tahseen Consulting, 7,800 new jobs were created in Islamic banks in 2015 with 500 job openings in other Islamic financial services.

With the UAE looking to become the centre of innovation and a global hub for Islamic finance, along with its large scale global projects, such as Expo 2020, it is but obvious that there will be growing opportunities for various sectors, including banking and financial services.

At a Career Fair organised by EIBFS in March, a majority of UAE’s banks were looking to recruit fresh graduates for various entry level positions in branch operations and customer services.

We were able to connect around 250 junior and senior candidates with UAE’s largest banks.

What is your outlook on human capital in the region over the next five years?

As our economy and industry becomes more sophisticated, addressing a greater demand would be the challenge in the years to come. The size of our economy is bigger than our actual population in terms of the number of citizens. Therefore, we still acquire talents from outside the country to fill this gap. Unless you reach a level where you can really have the home-grown talent to harness these skills locally, we will still need to import talent.

There are certain skills that need to be developed here. Many UAE nationals aspire to develop a career in banking and finance, but do not have the opportunity to take up these positions or advance their career due to competing international talent in the region. With this growing frustration, many nationals have opted to leave the industry and find more suitable positions elsewhere.

54 page 52-54 In Depth.indd 54

EIBFS was set up in 1983.

As I mentioned earlier, in the financial industry, there is a substantial opportunity in the Islamic sector for talented and hardworking individuals to make a mark. Islamic banking is a tremendously fast growing space and hence, the Islamic finance education is poised to become a significant and sizeable market. Given this scenario, EIBFS aims to qualify nationals and enable them to take up various junior to senior level positions in the UAE. Institutions like EIBFS should partner with the industry. We are increasingly doing that with all banks in the UAE. Training and academic institutions need to expand their curriculum by collaborating with industry professionals and developing truly attractive and relevant programmes for professionals seeking to pursue and advance their career. A system that would encourage greater cooperation with the industry, EIBFS intends to establish a corporate education degree for professionals who want to further their education while working full-time.

Critical areas in the region, such as research and development, need to be enhanced to secure the continuous growth of the industry. An institution like EIBFS plays two integral roles: 1) to provide research on the gaps in the industry and analysis on how to improve the industry based on an organisation’s present capabilities, and 2) disseminate this knowledge back to the industry. I look at it as a continuous circle of knowledge. The market is constantly evolving and ahead of the game, which is why vocational training and academic institutions must continue to align their curricula with industry requirements.

Finally and importantly, we need to continue to examine and analyse the industry and evolve into a modern landscape that communicates the language of the youth. I firmly believe it is necessary to keep pace with technology, especially mobile technology, as it will continue to modify the business.

www.bankerme.com

04/05/2016 14:40

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S W I T Z E R L A N D 14/04/2016 13:02

IN-DEPTH

SAIB’s brand remains a priority for 40 years.

Reaching the masses Ishraq Mohammed Al Thebiani, Assistant General Manager of Corporate Communications at The Saudi Investment Bank, discusses marketing and communication strategies

W

hat are your views on the marketing trends currently present in the banking industry?

The use of digital marketing using social media channels, including SMS messaging, continues to grow as the major marketing trend within the banking industry; this means of communication is preferred based on its cost effectiveness, ability to measure views and can be targeted to all or selected segments based on the message.

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What would you say are the best strategies for marketing in the banking industry?

The Middle East has one of the highest penetrations of users who use social media as a means of communication and for information gathering. The days of banks using TV, radio and print material to communicate with their customers has shifted to digital communications. Handheld devices [mobile and tablets]are in the hands of the majority of the population and the best strategies to use is via social media.

The percentage of customers who apply for a financial products via mobile will also grow as more banks support this option for mobile-savvy consumers. The key will be to combine customer analytics with mobile delivery to drive sales.

What are the challenges currently faced in marketing for the banking sector and how would you suggest to address them?

Digital disruption has impacted the banking sector and financial services industry on a global basis. While most disruptors are smaller niche players that won’t grab substantial market share from traditional banks, they still threaten profit margins by gaining small market share which was not a threat previously. The biggest threat is that banks lose their daily connection with consumers and businesses and the flow of customer insights slow down.

How important are loyalty programmes to a financial institution?

Loyalty programmes are indeed a very important tool for both the retention and acquisition of customers. Loyalty too allows for further branding awareness. cont. on page 58

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IN-DEPTH

cont. from page 56

As banks compete for market share and to meet the demands of it customer segments a well-managed loyalty programme with a long term strategy is vital to ensure cost-optimisation.

What are the trends in CSR programmes in the region?

As CSR activities continue to become more important to the wider population as it relates to national and global agendas the era of pure donations has shifted to that of a more strategic and sustainable approach to CSR activities.

A fundamental framework towards sustainability activities anchored to agreed principles allows for focus.

Trends are related to customer service, staff well being, activities of the bank and are in turn related to environmental, investment in business involved in environment friendly activities, community investment and stakeholder engagement on ‘materiality assessment’—the process of identifying those issues that are at the core to the bank’s sustainable development. These are all important to us as it allows focus for reporting and informs our strategic approach.

How does the bank choose which CSR initiative to pursue?

Our sustainability framework represents the integrated approach we are taking to make our business more sustainable. The bank has identified five priority areas to organise our approach, tied to Islamic principles of good governance and management.

The framework has been developed in alignment with our business strategy and our most material sustainability issues; the five areas shape the development of our sustainability strategy. The Saudi Investment Bank [SAIB] has a significant opportunity in its ability to contribute to and shape sustainable development. As a bank, we play a fundamental role in

58 page 56-58 In Depth.indd 58

society. We catalyse economic growth and stability by facilitating the flow of finances in society. We also have the power to influence the direction of that growth so that it becomes more sustainable, accessible, and inclusive, through the design of our products and services and the projects and businesses we choose to finance.

As earlier stated, our approach to sustainability centres on the five focus areas of our sustainability framework that capture our most material sustainability issues. The annual identification and prioritisation of our material issues is informed by frequent dialogue with our stakeholders.

ranking in the banking sector across social media channels in relation to the number of customer interaction is has achieved—likes, clicks and views.

What other social media initiatives do you have planned for the bank?

Content aligned to the targeted audience linked to ongoing engagements are vital for all current and future initiatives using social media. Strategically the bank remains a step ahead and vigilant in terms of the new trends and demands of or exiting and potential customers using social media channels.

The biggest threat is that banks lose their daily connection with consumers and businesses and the flow of customer insights slow down.

- Ishraq Mohammed Al Thebiani, Assistant General Manager of Corporate Communications at The Saudi Investment Bank

We strive to build lasting, trusting relationships through an open and constructive dialogue and by considering stakeholders’ views when we make decisions. We also seek to provide timely, reliable and fact-based information about ourselves, the financial sector and the economy so that our stakeholders have an informed basis for their views and decisions.

Describe the importance of social media interaction for the bank?

A focused approached linked to a strategy is important to achieving success using social media. Based on this approached these channels have proved a huge success for the bank.

We continue to retain the number one

What is your vision and goals in developing’s brand?

The brand remains at the heart of the bank’s 40-year success. One of our key initiatives, which formed part of our five-year strategic plan, was to assess our brand and its positioning for the future. Linked to a new vision and mission and through a thorough process, which started in 2015. In April this year, SAIB launched its new and revitalised brand as well as its brand guidelines in alignment with the five year strategic plan. Our vision is to offer the simplest and most accessible products and services to each of our customers and our brand will continue to support this vision in the near future.

www.bankerme.com

03/05/2016 09:20

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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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03/05/2016 12:02

The race towards digital universality

The omnichannel experience gives consistency in the capability to provide the same level of services across all platforms.

(Photocredit: PopTika/Shutterstock.com)

TECH FOCUS

Franky Van Damme, CEO of CR2, discusses the importance of an omnichannel experience in the banking industry

D

igitisation in the Middle East has taken on a new level, moving faster than expected. In the coming years, the banking landscape across the region is projected to become more digital and receive competition from the non-financial sector, particularly from companies such as telecommunications providers and retail startups, as commerce moves from physical transactions to

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mobile transactions. Banks used to own the payments industry however this function is now shared with third party providers and intermediaries. “Middle Eastern banking markets right now, much like those throughout the globe are going through a time of change. With huge advances in technology comes the possibility to service customers in a convenient and cheap way, but banks need to be

wary to also use these channels wisely to maintain and enhance customer relationships,� said Franky Van Damme, CEO of CR2.

The employment of an omnichannel system can bring great benefits to the financial industry. At the core of its business, CR2 claims to be a true omnichannel provider, having created an integrated platform that provides a consistent experience across all channels. cont. on page 62

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C C C M M M Y Y C Y CM CM M CM MY MY Y MY CY CY CM CY CMY CMY MY CMY K K CY K CMY

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TECH FOCUS

cont. from page 60

Providing opinion on the Middle East market, Van Damme said that although they are relatively up-to-date with banking technology, financial institutions across this region do not utilise these systems to their full capabilities. Some manage to provide more functionality on one platform—for example, the website compared to a mobile application.

The aim is to be consistent in the capability to provide the same level of services across all platforms.

The omnichannel experience seeks to provide the perfect customer experience, presenting a true continuity of interaction that is effective and seamless while creating an ongoing dialogue with customers. Other aspects that should be a focus is brand elevation, differentiation, and advancement.

Banks should aim to give customers

Franky Van Damme, CEO of CR2

Middle Eastern banking markets right now, much like those throughout the globe are going through a time of change. With huge advances in technology comes the possibility to service customers in a convenient and cheap way, but banks need to be wary to also use these channels wisely to maintain and enhance customer relationships.

- Franky Van Damme

a universal channel and continuous customer experience. Apart from that, brand differentiation should also be reflected in the institution’s product and service mix as well as distribution. This can be done through pricing and loyalty strategies, marketing and advertising, including via social media platforms.

“With continued customer migration away from branches, the Middle East is one of the few banking markets who are continuing to invest in bricks and mortar branch networks. These branches are often seen as brand builders but with the topic of enhancing convenience for the customer high on

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the agenda of most banks in the Middle East is it important to find a balance between managing the digital and physical channels,” stated Van Damme.

Digital development is also the ability to identify customer patterns, in terms of the services that a particular customer frequently uses and being able to personalise and provide the customer the services he/she needs.

This addresses one of the main themes in the banking industry this year, which is customer centricity.

“With investment in technology only set to rise for the foreseeable future, banks need to be mindful of investing

their money the right way. As customers, whose expectation from their bank are higher than ever before, are migrating towards digital, banks need to be able to reach out to them and offer the personalised customer experience once seen only in the branch,” he added.

To do this, Van Damme believes that data is key. Banks are urged to harness the data they already have by using an integrated approach like omnichannel to manage their entire self-service network. By taking this 360-degree view of the customer which can come only from an omnichannel strategy, banks can offer their customers a consistent experience across all channels, whether digital or physical.

“Giving them the convenience they demand as well as letting them bank their way, will allow banks to make strides in addressing the main trends of digitisation, enhancing convenience, emerging mobile payments and the emphasis on building customer engagement we are currently seeing in Middle Eastern banking markets,” said Van Damme.

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TECH FOCUS

Transaction, interaction, convergence Kazem Aminaee, CEO and President of Spire Payments discusses how the point of sale industry has developed since its inception, what lessons have been learnt, and what the future holds.

K

azem Aminaee has and still continues to be a name synonymous with the card payments industry. FrenchIranian by origin, Kazem has more than 30 years of experience in electronic payment, ATM and smart card disciplines and was formerly President of Hypercom Europe, Middle East and Africa where the business saw unprecedented growth under his tenure. Today Kazem is CEO and President of Spire Payments, a business created in 2011 thanks to a private equity purchase of Hypercom’s UK and Spanish operations, a legal stipulation during Verifone’s acquisition of Hypercom.

Having just celebrated five years of trading, Spire Payments is now recognised as one of the industry’s leading payment solution providers in the FinTech space.

The solution portfolio has grown rapidly to encompass traditional point of sale (POS) terminals, mobile POS (mPOS) devices, PIN pads, payment applications,

64 page 64-66 Tech Focus.indd 64

terminal management systems, network access controllers, managed services, and a variety of other POS-related solutions. Now serving over 25 global markets, Spire Payments is ranked as the third largest POS provider in Europe (Nilson Report 2014), and has gained significant traction in the Middle East.

Spire Payments’ MEA division offers a complete range of best-in-class payment solutions, with a central sales and marketing office located in Dubai, and a regional software development, technical support, warehousing, distribution and repairs facility in Jordan.

This success story has been built on a very simple philosophy: understand the needs of the market and deliver solutions meeting these requirements efficiently and cost-effectively. This is not rocket science but the payments industry is littered with ‘winning’ solutions which have been anything but. However, from failure many lessons can be learnt.

Kazem Aminaee

How will the payments landscape develop in the next 10 to 15 years?

What are the challenges and why does it need to change? Having personally been involved in this industry for over three decades, I do not consider these questions to be new. They have been asked many times, and the answers to date have delivered a slow-moving landscape with many false starts, explained Aminaee.

I can easily recall many attempts at developing new payment solutions, most notably biometrics, electronic purse and early eCommerce solutions.

There was one common theme: they all failed. Why did they fail? Firstly, they did not deliver any perceived value to the cardholder or merchant.

Secondly, competing standards confused the landscape and inhibited adoption.

Finally, solutions relied on technologies in their infancy. In summary, solutions were driven by emerging technologies rather than meeting a need. cont. on page 66

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TECH FOCUS

cont. from page 64

So what technologies have been successfully adopted in the payments space? Only one contender comes close: EMV chip and PIN. Initiated in 1995, the need to reduce fraud was clear.

Twenty years on, however, and only 33 per cent of global MasterCard and VISA transactions are EMV. That is enough of the past let’s focus on the future. Although the payment landscape has not evolved significantly in the past 20 years, the dynamics have recently changed with the arrival of digital giants: Apple, Samsung, Google (Apple Pay, Android Pay, Samsung Pay).

But are they going to significantly change the landscape in the next three to five years? There is no doubting many new innovations are entering the market but again are they driven by technology or need? One thing is for sure, the landscape is more complex than ever before. There is, however, light at the end of the tunnel.

Let’s take an example: mPOS. Unlike previous innovations this solution ticks many boxes. The smartphone is the catalyst that has singlehandedly changed the technological landscape due to capability and market penetration (two billion devices globally) and the payments industry has found a way to leverage its capabilities through mPOS. The opportunity referred to as the long tail is the untapped silent majority of small, cash-centric entrepreneurs who could double or triple card acceptance overnight by leveraging a micro merchants’ smartphone to create a payment environment. As for the need, this bridges merchants of all sizes. The long tail may not yet have ripened into the promised winning business model for payments, but the mPOS solution has morphed into an enabler of convergence between e-Commerce and traditional POS using beacons, location-based services, couponing, loyalty, etc. Success has been environment specific: emerging markets have seen increased promotion of card acceptance; developed markets

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Emerging markets have seen increased promotion of card acceptance; developed markets have seen an explosion of solutions allowing merchants to exploit new technologies to help streamline their businesses.

- Kazem Aminaee, CEO and President of Spire Payments

have seen an explosion of solutions allowing merchants to exploit new technologies to help streamline their businesses. As for speed to market, the very nature of the smart mobile environment has seen solutions rapidly come to market in just 12 months and be openly available on cloud-based servers.

This is the first time the payments space has truly capitalised on the convergence of technologies previously exploited by the telecoms industry. It is the first step in the new journey for payments. The ability for these smart

platforms to communicate anywhere, anytime and over multiple networks has allowed payments to become accessible and acceptable to all. This philosophy is echoed in our strapline: ‘Transaction. Interaction. Convergence’ Looking further towards the horizon the vision becomes foggier. Technologies such as block chain, digital currencies and artificial intelligence could well play a role in the payments world of the future. But are we falling into the same trap as in the past?

There is an expectation that all things will become connected (internet of things) which will allow objects such as handbags, watches, toasters, etc., to be controlled by cloud-based software solutions. However, can the current telecoms infrastructure reliably and securely support such demands?

Imagine a voice command to your mobile phone seamlessly ordering and paying for your favourite thin-crust pizza which is subsequently delivered to your friend’s house. This vision clearly exceeds our current infrastructure capabilities as demonstrated by bandwidth issues for simple voice and data services at peak times, but without imagination there is no progress.

Transaction. Interaction. Convergence: Transaction: to enable payment transactions over any type of network, to any end point,in any segment.

Interaction: provide any type of interactive application and we have a best-inclass TMS to manage interactively an installed POS base.

Convergence: promote convergence of non-payment specific technologies to payment, payment capability in non-traditional payment segments, promote the convergence of traditional payment infrastructures towards cloud -based solutions, and promote convergence from thick client to thin client payment solutions.

Source: Spire Payments

www.bankerme.com

03/05/2016 09:55

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17/03/2016 11:22 3/7/16 6:08 PM

CYBERSECURITY

Avoiding another ‘Panama Papers’ scandal

By Eric Eifert, Senior Vice President of Managed Security Services at DarkMatter, a UAE headquartered cybersecurity specialist that works with governments and enterprises

F

inancial firms have always been in the line of fire from cyberattackers, but in the last few months we’ve seen several high profile attacks aimed at exposing financial details of customers driven by either profit or malice. In order to survive, financial institutions must reassure customers that their private details really are secure, and won’t become the subject of the next tabloid headline or social media storm.

The leak of sensitive documents from the Panamanian financial services law firm Mossack Fonseca to German newspaper Süddeutsche Zeitung has affected several political figures and will no doubt take a few more famous scalps before the scandal runs its course.

The case follows closely on the November 2015 ransomware attack on a Sharjah bank by an anonymous hacker using the nickname of Buba.

Buba demanded that he be paid $3 million in Bitcoin (the internet’s pseudo currency), or he would leak the personal bank details of customers.

Eric Eifert

cont. on page 70

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CYBERSECURITY

cont. from page 68

When his demands were not met he began posting details on Twitter in chunks of 500 accounts at a time.

Yet, despite their high profile, attacks aimed at leaking account details are still not the most common suffered by financial institutions. In 2015 the most common attack suffered by banks was still Distributed Denial of Service (DDoS), a cyberattack which seeks to overwhelm a target’s systems through sheer volume of traffic.

Attackers mount this style of attack through multiple proxies to disguise their origin. HSBC was a victim this January of a DDoS assault on its online banking facilities leaving thousands of customers, and many of its own staff, without their salaries at the end of the month.

While DDoS attacks do raise questions about an institution’s resilience, leaks, although rarer, are far more pernicious in that they cut to the heart of one of the pillars of the customer-banker relationship: confidentiality. Very few of us want our financial affairs to become common knowledge.

When considering how best to protect the information they hold, cybersecurity officers of financial institutions need to consider the full range of cyberthreats; while there is an ever present external threat, firms are also vulnerable to the insider attack.

Although aimed at intelligence agencies rather than financial institutions, the WikiLeaks and Edward Snowden cases show how a well-placed insider can achieve a magnitude of damage which is hard to replicate from the outside.

Buba demanded that he be paid

$3 million

in Bitcoin (the internet’s pseudo currency) The sheer volume of the documents disclosed,

11.5 million

documents in 2.6 terabytes of data, is a significant amount of data to be removed from the organisation.

While Mossack Fonseca is claiming that it was the victim of an external breach, the possibility remains that any attacker may have had insider help.

The sheer volume of the documents disclosed, 11.5 million documents in 2.6 terabytes of data, is a significant amount of data to be removed from the organisation.

There are steps cybersecurity officers can implement to help prevent their firms from becoming the victim of the next leak. First and foremost they need to gain real visibility of their environment and that means understanding which individuals have what access rights, and where the ‘crown jewels’ of the firm’s sensitive information is stored. That can be more easily said than done as most firms have a variety of legacy software and

In order to survive, financial institutions must reassure customers that their private details really are secure, and won’t become the subject of the next tabloid headline or social media storm.

- Eric Eifert, Senior Vice President of Managed Security Services at DarkMatter

70 page 68-70 Cybersecurity.indd 70

hardware systems built over decades and with varying access rights.

Secondly, companies need to gain cybersituational awareness to include understanding their specific vulnerabilities, intelligence on who might pose a threat, and the potential that exists for data theft. For example, are all sensitive communications and data encrypted while in motion as well as at rest?

Thirdly, they need to integrate this knowledge into a comprehensive monitoring program that monitors access, tags and tracks sensitive data, correlates numerous data feeds for anomalous behaviours, and can enforce firm policies. With an understanding of the risks associated with data loss and a focus on data protection, it should be possible to reduce the potential of external and insider threats.

These are basic precautions, but too many financial firms, do not fully understand the full spectrum of risks to include cyberrisks. Expect to see many more reputation—destroying leaks in the years ahead.

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PERSONALITY

Tim Childe

Head of International and Jersey office, Quilter Cheviot I have been in in the investment management industry for nearly 30 years. I am proud to say I have been at Quilter Cheviot for 26 years.

Global stock markets have always been a passion of mine and I would consider myself to be a ‘people person’.

These attributes lend themselves to the investment management industry. My biggest achievement to date would be both the establishment of my personal client base, but also the reputation and profile that my Jersey-based colleagues and I have built for our office there. Quilter Cheviot, part of Old Mutual Wealth, has built a strong reputation over several hundred years as a respected firm of investment managers. We focus on structuring and managing bespoke portfolios. Our impartial approach, high standards of personal service, drive to build and preserve the wealth of our clients and a belief in the importance of a robust yet innovative investment process have remained unchanged.

Managing people’s wealth is a responsible position. Every morning there is a discussion with our research team in which market opportunities and concerns are explored. We proactively manage risk for our clients, but we also want to achieve solid investment performance, so we need to stay ahead and identify long-term positions.

I am often out meeting clients; these may be individual private clients or intermediaries.

As head of our Jersey office and international business I spend time ensuring the operations are running smoothly and dealing with people across the wider Old Mutual Wealth business, looking for opportunities to develop our business further.

I am very fortunate that Quilter Cheviot is such a well-respected, trusted firm, with a fantastic team of people. Our clients are the most important part of our business, and everything we do is centred around them. Being able to help clients meet their financial objectives is extremely rewarding, and achieving top quartile returns over five years is an incredible achievement.

I am currently reading The Everything Store by Jeff Bezos and the age of Amazon. My all-time favourite would have to be the Genghis Khan series by Conn Iggulden.

I enjoy going to the gym and running when time permits, spending time with my family as well as walking our Labrador—Rufus.

The financial services industry in the region continues to evolve, providing better choice and protection for clients. Alongside improving financial regulation we are seeing firms taking the lead in adopting best practise from longer established markets. Opportunity exists for firms such as ours to be a part of that change, working with local intermediaries in offering professionally managed portfolios to their clients.

We decided to set up an office in Dubai because the UAE is home to some world-leading intermediaries and we believe our bespoke approach to investment management, heritage and record for performance will provide an attractive alternative to the services offered in the region. Being a representative office means we will only sell through intermediaries, and we will work in partnership with financial advisers, lawyers, accounts and trust companies. In Dubai there is strong and growing demand for high quality tailored investment solutions for high net worth investors, and this fits well with the trend we are seeing in the region for advisers to outsource investment solutions, shifting their business model away from investment selection to the financial planning needs of their clients.

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LAST WORD

John Iossifidis

Head of Corporate Banking Group at Mashreq

On adjusting to a new norm How long have you been working in your field?

I graduated in 1984 and immediately commenced as a management trainee with a major Australian Bank. As of March 13, that was 32 years ago!

What prompted you and how did you start your career in this particular industry?

I have an undergraduate degree in Economics with a major in Accounting. Simply put, I didn’t want to be a chartered accountant; banking became the default choice. When I started, I said I would stick it out for two years and see how it goes. I guess it’s gone pretty well.

What is your biggest achievement thus far?

Building sustainable businesses. I have achieved this in numerous geographies and various lines of business from commercial banking in Sri Lanka to wholesale banking businesses in MENA.

Can you describe your day-to-day routine in your line of work?

I lead a great team of people at Mashreq who strive to provide our clients with the most rewarding banking relationships. That may seem similar to what others are trying to do, but we are differentiating ourselves through superior service that comes with a deep industry knowledge across 14 different sectors.

What are your hobbies?

I believe in a healthy body, mind and spirit so I try to exercise most days mixing strength based exercises with aerobic conditioning and yoga. I’m also an avid follower of motor sport and compete, when time permits, in races like the Dubai 24 Hours as well as instructing with the Porsche Club UAE. Oh, I also love good food!

What is your opinion of the current financial market and the banking industry in the region?

The industry has developed tremendously over the past decade while banks themselves are well capitalised and in sound financial condition to deal with the readjustment process that is occurring following lower oil prices. At Mashreq we are blessed to be based in the UAE which is more diversified and relatively less affected than other hydrocarbon based economies. We also have significant international business that is operating in some of the most attractive markets in the world.

What do you like most about your job? Why? People and variety, two things which I guess are interrelated. I enjoy meeting new people and learning about different and disparate businesses but the real enjoyment is about making a difference—a difference to the people I work with, our clients and the community we live in.

What book are you currently reading now and what is your alltime favourite book?

The book that has stayed with me over the years is One Flew over the Cuckoo’s Nest by Ken Kesey; the book’s major theme is about how elements of society try to impose order and control. My current read is The Silk Roads by Peter Frankopan.

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What is your outlook of the global financial markets and how would you suggest to improve market sentiment?

You have used the right word— sentiment, which in turn is affected by uncertainty. People are unwilling make decisions when the way forward is volatile and unclear. We seem to have reached stability in terms of oil prices which will operate in the $40 to $60 range (depending on who you listen to); we now need to adjust to the new norm.

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